<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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)
9197 S. Peoria
Englewood, Colorado 80112
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-4000
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
--- ---
<PAGE> 2
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
-------- ------------
June 30, December 31,
1999 1998
-------- ------------
amounts in millions
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ -- | $ 419
|
Restricted cash (note 4) 40 | 185
|
Trade and other receivables, net 490 | 653
|
Prepaid and committed program rights -- | 263
|
Investment in Liberty Media Group and related receivables (note 5) 35,349 | --
|
Investments in affiliates other than Liberty Media Group (the "Other |
Affiliates"), accounted for under the equity method (notes 6 |
and 12) 11,082 | 4,709
|
Investment in Time Warner, Inc. ("Time Warner") (note 2) 41 | 7,118
|
Investment in AT&T Corp. ("AT&T") (notes 2 and 11) -- | 3,556
|
Investment in Sprint Corporation (note 2) -- | 2,446
|
Property and equipment, at cost: |
Land 129 | 63
Distribution systems 5,894 | 10,107
Support equipment and buildings 1,081 | 1,769
------- | -------
7,104 | 11,939
Less accumulated depreciation 270 | 4,786
------- | -------
6,834 | 7,153
------- | -------
|
Intangible assets 22,752 | 15,782
Less accumulated amortization 186 | 2,723
------- | -------
22,566 | 13,059
------- | -------
|
Other assets, net of accumulated amortization 1,547 | 2,290
------- | -------
|
$77,949 | $41,851
======= | =======
</TABLE>
(continued)
I-1
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
-------- ------------
June 30, December 31,
1999 1998
-------- ------------
amounts in millions
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Accounts payable $ 307 | $ 229
Accrued interest 231 | 253
|
Accrued programming expense 301 | 471
|
Other accrued expenses 702 | 1,128
|
Debt (notes 2 and 8): |
|
Due to unaffiliated parties 9,915 | 14,052
Notes payable to AT&T 7,286 | --
|
Deferred income taxes 4,778 | 9,749
|
Other liabilities 1,329 | 1,819
-------- | --------
|
Total liabilities 24,849 | 27,701
-------- | --------
|
Minority interests in equity of consolidated subsidiaries 2,175 | 1,460
|
Redeemable securities (note 2): |
|
Preferred stock -- | 300
Common stock -- | 22
|
Company-obligated mandatorily redeemable preferred securities of |
subsidiary trusts ("Trust Preferred Securities") holding solely |
subordinated debt securities (note 9) 1,659 | 1,500
|
Stockholders' equity (notes 2 and 10): |
|
Class A Series Preferred Stock, $.01 par value -- | --
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred |
Stock, $.01 par value -- | --
Common stock, $.01 par value. Authorized 3,550,000,000 shares; |
issued 1,327,985,000 shares in 1999 13 | --
Common stock, $1 par value: |
Series A TCI Group. Authorized 1,750,000,000 shares; issued |
610,748,188 shares in 1998 -- | 611
Series B TCI Group. Authorized 150,000,000 shares; issued |
73,929,229 shares in 1998 -- | 74
Series A Liberty Media Group. Authorized 750,000,000 shares; |
issued 367,890,546 shares in 1998 -- | 368
Series B Liberty Media Group. Authorized 75,000,000 shares; |
issued 35,198,156 shares in 1998 -- | 35
Series A TCI Ventures Group. Authorized 750,000,000 shares; |
issued 377,253,230 shares in 1998 -- | 377
Series B TCI Ventures Group. Authorized 75,000,000 shares; issued |
45,750,534 shares in 1998 -- | 46
Additional paid-in capital 53,045 | 5,987
Accumulated other comprehensive earnings, net of taxes 2,011 | 3,749
Retained earnings (accumulated deficit) (1,770) | 1,124
-------- | --------
53,299 | 12,371
|
Investment in AT&T (notes 2 and 11) (4,033) | --
Treasury stock and common stock held by subsidiaries, at cost -- | (1,503)
-------- | --------
|
Total stockholders' equity 49,266 | 10,868
-------- | --------
Commitments and contingencies (notes 13 and 14) |
$ 77,949 | $ 41,851
======== | ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- -------------
Three months Three months
ended ended
June 30, 1999 June 30, 1998
------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C>
Revenue $ 1,419 | $ 1,830
|
Operating costs and expenses: |
|
Operating (note 11) 558 | 700
Selling, general and administrative 360 | 467
Year 2000 costs 25 | 1
AT&T merger and integration costs 27 | 10
Stock compensation 119 | 183
Reserve for loss arising from contingent obligation (note 13) 50 | --
Depreciation and amortization 402 | 434
------- | -------
1,541 | 1,795
------- | -------
|
Operating income (loss) (122) | 35
|
Other income (expense): |
Interest expense: |
Unaffiliated parties (154) | (251)
AT&T (notes 2 and 8) (87) | --
Interest and dividend income 3 | 18
Share of losses of Liberty Media Group (note 5) (543) | --
Share of losses of the Other Affiliates, net (note 6) (300) | (351)
Minority interests in earnings of consolidated subsidiaries, net |
(note 9) (43) | (35)
Gain on issuance of stock by equity investee -- | 201
Gains on disposition of assets, net (note 7) -- | 36
Other, net (6) | (8)
------- | -------
(1,130) | (390)
------- | -------
|
Loss before income taxes and extraordinary loss (1,252) | (355)
|
Income tax benefit 222 | 69
------- | -------
|
Loss before extraordinary loss (1,030) | (286)
|
Extraordinary loss (net of income tax benefit of |
$9 million) (note 8) -- | (13)
------- | -------
|
Net loss (1,030) | (299)
|
Dividend requirements on preferred stocks (3) | (2)
------- | -------
|
Net loss attributable to common stockholders $(1,033) | $ (301)
======= | =======
</TABLE>
(continued)
I-3
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- -------------
Three months Three months
ended ended
June 30, 1999 June 30, 1998
------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C>
Net loss attributable to common stockholders:
TCI Group Series A and Series B common stock $ -- | $ (144)
Liberty Media Group Series A and Series B common stock -- | (65)
TCI Ventures Group Series A and Series B common stock -- | (92)
------- | -------
$ -- | $ (301)
======= | =======
Basic loss attributable to common stockholders per common share |
(note 3): |
|
TCI Group Series A and Series B common stock $ -- | $ (.28)
======= | =======
Liberty Media Group Series A and Series B common stock |
$ -- | $ (.18)
======= | =======
TCI Ventures Group Series A and Series B common stock $ -- | $ (.22)
======= | =======
|
Diluted loss attributable to common stockholders per common and |
potential common share (note 3): |
|
TCI Group Series A and Series B common stock $ -- | $ (.28)
======= | =======
Liberty Media Group Series A and Series B common stock $ -- | $ (.18)
======= | =======
TCI Ventures Group Series A and Series B common stock $ -- | $ (.22)
======= | =======
|
Comprehensive earnings $ 57 | $ 209
======= | =======
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
I-4
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- --------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue $ 1,902 | $ 1,145 $ 3,720
|
Operating costs and expenses: |
|
Operating (note 11) 746 | 467 1,448
Selling, general and administrative 483 | 322 904
Year 2000 costs 31 | 11 1
AT&T merger and integration costs 27 | 65 10
Stock compensation 74 | 366 412
Reserve for loss arising from contingent obligation |
(note 13) 50 | -- --
Write-off of in-process research and development costs |
(note 2) 594 | -- --
Depreciation and amortization 569 | 277 868
------- | ------- -------
2,574 | 1,508 3,643
------- | ------- -------
|
Operating income (loss) (672) | (363) 77
|
Other income (expense): |
Interest expense: |
Unaffiliated parties (204) | (161) (535)
AT&T (notes 2 and 8) (106) | -- --
Interest and dividend income 6 | 13 39
Share of losses of Liberty Media Group (note 5) (601) | -- --
Share of losses of the Other Affiliates, net (note 6) (377) | (161) (589)
Minority interests in earnings of consolidated |
subsidiaries, net (note 9) (58) | (26) (65)
Gains on issuance of equity interests by subsidiaries |
(note 7) -- | 389 38
Gain on issuance of stock by equity investee -- | -- 201
Gains on disposition of assets, net (notes 6 and 7) -- | 144 1,099
Other, net 5 | 8 (18)
------- | ------- -------
(1,335) | 206 170
------- | ------- -------
|
Earnings (loss) before income taxes and |
extraordinary loss (2,007) | (157) 247
|
Income tax benefit (expense) 237 | (119) (177)
------- | ------- -------
|
Earnings (loss) before extraordinary loss (1,770) | (276) 70
|
Extraordinary loss (net of income tax benefit of $3 million |
in 1999 and $15 million in 1998, respectively) (note 8) -- | (5) (23)
------- | ------- -------
|
Net earnings (loss) (1,770) | (281) 47
|
Dividend requirements on preferred stocks (3) | (4) (13)
------- | ------- -------
|
Net earnings (loss) attributable to common |
stockholders $(1,773) | $ (285) $ 34
======= | ======= =======
</TABLE>
(continued)
I-5
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- --------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Net earnings (loss) attributable to common stockholders: |
TCI Group Series A and Series B common stock $ -- | $ (226) $ 83
Liberty Media Group Series A and Series B common stock -- | (49) 238
TCI Ventures Group Series A and Series B common stock -- | (10) (287)
------- | ------- -------
$ -- | $ (285) $ 34
======= | ======= =======
Basic earnings (loss) attributable to common stockholders |
per common share (note 3): |
TCI Group Series A and Series B common stock $ -- | $ (.42) $ .16
======= | ======= =======
Liberty Media Group Series A and Series B common stock $ -- | $ (.13) $ .67
======= | ======= =======
TCI Ventures Group Series A and Series B common stock $ -- | $ (.02) $ (.68)
======= | ======= =======
|
Diluted earnings (loss) attributable to common stockholders |
per common and potential common share (note 3): |
TCI Group Series A and Series B common stock $ -- | $ (.43) $ .15
======= | ======= =======
Liberty Media Group Series A and Series B common stock $ -- | $ (.13) $ .61
======= | ======= =======
TCI Ventures Group Series A and Series B common stock $ -- | $ (.09) $ (.68)
======= | ======= =======
Comprehensive earnings $ 241 | $ 691 $ 905
======= | ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-6
<PAGE> 8
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statement of Stockholders' Equity
(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>
Old TCI
- -------
Balance at January 1, 1999 $ -- $ 611 $ 74 $ 368 $ 35 $ 377 $ 46
Net loss -- -- -- -- -- -- --
Reclassification of redeemable
common stock to equity upon
expiration of put obligations -- -- -- -- -- -- --
Proceeds received upon termination
of equity swap facilities
(note 10) -- -- -- -- -- -- --
Settlement of equity swap
transaction in connection with
preferred stock exchange (note 10) -- -- -- -- -- -- --
Gain from contribution of cable
television systems to joint
venture, net of taxes (note 7) -- -- -- -- -- -- --
Issuance of common stock upon
exercise of stock options -- -- -- -- -- -- --
Recognition of stock compensation
related to restricted stock
awards -- -- -- -- -- -- --
Issuance of restricted stock
granted pursuant to stock
incentive plan -- 3 -- -- -- -- --
Conversion of Series B common
stock to Series A common stock -- -- -- -- -- 1 (1)
Accreted dividends on all classes
of preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes
of preferred stock not subject
to mandatory redemption
requirements -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- --
Change in unrealized holding gains
for available-for-sale securities,
net of taxes -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance at February 28, 1999 $ -- $ 614 $ 74 $ 368 $ 35 $ 378 $ 45
======== ======== ======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Treasury
stock and
Accumulated common
other stock
Additional comprehensive held by Total
paid-in earnings, Retained subsidiaries, stockholders'
capital net of taxes earnings at cost equity
---------- ------------- --------- ------------ -------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Old TCI
- -------
Balance at January 1, 1999 $ 5,987 $ 3,749 $ 1,124 $ (1,503) $ 10,868
Net loss -- -- (281) -- (281)
Reclassification of redeemable
common stock to equity upon
expiration of put obligations 10 -- -- -- 10
Proceeds received upon termination
of equity swap facilities
(note 10) 677 -- -- -- 677
Settlement of equity swap
transaction in connection with
preferred stock exchange (note 10) (29) -- -- -- (29)
Gain from contribution of cable
television systems to joint
ventures, net of taxes (note 7) 9 -- -- -- 9
Issuance of common stock upon
exercise of stock options 3 -- -- -- 3
Recognition of stock compensation
related to restricted stock
awards 12 -- -- -- 12
Issuance of restricted stock
granted pursuant to stock
incentive plan (3) -- -- -- --
Conversion of Series B common
stock to Series A common stock -- -- -- -- --
Accreted dividends on all classes
of preferred stock -- -- (4) -- (4)
Accreted dividends on all classes
of preferred stock not subject
to mandatory redemption
requirements 2 -- -- -- 2
Foreign currency translation
adjustment -- (15) -- -- (15)
Change in unrealized holding gains
for available-for-sale securities,
net of taxes -- 987 -- -- 987
-------- -------- -------- -------- --------
Balance at February 28, 1999 $ 6,668 $ 4,721 $ 839 $ (1,503) $ 12,239
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
I-7
<PAGE> 9
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statement of Stockholders' Equity, continued
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Class B Additional comprehensive
Preferred Common paid-in earnings,
Stock Stock capital net of taxes
--------- ------- ---------- -------------
amounts in millions
<S> <C> <C> <C> <C>
New TCI
- -------
Balance at March 1, 1999 (note 2) $ -- $ 13 $ 52,142 $ --
Net loss -- -- -- --
Payment of preferred stock dividends -- -- (10) --
Issuance of AT&T Common Stock upon
conversion of TCI notes payable
(note 8) -- -- 40 --
Issuance of AT&T Liberty Tracking Stock upon
conversion of Liberty Media Group debt
(note 5) -- -- 354 --
Gain from issuance of common stock by subsidiary
and affiliate (note 6) -- -- 470 --
Gain from issuance of common stock by attributed
subsidiary of Liberty Media Group -- -- 40 --
Reclassification by Liberty Media Group of
redeemable common stock to equity upon
expiration of put obligation -- -- 9 --
Change in non-interest bearing intercompany
account with AT&T -- -- -- --
Change in unrealized holding gains for
available-for-sale securities, net of
taxes (note 5) -- -- -- 2,054
Foreign currency translation adjustments,
net of taxes (note 5) -- -- -- (43)
-------- -------- -------- --------
Balance at June 30, 1999 $ -- $ 13 $ 53,045 $ 2,011
======== ======== ======== ========
<CAPTION>
Total
Accumulated Investment in stockholders'
deficit in AT&T equity
----------- ------------- -------------
amounts in millions
<S> <C> <C> <C>
New TCI
- -------
Balance at March 1, 1999 (note 2) $ -- $ (4,018) $ 48,137
Net loss (1,770) -- (1,770)
Payment of preferred stock dividends -- -- (10)
Issuance of AT&T Common Stock upon
conversion of notes held by the Company
(note 8) -- -- 40
Issuance of AT&T Liberty Tracking Stock upon
conversion of Liberty Media Group debt
(note 5) -- -- 354
Gain from issuance of common stock by affiliates
(note 6) -- -- 470
Gain from issuance of common stock by attributed
subsidiary of Liberty Media Group -- -- 40
Reclassification by Liberty Media Group of
redeemable common stock to equity upon
expiration of put obligation -- -- 9
Change in non-interest bearing intercompany
account with AT&T -- (15) (15)
Change in unrealized holding gains for
available-for-sale securities, net of
taxes (note 5) -- -- 2,054
Foreign currency translation adjustments,
net of taxes (note 5) -- -- (43)
-------- -------- --------
Balance at June 30, 1999 $ (1,770) $ (4,033) $ 49,266
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-8
<PAGE> 10
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- ---------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(1,770) | $ (281) $ 47
Adjustments to reconcile net earnings (loss) to net cash |
provided by (used in) operating activities: |
Depreciation and amortization 569 | 277 868
Stock compensation 74 | 366 412
Payments of obligation relating to stock compensation -- | (294) (136)
Reserve for loss arising from contingent obligation 50 | -- --
Payment of amounts relating to contingent obligation (114) | -- --
Share of losses of Liberty Media Group 601 | -- --
Share of losses of the Other Affiliates, net 377 | 161 589
Extraordinary loss (17) | 8 38
Minority interests in earnings of consolidated |
subsidiaries, net 58 | 26 65
Gains on issuance of equity interests by subsidiaries -- | (389) (38)
Gain on issuance of stock by equity investee -- | -- (201)
Gains on disposition of assets, net -- | (144) (1,099)
Deferred income tax expense (benefit) (210) | 113 122
Write-off of in-process research and development costs 594 | -- --
Other noncash charges (credits) (29) | 1 (6)
Changes in operating assets and liabilities, net of the |
effect of acquisitions and dispositions: |
Change in receivables (38) | (66) (30)
Change in prepaids 7 | (18) (33)
Change in non-interest bearing intercompany account |
with AT&T (15) | -- --
Change in other accruals and payables (14) | 44 (46)
------- | ------- -------
|
Net cash provided by (used in) operating activities 123 | (196) 552
------- | ------- -------
|
Cash flows from investing activities: |
Cash paid for acquisitions (29) | (353) (72)
Capital expended for property and equipment (1,013) | (297) (560)
Effect on cash and cash equivalents of deconsolidation |
of subsidiaries (401) | (53) --
Investments in and loans to affiliates (4) | (52) (770)
Collections of loans to affiliates 161 | 709 928
Proceeds from disposition of assets 28 | 344 643
Change in restricted cash 15 | 112 (274)
Other investing activities (2) | 65 (14)
------- | ------- -------
|
Net cash provided by (used in) investing activities (1,245) | 475 (119)
------- | ------- -------
|
Cash flows from financing activities: |
Borrowings of debt 2,127 | 583 2,966
Repayments of debt (1,490) | (1,468) (2,895)
Proceeds received upon termination of equity swap facilities -- | 677 --
Prepayment penalties -- | (4) (34)
Repurchase of common stock -- | -- (13)
Repurchase of subsidiary common and preferred stock -- | (45) (7)
Payment of preferred stock dividends (10) | (4) (23)
Payment of dividends on subsidiary preferred stock and Trust |
Preferred Securities (79) | (12) (95)
Payments for call agreements -- | -- (274)
Other financing activities (1) | 8 (7)
------- | ------- -------
|
Net cash provided by (used in) financing activities 547 | (265) (382)
------- | ------- -------
|
Net change in cash and cash equivalents (575) | 14 51
Cash and cash equivalents at beginning of period 575 | 419 244
------- | ------- -------
|
Cash and cash equivalents at end of period $ -- | $ 433 $ 295
======= | ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-9
<PAGE> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(unaudited)
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts
of Tele-Communications, Inc. and those of all majority-owned
subsidiaries ("TCI" or the "Company"). On March 9, 1999, AT&T acquired
TCI in a merger transaction (the "AT&T Merger"). For financial
reporting purposes the AT&T Merger and related restructuring
transactions described in note 2 are deemed to have occurred on March
1, 1999. The consolidated financial statements for periods prior to
March 1, 1999 are referred to herein as "Old TCI", and the consolidated
financial statements for periods subsequent to February 28, 1999 are
referred to herein as "New TCI." Due to the March 1, 1999 application
of purchase accounting in connection with the AT&T Merger, the
predecessor consolidated financial statements of Old TCI are not
comparable to the successor consolidated financial statements of New
TCI. In the following text, "TCI" and "the Company" refer to both Old
TCI and New TCI. See note 2.
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, 1998.
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.
Prior to the AT&T Merger, TCI generally recognized changes in its
proportionate share of the underlying equity of a subsidiary or equity
method investee, which resulted from the issuance of additional equity
securities by such subsidiary or equity investee, in the consolidated
statement of operations. Upon consummation of the AT&T Merger, TCI
began to account for such changes in the underlying equity of its
subsidiaries and affiliates as equity transactions in order to conform
with AT&T's accounting policy.
(continued)
I-10
<PAGE> 12
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain prior period amounts have been reclassified for comparability
with the 1999 presentation.
Targeted Stock
--------------
Prior to the AT&T Merger, the Company's assets and operations were
included in three separate groups, each of which was tracked separately
by public equity securities. These groups were formerly known as the
"Liberty Media Group" (referred to herein as the "Old Liberty Group"),
the "TCI Ventures Group" and the "TCI Group."
Old Liberty Group was intended to reflect the separate performance of
TCI's assets which produce and distribute programming services.
The TCI Ventures Group was intended to reflect the separate performance
of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets.
The TCI Group was intended to reflect the separate performance of TCI
and its subsidiaries and assets not attributed to Old Liberty Group or
TCI Ventures Group. Such subsidiaries and assets are comprised
primarily of TCI's domestic cable and communications business.
TCI Group, Old Liberty Group and TCI Ventures Group individually may be
referred to herein as a "Group."
The TCI Group was tracked separately through the Tele-Communications,
Inc. Series A TCI Group Common Stock (the "TCI Group Series A Stock")
and Series B TCI Group Common Stock (the "TCI Group Series B Stock,"
and together with the TCI Group Series A Stock, the "TCI Group Stock").
The Old Liberty Group was tracked through the Tele-Communications, Inc.
Series A Liberty Media Group Common Stock ("Liberty Group Series A
Stock") and Series B Liberty Media Group Common Stock ("Liberty Group
Series B Stock" and together with the Liberty Group Series A Stock, the
"Liberty Group Stock"). The TCI Ventures Group was tracked separately
through the Tele-Communications, Inc. Series A TCI Ventures Group
Common Stock ("TCI Ventures Group Series A Stock") and Series B TCI
Ventures Group Common Stock ("TCI Ventures Group Series B Stock" and
together with the TCI Ventures Group Series A Stock, the "TCI Ventures
Group Stock").
Upon consummation of the AT&T Merger, each of the separate series of
Tele-Communications, Inc. common stock was converted either into shares
of AT&T common stock, par value $1.00 per share, ("AT&T Common Stock")
or shares of one of two classes of a new AT&T tracking stock designated
to track the combined Old Liberty Group and TCI Ventures Group after
giving effect to certain asset transfers. See note 2.
(continued)
I-11
<PAGE> 13
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following the AT&T Merger, the authorized capital of TCI consists of
3,552,375,096 shares, consisting of 3,550,000,000 shares of common
stock, par value $.01 per share, and 2,375,096 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). The Preferred
Stock is divided into two classes: 700,000 shares of Class A Preferred
Stock, par value $.01 per share, and 1,675,096 shares of Class B 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock, par value
$.01 per share ("Class B Preferred Stock").
(2) Merger with AT&T and Related Accounting
---------------------------------------
On March 9, 1999, AT&T acquired TCI in the AT&T Merger, in which Italy
Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into
TCI, and TCI thereby became a subsidiary of AT&T. As a result of the
AT&T Merger, (i) each share of TCI Group Series A Stock was converted
into 1.16355 shares of AT&T Common Stock, (ii) each share of TCI Group
Series B Stock was converted into 1.27995 shares of AT&T Common Stock,
(iii) each share of Liberty Group Series A Stock was converted into 2
shares (as adjusted for a June 1999 two-for-one stock split) of a newly
created class of AT&T common stock designated as the Class A Liberty
Media Group Common Stock, par value $1.00 per share (the "AT&T Liberty
Class A Tracking Stock"), (iv) each share of Liberty Group Series B
Stock was converted into 2 shares (as adjusted for a June 1999 stock
split) of a newly created class of AT&T common stock designated as the
Class B Liberty Media Group Common Stock, par value $1.00 per share
(the "AT&T Liberty Class B Tracking Stock" and together with the AT&T
Liberty Class A Tracking Stock, the "AT&T Liberty Tracking Stock"), (v)
each share of TCI Ventures Group Series A Stock was converted into 1.04
shares of AT&T Liberty Class A Tracking Stock (as adjusted for a June
1999 stock split), (vi) each share of TCI Ventures Group Series B Stock
was converted into 1.04 shares of AT&T Liberty Class B Tracking Stock
(as adjusted for a June 1999 two-for-one stock split), (vii) each share
of TCI's Convertible Preferred Stock, Series C-TCI Group (the "Series
C-TCI Group Preferred Stock") was converted into 154.589253 shares of
AT&T Common Stock, (viii) each share of TCI's Convertible Preferred
Stock Series C-Liberty Media Group (the "Series C-Liberty Media Group
Preferred Stock") was converted into 112.50 shares of AT&T Liberty
Class A Tracking Stock (as adjusted for a June 1999 two-for-one stock
split), (ix) each share of TCI's Redeemable Convertible TCI Group
Preferred Stock, Series G ("Series G Preferred Stock") was converted
into 1.3846245 shares of AT&T Common Stock and (x) each share of TCI's
Redeemable Convertible Liberty Media Group Preferred Stock, Series H
("Series H Preferred Stock") was converted into 1.18125 shares of AT&T
Liberty Class A Tracking Stock (as adjusted for a June 1999 two-for-one
stock split). Following the AT&T Merger, each share of Class B
Preferred Stock continues to be outstanding as the Class B Preferred
Stock of TCI with the same rights and preferences such stock had prior
to the AT&T Merger. In general, the holders of shares of AT&T Liberty
Class A Tracking Stock and the holders of shares of AT&T Liberty Class
B Tracking Stock will vote together as a single class with the holders
of shares of AT&T Common Stock on all matters presented to such
stockholders, with the holders being entitled to 3/40th of a vote for
each share of AT&T Liberty Class A Tracking Stock held, 3/4ths of a
vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote
per share of AT&T Common Stock held.
(continued)
I-12
<PAGE> 14
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are
intended to reflect the separate performance of the businesses and
assets attributed to Old Liberty Group and TCI Ventures Group at the
time of the AT&T Merger. References herein to "Liberty/Ventures Group"
refer to the combined assets and businesses of Old Liberty Group and
TCI Ventures Group for periods prior to the AT&T Merger, and subsequent
to the AT&T Merger such combined assets and business are referred to as
"Liberty Media Group." Pursuant to, and subject to the terms and
conditions set forth in the Agreement and Plan of Restructuring and
Merger, dated as of June 23, 1998 (the "Merger Agreement"), immediately
prior to the AT&T Merger, certain assets previously attributed to TCI
Ventures Group (including, among others, the shares of AT&T Common
Stock received in the merger of AT&T and Teleport Communications Group,
Inc. ("TCG"), the stock of At Home Corporation ("@Home") attributed to
TCI Ventures Group, the assets and business of the National Digital
Television Center, Inc. ("NDTC") and TCI Ventures Group's equity
interest in Western Tele-Communications, Inc. ("WTCI")) were
transferred to TCI Group in exchange for approximately $5.5 billion in
cash. Also, upon consummation of the AT&T Merger, through a new tax
sharing agreement between Liberty Media Group and AT&T, Liberty Media
Group became entitled to the benefit of approximately $2.0 billion of
net operating loss carryforwards attributable to all entities included
in TCI's consolidated federal income tax return as of the date of the
AT&T Merger. Such net operating loss carryforwards are subject to
adjustment by the Internal Revenue Service and are subject to
limitations on usage which may affect the ultimate amount utilized.
Additionally, certain warrants to purchase shares of General
Instruments Corporation ("GI") previously attributed to TCI Group were
transferred to Liberty/Ventures Group in exchange for approximately
$176 million in cash. The transfer of certain immaterial assets was
also effected.
Immediately prior to the AT&T Merger, AT&T and Liberty Media
Corporation entered into an agreement relating to the carriage of
programming of Liberty Media Group to be distributed over the AT&T
cable systems. Pursuant to this agreement, Liberty Media Group will be
granted, among other rights, "preferred vendor status" with respect to
certain types of new programming services. Liberty Media Group will
also be entitled to the use of channel capacity equal to one six
megahertz channel to be used for category specific interactive video
channels. In addition, such agreement also provided for the extension
of existing affiliation agreements between TCI and programming
affiliates of Liberty Media Group to a date not less than 10 years from
the closing of the AT&T Merger, upon the terms and conditions set forth
in such agreement.
Pursuant to amended corporate governance documents for the entities
included in Liberty Media Group and certain agreements among AT&T and
TCI, the business of Liberty Media Group will continue to be managed by
certain persons who were members of TCI's management prior to the AT&T
Merger. AT&T will initially designate one third of the directors of
such entities and its rights as the sole shareholder of the common
stock of such entities following the AT&T Merger will, in accordance
with Delaware law, be limited to actions which will require shareholder
approval. Therefore, management has concluded that TCI does not have a
controlling financial interest (as that term is used in Statement of
Financial Accounting Standards No. 94) in the entities comprising the
Liberty Media Group following the AT&T Merger, and will account for its
ownership interests in such entities under the equity method.
(continued)
I-13
<PAGE> 15
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Immediately prior to the AT&T Merger, TCI restructured its ownership of
certain of its subsidiaries (the "Restructuring"). The Restructuring
included merging TCI's cable subsidiary, TCI Communications, Inc.
("TCIC"), into TCI. As a result of TCIC's merger with TCI, all assets
and liabilities of TCIC have been assumed by TCI, including TCIC's
public debt. In connection with TCIC's merger with TCI, each share of
TCIC's Cumulative Exchangeable Preferred Stock, Series A was converted
into 2.119 shares of TCI Group Series A Stock, and such shares of TCI
Group Series A Stock were subsequently converted into AT&T Common Stock
in connection with the AT&T Merger. All other public securities issued
by subsidiaries of TCIC (other than TCI Pacific Communications, Inc.
("Pacific")) otherwise remained unaffected. Furthermore, as part of the
Restructuring, (i) AT&T loaned TCI $5.5 billion pursuant to a
promissory note, (ii) certain asset transfers were made between TCI and
its subsidiaries, (iii) 123,896 shares of the Company's Convertible
Redeemable Participating Preferred Stock, Series F ("Series F Preferred
Stock") which were held by subsidiaries of TCI, were converted into
185,428,946 shares of TCI Group Series A Stock (which in turn were
converted into 215,755,850 shares of AT&T Common Stock in the AT&T
Merger and continue to be held by subsidiaries of TCI), (iv) the
remaining 154,411 shares of Series F Preferred Stock which were
formerly held by subsidiaries of TCI were distributed to TCI through a
series of liquidations and canceled, and (v) 125,728,816 shares of TCI
Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock,
6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of
Liberty Group Series B Stock, and 67,536 shares of Class B Preferred
Stock, each formerly held by subsidiaries of TCI, were distributed to
TCI through a series of liquidations and canceled.
Under the terms of the 5% Class A Senior Cumulative Exchangeable
Preferred Stock of Pacific (the "Exchangeable Preferred Stock"), each
share of that preferred stock is exchangeable, from and after August 1,
2001, for approximately 6.3375 shares of AT&T Common Stock, subject to
certain anti-dilution adjustments. Additionally, Pacific may elect to
make any dividend, redemption or liquidation payment on the
Exchangeable Preferred Stock in cash, by delivery of shares of AT&T
Common Stock or by a combination of the foregoing forms of
consideration.
(continued)
I-14
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The AT&T Merger has been accounted for using the purchase method of
accounting and has been deemed to be effective as of March 1, 1999 for
financial reporting purposes. Accordingly, the preliminary allocation
of AT&T's purchase price to acquire Old TCI has been reflected in TCI's
consolidated financial statements as of March 1, 1999. A final
allocation of such purchase price will be made upon resolution of
pre-acquisition contingencies and receipt of final third party
appraisals. Certain transactions occurring between March 1, 1999 and
March 9, 1999 that affected Old TCI's equity and stock compensation
have been reflected in the two-month period ended February 28, 1999.
The $52.2 billion aggregate value assigned to TCI's net assets as a
result of the application of purchase accounting was comprised of the
following (amounts in millions):
<TABLE>
<S> <C>
Issuance of AT&T Common Stock $ 26,798
Issuance of AT&T Liberty Tracking Stock 23,360
Assumption of convertible notes 1,593
Assumption of Class B Preferred Stock 154
Estimated merger costs 250
--------
$ 52,155
</TABLE>
The value assigned to the AT&T Common Stock was based on the average
closing price of AT&T Common Stock a few days before and after the AT&T
Merger was agreed to and announced. The value assigned to the AT&T
Liberty Tracking Stock was based on the average closing price of
Liberty Group Stock a few days before and after the AT&T Merger was
agreed to and announced. The Liberty Group Stock was used to value the
AT&T Liberty Tracking Stock issued in the AT&T Merger because the fair
value of Liberty Group Stock was more readily determinable than the
fair value of the AT&T Liberty Tracking Stock.
The following table reflects the opening summarized balance sheet of
New TCI which includes the effects of the Restructuring, purchase
accounting adjustments resulting from the allocation of AT&T's purchase
price to acquire Old TCI and the deconsolidation of the entities
comprising Liberty Media Group following the AT&T Merger:
(continued)
I-15
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
New TCI
March 1, 1999
---------------------
(amounts in millions)
<S> <C>
Assets
Cash and cash equivalents $ 575
Restricted cash 55
Receivables and prepaid assets 573
Investment in Liberty Media Group 33,728
Investment in the Other Affiliates 8,147
Property and equipment, net 6,072
Intangible assets, net 25,347
Other assets, net 2,395
---------
$ 76,892
=========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,728
Debt 16,850
Deferred income taxes 4,680
Other liabilities 1,271
---------
Total liabilities 24,529
---------
Minority interests in equity of consolidated
subsidiaries 2,566
Trust Preferred Securities 1,660
Stockholders' equity 52,155
Investment in AT&T (4,018)
---------
Total stockholders' equity 48,137
---------
$ 76,892
=========
</TABLE>
The following table reflects the change in cash and cash equivalents as a result
of the Restructuring and the deconsolidation of Liberty Media Group (amounts in
millions):
<TABLE>
<S> <C>
Cash and cash equivalents of Old TCI
at February 28, 1999 $ 433
Cash received from AT&T in
Restructuring 5,461
Decrease in cash due to
deconsolidation of Liberty Media Group (5,319)
--------
Cash and cash equivalents of New TCI
at March 1, 1999 $ 575
========
</TABLE>
(continued)
I-16
<PAGE> 18
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a result of the application of purchase accounting, New TCI has
recorded its assets and liabilities at their preliminary fair values on
March 9, 1999. Certain of the more significant effects of purchase
accounting are described below.
The $25 billion assigned to New TCI's intangible assets, as of March 1,
1999, is primarily comprised of goodwill and is being amortized over
the estimated useful lives of such assets, primarily 40 years. New
TCI's intangible assets in the March 1, 1999 opening consolidated
balance sheet also include $594 million of in-process research and
development costs. Such amount reflects the value, as of the
acquisition date, of the Company's research and development projects
which had not yet reached technological feasibility and which had no
alternative future use. Such in-process research and development costs
were written-off during March 1999.
As a result of the application of purchase accounting, the amount
assigned to New TCI's other liabilities includes $237 million which
represents New TCI's estimated liability for unvested stock
appreciation rights as of March 9, 1999. Such unvested stock
appreciation rights will vest over remaining periods ranging from 1 to
5 years. The amount assigned to New TCI's minority interests in equity
of consolidated subsidiaries includes $2.1 billion which represents the
fair value of the redeemable preferred stock of a subsidiary. For
additional information regarding the effects of purchase accounting on
New TCI's assets and liabilities, see notes 6, 8 and 9.
(continued)
I-17
<PAGE> 19
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following unaudited condensed results of operations for the six
months ended June 30, 1999 and 1998 were prepared assuming the AT&T
Merger, the Restructuring and the deconsolidation of Liberty Media
Group occurred on January 1, 1998. These pro forma amounts are not
necessarily indicative of operating results which would have occurred
if the AT&T Merger, the Restructuring and the deconsolidation of
Liberty Media Group had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1999 1998
--------- ---------
(amounts in millions)
<S> <C> <C>
Revenue $ 2,843 $ 3,186
Net loss before extraordinary item $ (2,278) (652)
Net loss $ (2,283) (675)
</TABLE>
(3) Earnings (Loss) Per Common and Potential Common Share
-----------------------------------------------------
Basic earnings per share ("EPS") is measured as the income or loss
attributable to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of
potential common shares 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. Basic and diluted
EPS are presented only for periods prior to the AT&T Merger. Subsequent
to the AT&T Merger, all shares of common stock of TCI are held by AT&T.
See notes 1 and 2.
(a) TCI Group Stock
---------------
The basic earnings (loss) attributable to TCI Group common
stockholders per common share for the two months ended
February 28, 1999 and the three and six month periods ended
June 30, 1998 was computed by dividing net earnings (loss)
attributable to TCI Group common stockholders by the weighted
average number of common shares outstanding of TCI Group Stock
during the period.
The diluted loss attributable to TCI Group common stockholders
per common share for the two months ended February 28, 1999
was computed by dividing net loss attributable to TCI Group
common stockholders, which is increased by aggregate fees paid
on equity swap facilities of $4 million during 1999, 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.
(continued)
I-18
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted earnings attributable to TCI Group common
stockholders per common share for the six months ended June
30, 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 six months ended June 30, 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 Series C-TCI
Group Preferred Stock, the Series G Preferred Stock, preferred
stock of subsidiaries, convertible notes payable, and stock
options and other performance awards have been included in the
computation of weighted average shares, as illustrated below.
Shares of TCI Group Stock issuable upon exercise of certain
stock rights, and issuable upon conversion of Convertible
Preferred Stock, Series D ("Series D Preferred Stock") and
associated dividend payments for the six months ended June 30,
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 six months ended June 30, 1998. All of the outstanding
shares of Series D Preferred Stock were redeemed effective
April 1, 1998.
The diluted loss attributable to TCI Group common stockholders
per common share for the three months ended June 30, 1998 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.
In connection with the March 9, 1999 AT&T Merger, TCI Group
Stock was converted into AT&T Common Stock. See note 2.
(continued)
I-19
<PAGE> 21
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>
Old TCI
-------------------------------------------------
Two months Three months Six months
ended ended ended
February 28, 1999 June 30, 1998 June 30, 1998
----------------- ------------- -------------
amounts in millions, except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to common stockholders $(226) $(144) $ 83
===== ===== =====
Weighted average common shares 539 523 520
===== ===== =====
Basic earnings (loss) per share attributable to
common stockholders $(.42) $(.28) $ .16
===== ===== =====
Diluted EPS:
Earnings (loss) attributable to common stockholders $(226) $(144) $ 83
Add preferred dividend requirements -- -- 6
Add interest expense -- -- 1
Less fees paid on equity swap facilities (4) -- --
----- ----- -----
Adjusted earnings (loss) attributable to common
stockholders assuming conversion of preferred shares $(230) $(144) $ 90
===== ===== =====
Weighted average common shares 539 523 520
----- ----- -----
Add dilutive potential common shares:
Employee and director options and other
performance awards -- -- 9
Convertible notes payable -- -- 24
Series C-TCI Group Preferred Stock -- -- 7
Series G Preferred Stock -- -- 8
Preferred stock of subsidiaries -- -- 45
----- ----- -----
Dilutive potential common shares -- -- 93
----- ----- -----
Diluted weighted average common shares 539 523 613
===== ===== =====
Diluted earnings (loss) per share attributable to
common stockholders $(.43) $(.28) $ .15
===== ===== =====
</TABLE>
(continued)
I-20
<PAGE> 22
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Liberty Group Stock
-------------------
The basic earnings (loss) attributable to Old Liberty Group
common stockholders per common share for the two months ended
February 28, 1999 and the three and six month periods ended
June 30, 1998 and the diluted loss attributable to Old Liberty
Group common stockholders per common and potential common
share for the two months ended February 28, 1999, were
computed by dividing net earnings (loss) attributable to Old
Liberty Group common stockholders by the weighted average
number of common shares outstanding of Liberty Group Stock
during the period. Potential common shares were not included
in the diluted computation of weighted average shares for the
two months ended February 28, 1999 because their inclusion
would be anti-dilutive.
The diluted earnings attributable to Old Liberty Group common
stockholders per common and potential common share for the six
months ended June 30, 1998 were computed by dividing earnings
attributable to Old Liberty 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 Series C-Liberty Media Group
Preferred Stock, the Series D Preferred Stock, the Series H
Preferred Stock, convertible notes payable, stock options and
other performance awards have been included in the diluted
calculation of weighted average shares, as illustrated below.
All of the outstanding shares of Series D Preferred Stock were
redeemed effective April 1, 1998. 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 were paid by TCI Group.
The diluted loss attributable to Old Liberty Group common
stockholders per common share for the three months ended June
30, 1998 was computed by dividing the net loss attributable to
Old Liberty Group stockholders by the weighted average number
of common shares outstanding of Liberty 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.
In connection with the AT&T Merger, Liberty Group Stock was
converted into AT&T Liberty Tracking Stock. See note 2.
(continued)
I-21
<PAGE> 23
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>
Old TCI
-------------------------------------------------
Two months Three months Six months
ended ended ended
February 28, 1999 June 30, 1998 June 30, 1998
----------------- ------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to common stockholders $ (49) $ (65) $ 238
===== ===== =====
Weighted average common shares 367 358 356
===== ===== =====
Basic earnings (loss) per share attributable to common
stockholders $(.13) $(.18) $ .67
===== ===== =====
Diluted EPS:
Earnings (loss) attributable to common stockholders $ (49) $ (65) $ 238
===== ===== =====
Weighted average common shares 367 358 356
----- ----- -----
Add dilutive potential common shares:
Employee and director options and other
performance awards -- -- 8
Convertible notes payable -- -- 19
Series C-Liberty Media Group Preferred Stock -- -- 4
Series H Preferred Stock -- -- 4
----- ----- -----
Dilutive potential common shares -- -- 35
----- ----- -----
Diluted weighted average common shares 367 358 391
===== ===== =====
Diluted earnings (loss) per share attributable to common
stockholders $(.13) $(.18) $ .61
===== ===== =====
</TABLE>
(c) TCI Ventures Group Stock
------------------------
The basic loss attributable to TCI Ventures Group common
stockholders per common share for the two months ended
February 28, 1999 and the three and six month periods ended
June 30, 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 (423 million, 422 million and
421 million, respectively). Potential common shares were not
included in the diluted calculation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
(continued)
I-22
<PAGE> 24
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted loss attributable to TCI Ventures Group common
stockholders per common share for the two months ended
February 28, 1999 and the three and six month periods ended
June 30, 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. In 1999, the net loss
attributable to TCI Ventures Group common stock holders is
increased by $29 million for charges recorded directly to
equity upon settlement of an equity swap transaction. See note
10. For purposes of computing diluted EPS such amount is
assumed to be charged to earnings. Potential common shares
were not included in the computation of weighted average
shares outstanding because their inclusion would be
anti-dilutive.
In connection with the March 9, 1999 AT&T Merger, TCI Ventures
Group Stock was converted into AT&T Liberty Tracking Stock.
See note 2.
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
Cash paid for interest was $105 million, $287 million and $538 million
for the four months ended June 30, 1999, the two months ended February
28, 1999 and the six months ended June 30, 1998, respectively.
Cash paid for income taxes was not material during such periods.
Significant non-cash investing and financing activities and certain
supplemental disclosures with respect to the statement of cash flows
are reflected below:
<TABLE>
<CAPTION>
New TCI Old TCI
------------- ---------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Recorded value of assets acquired $ (29) | $(353) $(729)
Net liabilities assumed -- | -- 3
Deferred tax liability recorded in acquisitions -- | -- 107
Change in minority interests in equity of |
consolidated subsidiaries -- | -- (179)
Elimination of notes receivable from affiliates -- | -- 350
Common stock issued in acquisitions -- | -- 376
----- | ----- -----
|
Cash paid for acquisitions $ (29) | $(353) $ (72)
===== | ===== =====
|
Capitalized costs of distribution agreements $ 79 | $ -- $ 83
===== | ===== =====
</TABLE>
(continued)
I-23
<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company ceased to include TV Guide, Inc. ("TV Guide") in its
consolidated financial results and began to account for TV Guide using
the equity method of accounting effective February 28, 1999 (see note
7). In addition, during the second quarter of 1999, the Company ceased
to include @Home in its consolidated financial results and began to
account for @Home using the equity method of accounting (see note 6).
The effects of changing the method of accounting for the Company's
ownership interests in TV Guide and @Home from the consolidation method
to the equity method are summarized below (amounts in millions):
<TABLE>
<CAPTION>
Four months Two months
ended ended
June 30, 1999 February 28, 1999
------------- -----------------
<S> <C> <C>
Assets (other than cash and cash equivalents) |
reclassified to investments in affiliates $(896) | $(572)
Liabilities reclassified to investments in affiliates 357 | 190
Minority interests in equity of subsidiaries |
reclassified to investments in affiliates 474 | 63
Gain on issuance of equity by subsidiary 466 | 372
----- | -----
|
Decrease in cash and cash equivalents $ 401 | $ 53
===== | =====
</TABLE>
For a description of certain additional non-cash transactions, see
notes 2, 6 and 7.
The Company's restricted cash of $40 million and $185 million at June
30, 1999 and December 31, 1998, respectively, is primarily comprised of
proceeds received in connection with certain asset dispositions. Such
proceeds, which aggregated $32 million and $162 million at June 30,
1999 and December 31, 1998, respectively, are designated to be
reinvested in certain identified assets for income tax purposes. At
December 31, 1998, the Company's restricted cash also included $17
million held as collateral for interest payment obligations pursuant to
certain bank credit facilities.
(continued)
I-24
<PAGE> 26
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investment in Liberty Media Group
---------------------------------
As described in note 2, immediately following the AT&T Merger, the
entities comprising the Liberty Media Group were deconsolidated. The
Company's investment in Liberty Media Group includes non-interest
bearing receivables from Liberty Media Group. Summarized unaudited
results of operations for Liberty Media Group for the period in which
the Company used the equity method to account for Liberty Media Group
are as follows (amounts in millions):
<TABLE>
<CAPTION>
Four months
ended
June 30, 1999
-------------
<S> <C>
Revenue $ 292
Operating costs and expenses (240)
Stock compensation (455)
Depreciation and amortization (230)
-------
Operating loss (633)
Interest expense (46)
Other, net 78
-------
Net loss $ (601)
=======
</TABLE>
During March and April 1999, certain convertible debentures of a
subsidiary attributed to the Liberty Media Group were converted into
shares of AT&T Liberty Tracking Stock. The $354 million principal
amount of such converted debentures has been reflected as an increase
to New TCI's additional paid-in capital.
The accompanying consolidated statement of stockholders' equity for the
four months ended June 30, 1999 includes changes in Liberty Media
Group's unrealized holding gains for available-for-sale securities
totaling $2,012 million, net of taxes, and Liberty Media Group's
foreign currency translation adjustments totaling $43 million, net of
taxes.
(continued)
I-25
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Investments in the Other Affiliates
-----------------------------------
The Company has various investments in the Other Affiliates accounted
for under the equity method. The following table includes the Company's
carrying value of its more significant investments in the Other
Affiliates as of the indicated dates:
<TABLE>
<CAPTION>
New TCI Old TCI
-------- ------------
June 30, December 31,
1999 1998
-------- ------------
amounts in millions
<S> <C> <C>
Cablevision Systems Corporation ("CSC") (a) $ 3,223 | $ 945
@Home (b) 3,193 | --
Lenfest Communications, Inc. ("Lenfest") 1,708 | (138)
Texas Cable Partners, L.P. 726 | 111
InterMedia Capital Partners IV, L.P.
("InterMedia IV") and InterMedia
Capital Management IV, L.P. ("ICM IV") 574 | 201
USA Networks, Inc. and related investments (c) -- | 1,042
Various foreign equity investments (c) -- | 1,492
Other 1,658 | 1,056
------- | -------
$11,082 | $ 4,709
======= | =======
</TABLE>
-----------------
(a) CSC
On March 4, 1998, the Company contributed to CSC certain of
its cable television systems serving approximately 830,000
customers in exchange for approximately 48.9 million newly
issued CSC Class A common shares (the "CSC Transaction"). CSC
also assumed and repaid approximately $574 million of debt
owed by the Company to external parties and $95 million of
debt owed to the Company. As a result of the CSC Transaction,
the Company recognized a $506 million gain in the accompanying
consolidated statement of operations for the six months ended
June 30, 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.
(continued)
I-26
<PAGE> 28
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has also entered into letters of intent with CSC
which provide for the Company to acquire a cable system in
Michigan and an additional 4% of CSC's Class A common shares
and for CSC to (i) acquire cable systems serving approximately
250,000 customers in Connecticut and (ii) assume $110 million
of liabilities.
At June 30, 1999, the Company owned 48,942,172 shares of CSC
Class A common stock, which had a closing market price of
$70.00 per share on such date. Such shares represented an
approximate 32% equity interest in CSC's total outstanding
shares and an approximate 9% voting interest in CSC in all
matters except for (i) the election of directors, in which
case the Company effectively has the right to designate two of
CSC's directors, and (ii) any increase in authorized shares,
in which case the Company has agreed to vote its interest in
proportion with the public holders of CSC Class A common
shares. The ability of the Company to sell or increase its
investment in CSC is subject to certain restrictions and
limitations set forth in a stockholders agreement with CSC. As
a result of the deconsolidation of Liberty Media Group,
1,040,400 shares of CSC Class A common stock held by Liberty
Media Group are no longer included in the Company's investment
in CSC. See note 2.
(b) @Home
During the second quarter of 1999, the stockholders of @Home
approved certain changes in the corporate governance of @Home.
As a result of these changes, management has concluded that
TCI no longer holds a controlling financial interest (as that
term is used in Statement of Financial Accounting Standards
No. 94) in @Home and, accordingly, during the second quarter
of 1999, TCI ceased to consolidate @Home and began to account
for @Home using the equity method of accounting.
On May 28, 1999, @Home consummated a merger agreement with
Excite, Inc. ("Excite"), a global Internet media company that
offers consumers and advertisers comprehensive Internet
navigation services with extensive personalization
capabilities. Under the terms of the merger agreement, @Home
issued approximately 116 million shares of its common stock
(as adjusted for a June 1999 two-for-one stock split) for all
of the outstanding common stock of Excite based on an exchange
ratio of 2.083804 shares of @Home's common stock (as adjusted
for a June 1999 two-for-one stock split) for each share of
Excite's common stock. @Home may issue up to approximately 46
million additional shares of common stock (as adjusted for a
June 1999 two-for-one stock split) in connection with the
assumption of obligations under Excite's stock option and
employer stock purchase plans and outstanding warrants. As a
result of the merger, TCI's economic interest in @Home
decreased from 38% to 26%. Due to the resulting increase in
@Home's equity, net of the dilution of TCI's ownership
interest in @Home, TCI recorded a $466 million increase to
"Additional paid-in capital" and a $298 million increase to
"Deferred income tax liability." At June 30, 1999, the Company
owned 63,720,000 shares of @Home Class A common stock (as
adjusted for a June 1999 two-for-one stock split), which had a
closing market price of $53.94 per share on such date.
(continued)
I-27
<PAGE> 29
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the two months ended February 28, 1999, @Home issued
2.2 million common shares (as adjusted for a June 1999
two-for-one stock split). Due to the resulting increase in
@Home's equity, net of the dilution of TCI's ownership
interest in @Home, TCI recognized a gain of $17 million.
(c) Liberty Media Group Investments
As a result of the deconsolidation of Liberty Media Group, the
indicated investments are no longer included in the Company's
consolidated investments. See note 2.
At June 30, 1999, the aggregate carrying value of the Company's
investments in the Other Affiliates exceeded the Company's aggregate
proportionate share of the Other Affiliates' underlying equity by $11.2
billion, of which $5.4 billion, $4.2 billion and $1.6 billion is being
amortized over 40 years, 25 years and 7 years, respectively.
TCI has entered into various agreements, which, among other matters,
contemplate the disposition of certain of its investments in the Other
Affiliates. See note 7.
Summarized unaudited combined results of operations for the Other
Affiliates for the periods in which the Company used the equity method
to account for the Other Affiliates are as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
Combined Operations 1999 1998
------------------- ------- -------
amounts in millions
<S> <C> <C>
Revenue $ 5,443 $ 8,209
Operating expenses (4,333) (7,211)
Depreciation and amortization (1,324) (1,585)
------- -------
Operating loss (214) (587)
Interest expense (766) (1,110)
Other, net (124) (172)
------- -------
Net loss $(1,104) $(1,869)
======= =======
</TABLE>
(7) Acquisitions and Dispositions
-----------------------------
On May 4, 1999, AT&T and Comcast Corporation ("Comcast") announced that
they had signed a letter of intent to exchange various cable systems,
including certain cable systems of TCI. In addition, Comcast will
receive an option from AT&T to purchase, over the next three years,
additional cable systems with a total of approximately 1.25 million
subscribers, which may include cable subscribers of TCI. The foregoing
agreements are subject to completion of certain other transactions, and
regulatory and legal approvals.
(continued)
I-28
<PAGE> 30
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On May 4, 1999, AT&T and Lenfest announced that they have signed an
agreement for AT&T to acquire the remaining 50% interest in Lenfest not
already owned by TCI. Lenfest has approximately 1.5 million customers
in the greater Philadelphia area. AT&T has agreed to a stock purchase
of the remaining ownership interest, and expects to issue shares of
AT&T Common Stock to Lenfest valued at approximately $2.2 billion,
subject to purchase price adjustments. The number of shares of AT&T
Common Stock issued to Lenfest will be based on the average price per
share of AT&T Common Stock during the sixty day period prior to the
closing date. The transaction is subject to receipt of necessary legal
and regulatory approvals. No assurance can be given that such
transaction will be consummated. See note 6.
On July 6, 1999, AT&T and Cox Communications, Inc. ("Cox") signed an
agreement whereby AT&T would redeem approximately 50.3 million shares
of AT&T Common Stock held by Cox in exchange for cable television
systems of TCI serving approximately 316,000 customers and TCI's
interest in certain equity method investments. The transaction is
subject to receipt of necessary government and regulatory approvals. No
assurance can be given that such transaction will be consummated. See
note 6.
TCI has entered into agreements with Century Communications Corp.
("Century") whereby TCI will contribute cable television systems
serving approximately 249,000 customers located in Southern California
to a newly formed limited partnership in which TCI will have an
approximate 25% partnership interest. TCI will also exchange
with the new partnership, a cable television system serving
approximately 100,000 customers in Southern California for cable
television systems in Northern California serving approximately 100,000
customers. The transactions are subject to various closing conditions.
No assurance can be given that such transactions will be consummated.
During the second quarter of 1999, the Company entered into an
agreement for the acquisition by Charter Communications, Inc.
("Charter") and TCI of certain cable television systems owned by
InterMedia IV and InterMedia Partners. Charter will pay consideration
consisting of cash and cable television systems for the systems it
acquires from InterMedia IV. TCI will acquire certain other cable
systems in a non-cash transaction. Upon the consummation of the
transactions, TCI will own all of the partnership interests in
InterMedia IV and InterMedia Partners. The transactions are subject to
various closing conditions. No assurance can be given that such
transactions will be consummated. See notes 6 and 12.
During the second quarter of 1999, TCI entered into separate agreements
to sell the majority of its 50% interest in Bresnan Communications
Group LLC (the "Bresnan Transaction") and its 46% interest in Falcon
Communications, L.P. (the "Falcon Transaction") to Charter. In
accordance with the terms of the Bresnan Transaction, TCI would receive
consideration of approximately $900 million in the form of cash, and an
approximate 4.5% interest in a new entity to be formed by Charter. In
accordance with the terms of the Falcon Transaction, TCI would receive
cash proceeds of approximately $725 million for its interest in Falcon
Communications, L.P. The transactions are subject to various closing
conditions. No assurance can be given that such transactions will be
consummated. See note 6
During the second quarter of 1999, the Company paid $40 million in cash
and traded cable television systems serving approximately 618,000
customers located in Florida, Hawaii, Maine, New York, Ohio, Texas and
Wisconsin in exchange for cable systems serving approximately 565,000
customers located in Illinois, New Jersey, Oregon and Pennsylvania (the
"1999 Exchange"). The 1999 Exchange was consummated pursuant to an
agreement that was executed in November 1998. No gain was recognized on
the 1999 Exchange due to the Company's application of purchase
accounting in connection with the AT&T Merger.
(continued)
I-29
<PAGE> 31
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the two months ended February 28, 1999, the Company completed a
transaction whereby the Company contributed cable television systems to
an entity in which the Company had an approximate 80% ownership
interest. Through a series of transactions, including the contribution
of cash by a third party in exchange for an ownership interest in the
entity, the Company's ownership interest in such majority-owned
subsidiary was reduced to a non-controlling 50% ownership interest (the
"1999 Contribution Transaction"). In connection with the associated
dilution of the Company's ownership interest, the Company
deconsolidated assets and liabilities related to cable television
systems serving approximately 614,000 customers. The deconsolidated
liabilities included $210 million of debt owed to external parties and
$709 million of intercompany debt owed to the Company. In connection
with the 1999 Contribution Transaction, the Company has agreed to take
certain steps to support compliance by such entity with its payment
obligations under certain debt instruments. See note 13. As a result of
the dilution of the Company's ownership interest from 80% to 50%, the
Company recorded a $9 million increase (net of deferred income taxes of
$5 million) to additional paid-in capital in connection with the 1999
Contribution Transaction. No gain was recognized due to the Company's
aforementioned commitment to support the entity's payment obligations
under certain debt instruments.
During February 1999, the Company sold cable television assets serving
approximately 145,000 customers to an unaffiliated third party for
approximately $300 million. The Company recorded a $123 million gain on
such disposition.
During the year ended 1998, the Company completed various transactions
in addition to the CSC Transaction described in note 6, wherein the
Company contributed cable television systems serving in the aggregate
approximately 1.9 million customers to several joint ventures
(collectively, the "1998 Joint Ventures") in exchange for
non-controlling ownership interests in each of the 1998 Joint Ventures,
and the assumption and repayment by the 1998 Joint Ventures of debt
owed by the Company to external parties aggregating $323 million and
intercompany debt owed to the Company aggregating $2,374 million. In
connection with such transactions, the Company has agreed to take
certain steps to support compliance by the 1998 Joint Ventures with
their payment obligations under certain debt instruments. See notes 6
and 13.
(continued)
I-30
<PAGE> 32
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective February 28, 1999, TV Guide (formerly United Video Satellite
Group, Inc. ("UVSG")) and The News Corporation Limited ("News Corp.")
completed a transaction whereby News Corp.'s TV Guide properties were
combined with UVSG to create a platform for offering television guide
services to consumers and advertising and the resulting company was
named TV Guide. As part of this combination, a unit of News Corp.
received consideration consisting of $800 million in cash and 60
million shares of UVSG's stock, including 22.5 million shares of its
Class A common stock and 37.5 million shares of its Class B common
stock. In addition, News Corp. elected to purchase approximately 6.5
million additional shares of UVSG Class A common stock for $129 million
in order to equalize its ownership with that of Liberty/Ventures Group.
Prior to such transactions, UVSG was a subsidiary of TCI. As a result
of these transactions, and another transaction completed on the same
date, News Corp., Liberty/Ventures Group and TV Guide's public
stockholders own on an economic basis approximately 44%, 44% and 12%,
respectively, of TV Guide. Following such transactions, News Corp. and
Liberty/Ventures Group each have approximately 49% of the voting power
of TV Guide's outstanding stock. Due to the resulting increase in TV
Guide's equity, net of the dilution of TCI's ownership interest in TV
Guide, TCI recognized a $372 million gain (before deducting deferred
income tax expense of $147 million).
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.
(8) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
New TCI Old TCI
-------- ------------
June 30, December 31,
1999 1998
-------- ------------
amounts in millions
<S> <C> <C>
AT&T Notes (a) $ 7,286 | $ --
Other notes payable (b) 9,602 | 9,412
Bank credit facilities (c) -- | 3,773
Commercial paper -- | 109
Convertible notes (d) -- | 40
Capital lease obligations and other debt 313 | 718
------- | -------
|
$17,201 | $14,052
======= | =======
</TABLE>
(a) Amounts outstanding under the notes payable to AT&T ("AT&T
Notes") bear interest at the London Interbank Offered Rate
("LIBOR") plus 15 basis points (5.52% at June 30, 1999) and
are due and payable on or before March 9, 2004. Interest on
the AT&T Notes is compounded quarterly.
(continued)
I-31
<PAGE> 33
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) During the two months ended February 28, 1999, the Company
redeemed certain notes payable which had an aggregate
principal balance of $21 million and fixed interest rates
ranging from 8.75% to 9.25%. In connection with such
redemptions, the Company recognized a pre-tax loss on early
extinguishment of debt of $4 million in 1999. Such loss
related to prepayment penalties and the retirement of deferred
loan costs.
During the six months ended June 30, 1998, the Company
redeemed certain notes payable which had an aggregate
principal balance of $299 million and fixed interest rates
ranging from 8.67% to 10.125%. In connection with such
redemptions, the Company recognized a pre-tax loss on early
extinguishment of debt of $38 million in 1998. Such loss
related to prepayment penalties amounting to $34 million and
the retirement of deferred loan costs.
(c) During the two months ended February 28, 1999, the Company
repaid a bank credit facility. In connection with such
repayment, the Company recognized a pre-tax loss on early
extinguishment of debt of $4 million. Such loss related to the
retirement of deferred loan costs.
As security for borrowings under one of Old TCI's credit
facilities, Old TCI had pledged a portion of its Time Warner
common stock. As a result of the deconsolidation of
Liberty/Ventures Group, such borrowings and the associated
Time Warner common stock are no longer reflected in the
Company's consolidated debt and asset balances.
(d) The convertible notes, which were stated net of unamortized
discount of $166 million at December 31, 1998, were scheduled
to mature on December 12, 2021. The notes required an annual
interest payment equal to 1.85% of the face amount of the
notes. On March 26, 1999, all of the notes were converted into
shares of AT&T Common Stock, AT&T Liberty Class A Tracking
Stock and TCI Satellite Entertainment, Inc. Series A common
stock, $1.00 par value per share ("Satellite Series A Common
Stock") in accordance with the terms of the notes. Following
such conversion, none of such notes remain outstanding. Such
notes were held by a then director of the Company, as well as
several members of his family. In connection with the AT&T
Merger, such director resigned. Immediately prior to the AT&T
Merger, the notes were convertible, at the option of the
holders, into an aggregate of 24,163,259 shares of TCI Group
Series A Stock, 19,416,889 shares of Liberty Group Series A
Stock, 20,711,364 shares of TCI Ventures Group Series A Stock
and 3,451,897 shares of Satellite Series A Common Stock.
Pursuant to the terms of the Merger Agreement and a certain
stock purchase agreement, dated as of July 9, 1986, among the
Company and the holders of such convertible notes, the
conversion feature of the convertible notes was adjusted such
that as of the March 9, 1999 consummation date of the AT&T
Merger, such notes were convertible into an aggregate of
28,632,122 shares of AT&T Common Stock, 60,373,632 shares of
AT&T Liberty Class A Tracking Stock (as adjusted for a June
1999 two-for-one stock split) and 3,451,897 shares of
Satellite Series A Common Stock.
(continued)
I-32
<PAGE> 34
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain debt instruments of a subsidiary of the Company 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 aggregate fair value assigned in purchase accounting to New TCI's
debt and related variable and fixed interest rate exchange agreements
("Interest Rate Swaps") exceeded the aggregate recorded value at the
date of the AT&T Merger by $945 million. Such excess is being amortized
over the respective remaining 1 to 30 year lives of the underlying debt
obligations and Interest Rate Swaps. See note 2.
The fair value of the Company's debt, exclusive of the AT&T Notes, 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 June 30, 1999, the fair value of the
Company's debt, exclusive of the AT&T Notes, was $9,584 million, as
compared to a carrying value of $9,915 million on such date. Due to its
related party nature, it is not practical to obtain a reasonable
estimate of the fair value of the AT&T Notes.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company may enter into Interest Rate Swaps pursuant
to which it (i) pays fixed interest rates (the "Fixed Rate Agreements")
and receives variable interest rates and (ii) pays variable interest
rates (the "Variable Rate Agreements") and receives fixed interest
rates. During the six months ended June 30, 1998, the Company's
payments pursuant to the Fixed Rate Agreements were $1 million. At
December 31, 1998, all of the Company's Fixed Rate Agreements had
expired, therefore, no such payments were made in 1999. During the four
months ended June 30, 1999, the two months ended February 28, 1999 and
the six months ended June 30, 1998, the Company's net receipts pursuant
to the Variable Rate Agreements were $9 million, $1 million and $4
million, respectively.
Information concerning the Company's Variable Rate Agreements at June
30, 1999 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to be
Expiration Interest rate Notional received (paid) upon
date to be received amount termination (a)
---------- -------------- -------- --------------------
<S> <C> <C> <C>
September 1999 6.4% $ 350 $ 2
February 2000 5.8%-6.6% 300 2
March 2000 5.8%-6.0% 675 3
September 2000 5.1% 75 (1)
March 2027 9.7% 300 9
December 2036 9.7% 200 --
------- -------
$ 1,900 $ 15
======= =======
</TABLE>
--------------------
(a) The estimated amount that the Company would receive to
terminate the agreements at June 30, 1999, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
(continued)
I-33
<PAGE> 35
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition to the Variable Rate Agreements, the Company has entered
into Interest Rate Swaps pursuant to which it pays a variable rate
based on LIBOR (6.1% at June 30, 1999) and receives a variable rate
based on the Constant Maturity Treasury Index ("CMT") (5.9% at June 30,
1999) on a notional amount of $400 million through September 2000; and
pays a variable rate based on LIBOR (6.0% at June 30, 1999) and
receives a variable rate based on CMT (6.0% at June 30, 1999) on
notional amounts of $95 million through February 2000. During each of
the four months ended June 30, 1999, the two months ended February 28,
1999 and the six months ended June 30, 1998, the Company's net payments
pursuant to such agreements were $1 million. At June 30, 1999, the
Company would be required to pay less than $1 million to terminate such
Interest Rate Swaps.
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties. Further, the Company does not anticipate material
near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of June 30, 1999.
(9) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities
-------------------------------------------------------------
The Trust Preferred Securities are presented together in a separate
line item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities."
Dividends accrued on the Trust Preferred Securities aggregated $48
million, $23 million and $71 million during the four months ended June
30, 1999, the two months ended February 28, 1999 and the six months
ended June 30, 1998, respectively, and are included in minority
interests in earnings of consolidated subsidiaries in the accompanying
consolidated financial statements.
The aggregate fair value assigned to the Trust Preferred Securities in
purchase accounting exceeded the aggregate recorded value at the date
of the AT&T Merger by $160 million. Such excess is being amortized over
the remaining 28 to 46 year terms of such securities.
(10) Stockholders' Equity
--------------------
Treasury Stock and Common Stock Held by Subsidiaries, at Cost
-------------------------------------------------------------
In conjunction with the AT&T Merger, Old TCI shares held in treasury
and Old TCI shares held by subsidiaries were canceled. See note 2.
(continued)
I-34
<PAGE> 36
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
General
-------
During 1997, Old TCI entered into certain equity swap facilities. Due
to Old TCI's ability to issue shares to settle periodic price
fluctuations and fees under the equity swap facilities, Old TCI
recorded all amounts received or paid under these arrangements as
increases or decreases, respectively, to equity. From February 1, 1999
to March 5, 1999, Old TCI terminated all transactions under the equity
swap facilities and the related swap agreements. In connection with the
termination of such transactions, the Company received aggregate cash
payments of $677 million. Such cash payments are reflected in Old TCI's
consolidated financial statements for the two months ended February 28,
1999.
In July 1998, the Company entered into an equity swap transaction with
a commercial bank, which provided the Company with the right but not
the obligation to acquire 1,084,056 shares of TCI Group Series A Stock
for approximately $45 million on or before April 19, 1999. During the
two months ended February 28, 1999, the Company acquired the 1,084,056
shares of TCI Group Series A Stock under the agreement. Such shares
were used to satisfy the exchange requirements of a subsidiary's
preferred stock. The $29 million excess of the amount paid for the TCI
Group Series A Stock over the Company's minority interest in such
subsidiary has been reflected as a decrease to stockholders' equity in
the accompanying consolidated financial statements for the two months
ended February 28, 1999.
(11) Transactions with Related Parties
---------------------------------
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. As a result of such merger, TCI received in exchange
for all of its interest in TCG, 70,429,248 shares of AT&T Common Stock.
TCI recognized a $2.3 billion gain (before deducting deferred income
tax expense of $883 million) on such transaction during the third
quarter of 1998 based on the difference between the carrying amount of
TCI's interest in TCG and the fair value of the AT&T Common Stock
received. Prior to the AT&T Merger, TCI had accounted for its ownership
interest in AT&T Common Stock as an available-for-sale security. Such
AT&T Common Stock was transferred from Liberty/Ventures Group to TCI
Group in connection with the AT&T Merger. See note 2. In addition,
immediately prior to the AT&T Merger, certain shares of Series F
Preferred Stock were converted into shares of TCI Group Stock which, in
turn, were converted into 215,755,850 shares of AT&T Common Stock. Such
converted shares are recorded at Old TCI's historical cost basis. New
TCI treats its investment in AT&T Common Stock as an investment in its
parent. Accordingly, New TCI's investment in AT&T Common Stock is
reflected as a reduction of TCI's equity. The Company does not
anticipate that it will receive dividends on its investment in AT&T
Common Stock.
The Company's non-interest bearing intercompany account with AT&T ($15
million at June 30, 1999) is included in TCI's "Investment in AT&T" in
the accompanying consolidated balance sheet.
(continued)
I-35
<PAGE> 37
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain entities attributed to Liberty Media Group produce and/or
distribute programming to the Company. Charges to the Company
aggregated $69 million for the four months ended June 30, 1999. Such
amount is included in operating costs and expenses in the accompanying
consolidated statements of operations.
AT&T provides long distance service and allocates certain other
administrative costs to the Company. During the four months ended June
30, 1999, such amounts aggregated $17 million and are included in
selling, general and administrative expenses in the accompanying
consolidated statements of operations.
NDTC leases transponder facilities to entities attributed to Liberty
Media Group. Charges by NDTC for such arrangements were $10 million for
the four months ended June 30, 1999 and are included in revenue in the
accompanying consolidated statements of operations.
(12) Transactions with Officers and Directors
----------------------------------------
After the Company's stockholders voted to approve the terms of the AT&T
Merger, on February 17, 1999, TCI's Board of Directors approved the
payment by Liberty/Ventures Group of $1 million to each of two
directors of the Company for their services on the Special Committee of
TCI's Board of Directors in evaluating the AT&T Merger and the
consideration to be received by the stockholders of the Company. In
addition, Liberty/Ventures Group paid $10 million to a director and
executive officer of TCI, immediately prior to the AT&T Merger, for his
services in negotiating the merger agreement and completing the AT&T
Merger.
Prior to the AT&T Merger, a limited liability company owned by Dr.
Malone, TCI's Chairman and Chief Executive Officer, acquired, from
certain subsidiaries of Old TCI, working cattle ranches located in
Wyoming in exchange for a $17 million promissory note from such limited
liability company. No gain or loss was recognized on such acquisition.
Upon payment of such note, the excess of the proceeds received over the
carrying value of the cattle ranches will be reflected as an increase
to additional paid-in-capital. The purchase price paid by such limited
liability company was in the form of a 12-month note in the amount of
$17 million having an interest rate of 7%. Such note is payable to an
entity attributed to Liberty Media Group at any time without penalty
and is personally guaranteed by Dr. Malone.
(continued)
I-36
<PAGE> 38
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As described more fully in note 7, the Company has entered into an
agreement wherein TCI will acquire all of the partnership interests in
InterMedia IV and InterMedia Partners. An individual who is a director
and executive officer of TCI, currently has a .001% special limited
partnership interest in ICM IV, which in turn has a 1.19% limited
partnership interest in InterMedia IV. Such individual's special
limited partnership interest in ICM IV was created in August 1997 in
connection with TCI's acquisition of all of the partnership interests
(other than a .002% general partnership interest and a .001% special
limited partnership interest) in ICM IV. Such individual also
indirectly owns a minimal interest in InterMedia Partners. In
connection with the proposed transaction described in note 7, it is
anticipated that such individual, by virtue of his .001% special
limited partnership interest in ICM IV, will participate in a profit
sharing mechanism of InterMedia IV and receive cash consideration based
on the valuation of InterMedia IV in the transaction described in note
7. Although the amount of such consideration is uncertain at this time,
its is expected that such consideration will be approximately $10
million. In the transaction described above, it is expected that such
individual will receive less than $50,000 for his indirect interest in
InterMedia Partners.
For additional transactions involving the Company's officers and
directors, see notes 8 and 13.
(13) Commitments and Contingencies
-----------------------------
The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act") imposed certain rate regulations on the cable
television industry. Under the 1992 Cable Act, all cable systems are
subject to rate regulation, unless they face "effective competition,"
as defined by the 1992 Cable Act and expanded in the Telecommunications
act of 1996 (the "1996 Act"), in their local franchise area.
Although the Federal Communications Commission (the "FCC") has
established regulations required by the 1992 Cable Act, local
government units (commonly referred to as local franchising
authorities) are primarily responsible for administering the regulation
of a cable system's basic service tier ("BST"). The FCC itself directly
administered rate regulation of any cable programming service tier
("CPST"). The FCC's authority to regulate CPST rates expired on March
31, 1999. The FCC has taken the position that it will still adjudicate
CPST complaints filed after this sunset date (but no later than 180
days after the last CPST rate increase imposed prior to March 31,
1999), and will strictly limit its review (and possible refund orders)
to the time period predating the sunset date.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had
their rate increases governed by a complicated price structure that
allows for the recovery of inflation and certain increased costs, as
well as providing some incentive for expanding channel carriage.
Operators also have the opportunity to bypass this "benchmark"
regulatory structure in favor of the traditional "cost-of-service"
regulation in cases where the latter methodology appears favorable.
Premium cable services offered on a per-channel or per-program basis
remain unregulated, as do affirmatively marketed packages consisting
entirely of new programming product.
(continued)
I-37
<PAGE> 39
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 and the 1996 Act, including its
rate setting provisions. 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 CPST rates would be retroactive to the date of complaint. Any
refunds of the excess portion of BST or equipment rates would be
retroactive to one year prior to the implementation of the rate
reductions.
The Company is obligated and/or has guaranteed Liberty Media Group's
obligation 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 June 30, 1999, these
agreements require minimum payments aggregating approximately $317
million. The aggregate amount of the Film Licensing Obligations under
these license agreements is not currently estimable because such amount
is dependent upon the number of qualifying films released theatrically
by certain motion picture studios as well as the domestic theatrical
exhibition receipts upon the release of such qualifying films.
Nevertheless, required aggregate payments under the Film Licensing
Obligations could prove to be significant.
The Company is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, the Company is
committed to carry such suppliers' programming on its cable systems.
Additionally, certain of such agreements provide for penalties and
charges in the event the programming is not carried or not delivered to
a contractually specified number of customers.
The Company is committed to purchase billing services from a third
party pursuant to three successive five-year agreements. Pursuant to
such arrangement, the Company is obligated at June 30, 1999 to make
minimum payments aggregating approximately $1.5 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 $77 million at June 30, 1999. The Company also has agreed
to take certain steps to support debt compliance with respect to
obligations aggregating $1,690 million of certain cable television
partnerships in which the Company has non-controlling ownership
interests. See note 7. 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-38
<PAGE> 40
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1999, a subsidiary of the Company entered into a contribution
agreement ("Contribution Agreement") with certain shareholders of
Phoenixstar, Inc. (formerly Primestar, Inc.) ("Phoenixstar") pursuant
to which the Company would, to the extent it is relieved of $166
million of contingent liabilities currently owed to certain creditors
of Phoenixstar and its subsidiaries, contribute up to $166 million to
Phoenixstar to the extent necessary to satisfy liabilities of
Phoenixstar. During the second quarter of 1999 and the fourth quarter
of 1998, the Company recorded charges of $50 million and $90 million,
respectively, to provide for the estimated losses that were expected to
result from the Contribution Agreement. During the second quarter of
1999, the Company contributed approximately $114 million to Phoenixstar
in partial satisfaction of its obligation. The Company's remaining
obligation under the Contribution Agreement will expire in 2001. An
individual who is a director of TCI is also the Chairman of the Board
of TCI Satellite Entertainment, Inc. ("TSAT"). TSAT has an approximate
37% ownership interest in Phoenixstar.
TCI has agreed to make fixed monthly payments to an entity attributed
to Liberty Media Group pursuant to an affiliation agreement. The fixed
annual commitments increase annually from $190 million in 1999 to $267
million in 2003, and will increase with inflation through 2022. In
addition, TCI is obligated to make minimum revenue payments through
2017 and minimum license fee payments through 2007 aggregating $392
million to an entity attributed to Liberty Media Group. Such minimum
payments are subject to inflation and other adjustments pursuant to the
terms of the underlying agreements.
Effective as of December 16, 1997, NDTC on behalf of the Company 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 GI to purchase advanced digital
set-top devices. The hardware and software incorporated into these
devices are designed and manufactured to be compatible and
interoperable with the OpenCable(TM) architecture specifications
adopted by CableLabs, the cable television industry's research and
development consortium, in November 1997. NDTC has agreed that Approved
Purchasers will purchase, in the aggregate, a minimum of 6.5 million
set-top devices during calendar years 1998, 1999 and 2000 at an average
price of $318 per set-top device. The 1998 purchase commitment of 1.5
million set-top devices was met. During the six months ended June 30,
1999, approximately 930,000 set-top devices had been purchased related
to the 1999 commitment of 1,750,000 devices. 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. In connection
with the AT&T Merger, such warrants were transferred to
Liberty/Ventures Group in exchange for approximately $176 million in
cash. To the extent such warrants do not vest because TCI fails to meet
its purchase commitments, TCI is required to repay a proportional
amount of such cash to Liberty Media Group. NDTC has the right to
terminate the Digital Terminal Purchase Agreement if, among other
reasons, GI fails to meet a material milestone designated in the
Digital Terminal Purchase Agreement with respect to the development,
testing and delivery of advanced digital set-top devices.
(continued)
I-39
<PAGE> 41
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 17, 1998, the Company acquired 21.4 million shares of common
stock of GI in exchange for (i) certain of the assets of NDTC's set-top
authorization business, (ii) the license of certain related software to
GI, (iii) a $50 million promissory note from the Company to GI, and
(iv) a nine-year revenue guarantee from the Company in favor of GI. In
connection therewith, NDTC also entered into a services agreement
pursuant to which it will provide certain postcontract services to GI's
set-top authorization business. The 21.4 million shares of GI common
stock are, in addition to other transfer restrictions, restricted as to
their sale by NDTC for a three-year period. The Company recorded its
investment in such shares at fair value which included a discount
attributable to the above-described liquidity restriction. As a result
of the deconsolidation of Liberty Media Group, the 21.4 million shares
of GI common stock are no longer included in the Company's consolidated
assets. The $346 million excess of the fair value of GI common stock
received in 1998 over (i) the book value of certain assets transferred
from NDTC to GI, and (ii) the $42 million present value of the
promissory note due from the Company to GI, was deferred by the
Company. A portion of such excess equal to the $160 million present
value of the annual amounts specified by the revenue guarantee is being
amortized to revenue over nine years in proportion to such annual
guaranteed amounts. The remaining $186 million excess is being
amortized to revenue on a straight-line basis over the nine-year period
that NDTC is required to perform postcontract services.
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) Year 2000
---------
During the six months ended June 30, 1999, the Company continued its
enterprise-wide, comprehensive efforts to assess and remediate its
computer systems and related software and equipment to ensure such
systems, software and equipment recognize, process and store
information in the year 2000 and thereafter. The Company's year 2000
remediation efforts include an assessment of its most critical systems,
such as customer service and billing systems, headends and other cable
plant systems that support the Company's programming services, business
support operations, and other equipment and facilities. The Company
also continued its efforts to verify the year 2000 readiness of its
significant suppliers and vendors and continued to communicate with
significant business partners and affiliates to assess such partners
and affiliates' year 2000 status.
The Company has a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 remediation efforts. The PMO is
responsible for overseeing, coordinating and reporting on the Company's
year 2000 remediation efforts. At June 30, 1999, it was comprised of a
340-member, full-time staff, accountable to executive management of the
Company.
(continued)
I-40
<PAGE> 42
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the six months ended June 30, 1999, the Company continued its
survey of significant third-party vendors and suppliers whose systems,
services or products are important to the Company's operations. The
year 2000 readiness of such vendors and suppliers is critical to
continued provision of the Company's cable service. The Company has
examined the public disclosures regarding compliance status made by
vendors of critical systems products utilized by the Company (such as
addressable controllers, accounting systems and other critical hardware
and software), and the Company is in the process of examining the
public disclosures regarding compliance status made by critical
suppliers (such as utilities, banking, and similar critical operational
services). Verification of the survey results may include, as deemed
necessary, conducting functionality tests, reviewing vendors' test data
certifications, engaging in regular conferences with vendors' year 2000
teams, or re-examining public disclosures for changes in status. For
those vendors and suppliers who do not expect to be year 2000 ready by
December 31, 1999, or are deemed to be critical to the Company's
operations, contingency planning efforts are underway to make such
changes as are required to continue critical operations.
Significant market value is associated with the Company's investments
in certain public and private corporations, partnerships and other
businesses. Accordingly, the Company is monitoring the public
disclosure of such publicly-held business entities, including CSC and
@Home, to determine their year 2000 readiness. In addition, the Company
has surveyed and monitored the year 2000 status of certain
privately-held business entities in which the Company has significant
investments.
Year 2000 expenses and capital expenditures incurred during the four
months ended June 30, 1999 were $31 million and $10 million,
respectively. Year 2000 expenses and capital expenditures incurred
during the two months ended February 28, 1999 were $11 million and $2
million, respectively. Year 2000 expenses and capital expenditures for
the four months ended June 30, 1999 are exclusive of costs attributable
to Liberty Media Group, which was deconsolidated as of March 1, 1999.
See note 2. Management of the Company currently estimates the remaining
costs, exclusive of future costs attributable to the assessment and
remediation of year 2000 issues associated with Liberty Media Group, to
be not less than $69 million, bringing the total estimated cost
associated with the Company's year 2000 remediation efforts to be not
less than $136 million (including $32 million for replacement of
noncompliant information technology systems). Also included in this
estimate is $13 million in future payments to be made pursuant to
unfulfilled executory contracts or commitments with vendors for year
2000 remediation services.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There
can be no assurance that the Company's systems or the systems of other
companies on which the Company relies will be converted in time or that
any such failure to convert by the Company or other companies will not
have a material adverse effect on its financial position, results of
operations or cash flows.
(continued)
I-41
<PAGE> 43
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Information about the Company's Operating Segments
--------------------------------------------------
Prior to the AT&T Merger, Old TCI had 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 are
produced, acquired, and distributed, through all available formats and
media, branded entertainment and informational programming and
software, including multimedia products, delivered in both analog and
digital form. Old TCI's domestic cable and communications services
business and assets were included in TCI Group, and Old TCI's domestic
programming business and assets were included in Old Liberty Group. Old
TCI's principal international businesses and assets and Old TCI's
remaining non-cable and non-programming domestic businesses and assets
were included in TCI Ventures Group.
As described in note 2, immediately prior to the AT&T Merger, Old TCI
purchased certain assets from Liberty/Ventures Group and the net assets
attributed to Liberty Media Group were deconsolidated. As a result of
these transactions, domestic cable and communications services is the
only reportable segment of New TCI.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance based on a measure of Operating Cash Flow.
Operating Cash Flow is a measure of value and borrowing capacity within
the cable television industry and is not intended to be a substitute
for cash flow provided by operating activities, or a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such.
In addition, New TCI's performance is evaluated by AT&T based on
several factors, of which the primary financial measure is earnings,
including other income, before interest expense and taxes ("EBIT").
Segment EBIT data and segment depreciation and amortization are
provided supplementally herein along with the Company's standard
measure of Operating Cash Flow. The Company's calculation of EBIT may
or may not be consistent with the calculation of EBIT by other public
companies, and EBIT should not be viewed as an alternative to generally
accepted accounting principles measures of income, as a measure of
performance, or to cash flows from operating, investing and financing
activities as a measure of liquidity.
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.
Old TCI's reportable segments were strategic business units that
offered different products and services. They were managed separately
because each segment required different technology and marketing
strategies.
(continued)
I-42
<PAGE> 44
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
& communications All
services other Total
---------------- -------- ---------
amounts in millions
<S> <C> <C> <C>
New TCI
--------
Three months ended
June 30, 1999:
-------------
External and
intersegment revenue $ 1,358 $ 69 $ 1,427
Intersegment revenue $ 4 $ 4 $ 8
Segment Operating Cash Flow $ 492 $ 9 $ 501
Segment depreciation and
amortization $ 267 $ 135 $ 402
Segment EBIT $ (123) $ (888) $(1,011)
Four months ended
June 30, 1999:
-------------
External and
intersegment revenue $ 1,812 $ 100 $ 1,912
Intersegment revenue $ 5 $ 5 $ 10
Segment Operating Cash Flow $ 664 $ 9 $ 673
Segment depreciation and
amortization $ 378 $ 191 $ 569
Segment EBIT $ (617) $(1,080) $(1,697)
- ------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
I-43
<PAGE> 45
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Domestic cable Domestic
& communications programming All
services services other Total
---------------- ----------- ------- -------
<S> <C> <C> <C> <C>
Old TCI
-------
Two months ended
February 28, 1999:
-----------------
External and
intersegment revenue $ 902 $ 128 $ 165 $ 1,195
Intersegment revenue $ -- $ 39 $ 11 $ 50
Segment Operating Cash Flow $ 301 $ 30 $ 25 $ 356
Three months ended
June 30, 1998:
-------------
External and
intersegment revenue $ 1,521 $ 165 $ 225 $ 1,911
Intersegment revenue $ (4) $ 69 $ 16 $ 81
Segment Operating Cash Flow $ 624 $ 16 $ 23 $ 663
Six months ended
June 30, 1998:
-------------
External and
intersegment revenue $ 3,116 $ 322 $ 436 $ 3,874
Intersegment revenue $ (9) $ 141 $ 22 $ 154
Segment Operating Cash Flow $ 1,279 $ 44 $ 45 $ 1,368
</TABLE>
(continued)
I-44
<PAGE> 46
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of reportable segment Operating Cash Flow to the
Company's consolidated EBIT and consolidated earnings (loss) before
income tax and extraordinary loss is as follows:
<TABLE>
<CAPTION>
New TCI Old TCI
------------- --------------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
<S> <C> <C> <C>
Total Operating Cash Flow for reportable segments $ 664 | $ 331 $ 1,323
Other Operating Cash Flow 9 | 25 45
Other items excluded from Operating Cash Flow: |
Year 2000 costs (31) | (11) (1)
AT&T merger and integration costs (27) | (65) (10)
Stock compensation (74) | (366) (412)
Reserve for loss arising from contingent obligation (50) | -- --
Write-off of in-process research and development costs (594) | -- --
Depreciation and amortization (569) | (277) (868)
Interest and dividend income 6 | 13 39
Share of losses of Liberty Media Group (601) | -- --
Share of losses of the Other Affiliates, net (377) | (161) (589)
Minority interest in earnings of consolidated |
subsidiaries, net (58) | (26) (65)
Gains on issuance of equity interests by subsidiaries -- | 389 38
Gain on issuance of stock by equity investee -- | -- 201
Gains on disposition of assets, net -- | 144 1,099
Other, net 5 | 8 (18)
------- | ------- -------
EBIT (1,697) | 4 782
Interest expense (310) | (161) (535)
------- | ------- -------
Earnings (loss) before income taxes and |
extraordinary loss $(2,007) | $ (157) $ 247
======= | ======= =======
</TABLE>
I-45
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information concerning
the results of operations and financial condition of the Company. Such
discussion should be read in conjunction with the accompanying consolidated
financial statements and notes thereto. 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, 1998. The following discussion focuses on material
trends, risks and uncertainties affecting the results of operations and
financial condition of the Company.
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; uncertainties inherent in the
changeover to the year 2000, including the Company's projected state of
readiness, the projected costs of remediation, the expected date of completion
of each program or phase, the projected worst case scenarios, and the expected
contingency plans associated with such worst case scenarios; 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 FCC, 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. Any statement contained within Management's Discussion and
Analysis of Financial Condition and Results of Operations on this Form 10-Q
related to year 2000 are hereby denominated as "Year 2000 Statements" within the
meaning of the Year 2000 Information and Readiness Disclosure Act.
I-46
<PAGE> 48
Targeted Stock
--------------
The Company, through its subsidiaries and affiliates, is principally
engaged in the construction, acquisition, ownership, and operation of cable
television systems and, through its ownership interests in Liberty Media Group,
the provision of satellite-delivered video entertainment, information and home
shopping programming services to various video distribution media, principally
cable television systems. Liberty Media Group also has investments in cable and
telecommunications operations and television programming in certain
international markets as well as investments in companies and joint ventures
involved in developing and providing programming for new television and
telecommunications technologies.
Prior to the AT&T Merger, the Company's assets and operations were
included in three separate groups, each of which was tracked separately by
public equity securities. These groups were formerly known as the Liberty Media
Group (referred to herein as the Old Liberty Group), the TCI Ventures Group and
the TCI Group.
The Old Liberty Group was intended to reflect the separate performance
of TCI's assets which produce and distribute programming services.
The TCI Ventures Group was intended to reflect the separate performance
of TCI's principal international assets and businesses and substantially all of
TCI's non-cable and non-programming assets.
The TCI Group was intended to reflect the separate performance of TCI
and its subsidiaries and assets not attributed to the Old Liberty Group or TCI
Ventures Group. Such subsidiaries and assets are comprised primarily of TCI's
domestic cable and communications business. For additional information, see note
1 to the accompanying consolidated financial statements.
The TCI Group was tracked separately through the TCI Group Series A
Stock and the TCI Group Series B Stock. The Old Liberty Group was tracked
separately through the Liberty Group Series A Stock and Liberty Group Series B
Stock. The TCI Ventures Group was tracked separately through the TCI Ventures
Group Series A Stock and TCI Ventures Group Series B Stock.
Following the AT&T Merger, the authorized capital of TCI consists of
3,552,375,096 shares, consisting of 3,550,000,000 shares of common stock, par
value $.01 per share, and 2,375,096 shares of Preferred Stock. The Preferred
Stock is divided into two classes: 700,000 shares of Class A Preferred Stock,
par value $.01 per share, and 1,675,096 shares of Class B Preferred Stock, par
value $.01 per share.
I-47
<PAGE> 49
AT&T Merger and Restructuring
-----------------------------
On March 9, 1999, AT&T acquired TCI in the AT&T Merger in which Italy Merger
Corp., a wholly-owned subsidiary of AT&T, merged with and into TCI, and TCI
thereby became a subsidiary of AT&T. As a result of the AT&T Merger, (i) each
share of TCI Group Series A Stock was converted into 1.16355 shares of AT&T
Common Stock, (ii) each share of TCI Group Series B Stock was converted into
1.27995 shares of AT&T Common Stock, (iii) each share of Liberty Group Series A
Stock was converted into 2 shares of a newly created class of AT&T common stock
designated as the AT&T Liberty Class A Tracking Stock (as adjusted for a June
1999 stock split), (iv) each share of Liberty Group Series B Stock was converted
into 2 shares (as adjusted for a June 1999 stock split) of a newly created class
of AT&T common stock designated as the AT&T Liberty Class B Tracking Stock, (v)
each share of TCI Ventures Group Series A Stock was converted into 1.04 shares
of AT&T Liberty Class A Tracking Stock (as adjusted for a June 1999 stock
split), (vi) each share of TCI Ventures Group Series B Stock was converted into
1.04 shares of AT&T Liberty Class B Tracking Stock (as adjusted for a June 1999
stock split), (vii) each share of Series C-TCI Group Preferred Stock was
converted into 154.589253 shares of AT&T Common Stock, (viii) each share of
Series C-Liberty Media Group Preferred Stock was converted into 12.5 shares of
AT&T Liberty Class A Tracking Stock (as adjusted for a June 1999 stock split),
(ix) each share of Series G Preferred Stock was converted into 1.3846245 shares
of AT&T Common Stock and (x) each share of Series H Preferred Stock was
converted into 1.18125 shares of AT&T Liberty Class A Tracking Stock (as
adjusted for a June 1999 stock split). Following the AT&T Merger, each share of
Class B Preferred Stock continues to be outstanding as the Class B Preferred
Stock with the same rights and preferences such stock had prior to the AT&T
Merger. In general, the holders of shares of AT&T Liberty Class A Tracking Stock
and the holders of shares of AT&T Liberty Class B Tracking Stock will vote
together as a single class with the holders of shares of AT&T Common Stock on
all matters presented to such stockholders, with the holders being entitled to
3/40th of a vote for each share of AT&T Liberty Class A Tracking Stock held,
3/4ths of a vote per share of AT&T Liberty Class B Tracking Stock held and 1
vote per share of AT&T Common Stock held.
I-48
<PAGE> 50
The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are
intended to reflect the separate performance of the businesses and assets
attributed to Old Liberty Group and TCI Ventures Group at the time of the AT&T
Merger. References herein to Liberty/Ventures Group refer to the combined assets
and businesses of Old Liberty Group and TCI Ventures Group for periods prior to
the AT&T Merger, and subsequent to the AT&T Merger such combined assets and
businesses are referred to as Liberty Media Group. Pursuant to, and subject to
the terms and conditions set forth in the Merger Agreement, immediately prior to
the AT&T Merger, certain assets previously attributed to TCI Ventures Group
(including, among others, the shares of AT&T Common Stock received in the merger
of AT&T and TCG, the stock of @Home attributed to TCI Ventures Group, the assets
and business of NDTC and TCI Ventures Group's equity interest in WTCI were
transferred to TCI Group in exchange for approximately $5.5 billion in cash.
Also, upon consummation of the AT&T Merger, through a new tax sharing agreement
between Liberty Media Group and AT&T, Liberty Media Group became entitled to the
benefit of approximately $2.0 billion of net operating loss carryforwards
attributable to all entities included in TCI's consolidated federal income tax
return as of the date of the AT&T Merger. Such net operating loss carryforwards
are subject to adjustment by the Internal Revenue Service and are subject to
limitations on usage which may affect the ultimate amount utilized.
Additionally, certain warrants to purchase shares of GI previously attributed to
TCI Group were transferred to Liberty/Ventures Group in exchange for
approximately $176 million in cash. The transfer of certain immaterial assets
was also effected.
Immediately prior to the AT&T Merger, AT&T and Liberty Media
Corporation entered into an agreement relating to the carriage of programming of
Liberty Media Corporation and its affiliates to be distributed over the AT&T
cable systems. Pursuant to this agreement, Liberty Media Corporation will be
granted, among other rights, "preferred vendor status" with respect to certain
types of new programming services. Liberty Media Corporation will also be
entitled to the use of channel capacity equal to one six megahertz channel to be
used for category specific interactive video channels. In addition, such
agreement also provided for the extension of existing affiliation agreements
between TCI and programming affiliates of Liberty Media Corporation to a date
not less than 10 years from the closing of the AT&T Merger, upon the terms and
conditions set forth in such agreement.
Pursuant to amended corporate governance documents for the entities
included in Liberty Media Group and certain agreements among AT&T and TCI, the
business of Liberty Media Group will continue to be managed by certain persons
who were members of TCI's management prior to the AT&T Merger. AT&T will
initially designate one third of the directors of such entities and its rights
as the sole shareholder of the common stock of such entities following the AT&T
Merger will, in accordance with Delaware law, be limited to actions which will
require shareholder approval. Therefore, management has concluded that TCI does
not have a controlling financial interest (as that term is used in Statement of
Financial Accounting Standards No. 94) in the entities comprising the Liberty
Media Group following the AT&T Merger, and will account for its ownership
interests in such entities under the equity method.
I-49
<PAGE> 51
Accordingly, effective with the AT&T Merger, the results of operations
of the entities attributed to Liberty/Ventures Group (exclusive of @Home, NDTC
and WTCI which were transferred to TCI Group immediately prior to the AT&T
Merger) will no longer be consolidated in the TCI consolidated financial
statements. The results of operations for such deconsolidated entities prior to
the date of the deconsolidation is discussed further below under the caption
Material Changes in Results of Operations - Adjusted Liberty/Ventures Group.
Immediately prior to the AT&T Merger, TCI consummated the
Restructuring. The Restructuring included merging TCI's cable subsidiary, TCIC,
into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of
TCIC have been assumed by TCI, including TCIC's public debt. In connection with
TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred
Stock, Series A was converted into 2.119 shares of TCI Group Series A Stock, and
such shares of TCI Group Series A Stock were subsequently converted into AT&T
Common Stock in connection with the AT&T Merger. All other public securities
issued by subsidiaries of TCIC (other than Pacific) otherwise remained
unaffected. Furthermore, as part of the Restructuring, (i) AT&T loaned TCI $5.5
billion pursuant to a promissory note, (ii) certain asset transfers were made
between TCI and its subsidiaries, (iii) 123,896 shares of the Series F Preferred
Stock, which were held by subsidiaries of TCI, were converted into 185,428,946
shares of TCI Group Series A Stock (which in turn were converted into
215,755,850 shares of AT&T Common Stock in the AT&T Merger and continue to be
held by subsidiaries of TCI), (iv) the remaining 154,411 shares of Series F
Preferred Stock which were formerly held by subsidiaries of TCI were distributed
to TCI through a series of liquidations and canceled, and (v) 125,728,816 shares
of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock,
6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty
Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each
formerly held by subsidiaries of TCI, were distributed to TCI through a series
of liquidations and canceled.
Under the terms of the Exchangeable Preferred Stock, each share of that
preferred stock is exchangeable, from and after August 1, 2001, for
approximately 6.3375 shares of AT&T Common Stock, subject to certain
anti-dilution adjustments. Additionally, Pacific may elect to make any dividend,
redemption or liquidation payment on the Exchangeable Preferred Stock in cash,
by delivery of shares of AT&T Common Stock or by a combination of the foregoing
forms of consideration.
For information concerning the accounting treatment of the AT&T Merger,
see note 2 to the accompanying consolidated financial statements.
I-50
<PAGE> 52
Year 2000
---------
During the six months ended June 30, 1999, the Company continued its
enterprise-wide, comprehensive efforts to assess and remediate its computer
systems and related software and equipment to ensure such systems, software and
equipment recognize, process and store information in the year 2000 and
thereafter. The Company's year 2000 remediation efforts include an assessment of
its most critical systems, such as customer service and billing systems,
headends and other cable plant systems that support the Company's programming
services, business support operations, and other equipment and facilities. The
Company also continued its efforts to verify the year 2000 readiness of its
significant suppliers and vendors and continued to communicate with significant
business partners and affiliates to assess such partners and affiliates' year
2000 status.
The Company has a year 2000 Program Management Office to organize and
manage its year 2000 remediation efforts. The PMO is responsible for overseeing,
coordinating and reporting on the Company's year 2000 remediation efforts. At
June 30, 1999, it was comprised of a 340-member, full-time staff, accountable to
executive management of the Company.
The PMO has defined a four-phase approach to determining the year 2000
readiness of the Company's systems, software and equipment. Such approach is
intended to provide a detailed method for tracking the evaluation, repair and
testing of the Company's critical systems, software and equipment. Phase 1,
Assessment, involves the inventory of all critical systems, software and
equipment and the identification of any year 2000 issues. Phase 1 also includes
the preparation of the workplans needed for remediation. Phase 2, Remediation,
involves repairing, upgrading and/or replacing any non-compliant critical
equipment and systems. Phase 3, Testing, involves testing the Company's critical
systems, software, and equipment for year 2000 readiness, or in certain cases,
relying on test results provided to the Company. Phase 4, Implementation,
involves placing compliant systems, software and equipment into production or
service.
At June 30, 1999, TCI's overall progress by phase was as follows:
<TABLE>
<CAPTION>
Percentage of Year 2000 Expected Completion Date --
Phase Projects Completed by Phase* All Year 2000 Projects
- ----- ---------------------------- -----------------------------
<S> <C> <C>
Phase 1-Assessment 100% Completed
Phase 2-Remediation 99% August 1999
Phase 3-Testing 81% September 1999
Phase 4-Implementation 56% September 1999
</TABLE>
- ---------------------
*The percentages set forth above were calculated by dividing the number of year
2000 projects that have completed a given phase by the total number of year 2000
projects. Such calculations do not reflect any systems or businesses that may be
acquired subsequent to June 30, 1999. See related discussion below.
The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such projects will be
completed on such dates.
The Company has completed the inventory and assessment of critical
systems with embedded technologies that impact its operations. The progress by
phase of year 2000 compliance work on such systems is included in the table
above.
I-51
<PAGE> 53
During the six months ended June 30, 1999, the Company continued its
survey of significant third-party vendors and suppliers whose systems, services
or products are important to the Company's operations. The year 2000 readiness
of such vendors and suppliers is critical to continued provision of the
Company's cable service. The Company has examined the public disclosures
regarding compliance status made by vendors of critical systems products
utilized by the Company (such as addressable controllers, accounting systems and
other critical hardware and software), and the Company is in the process of
examining the public disclosures regarding compliance status made by critical
suppliers (such as utilities, banking, and similar critical operational
services). The majority are either year 2000 ready, require the implementation
of an adjustment to the company's systems, or are expected to be year 2000 ready
by third quarter 1999. Verification of the survey results may include, as deemed
necessary, conducting functionality tests, reviewing vendors' test data
certifications, engaging in regular conferences with vendors' year 2000 teams,
or re-examining public disclosures for changes in status. For those vendors and
suppliers who do not expect to be year 2000 ready by December 31, 1999, or are
deemed to be critical to the Company's operations, contingency planning efforts
are underway to make such changes as are required to continue critical
operations.
Significant market value is associated with the Company's investments
in certain public and private corporations, partnerships and other businesses.
Accordingly, the Company is monitoring the public disclosure of such
publicly-held business entities, including CSC and @Home, to determine their
year 2000 readiness. For updated information related to year 2000 programs of
CSC and @Home, please refer to the most recent periodic filings with the
Securities and Exchange Commission of CSC and @Home. In addition, the Company
has surveyed and monitored the year 2000 status of certain privately-held
business entities in which the Company has significant investments.
Year 2000 expenses and capital expenditures incurred during the four
months ended June 30, 1999 were $31 million and $10 million, respectively. Year
2000 expenses and capital expenditures incurred during the two months ended
February 28, 1999 were $11 million and $2 million, respectively. Year 2000
expenses and capital expenditures for the four months ended June 30, 1999 are
exclusive of costs attributable to Liberty Media Group, which was deconsolidated
as of March 1, 1999. See AT&T Merger and Restructuring, above. Management of the
Company currently estimates the remaining costs, exclusive of future costs
attributable to the assessment and remediation of year 2000 issues associated
with Liberty Media Group, to be not less than $69 million, bringing the total
estimated cost associated with the Company's year 2000 remediation efforts to be
not less than $136 million (including $32 million for replacement of
noncompliant information technology ("IT") systems). Also included in this
estimate is $13 million in future payments to be made pursuant to unfulfilled
executory contracts or commitments with vendors for year 2000 remediation
services. Although no assurances can be given, management currently expects that
(i) cash flow from operations or advances from AT&T will fund the costs
associated with year 2000 compliance and (ii) the total projected cost
associated with the Company's year 2000 program will not be material to the
Company's financial position, results of operations or cash flows.
The Company is a widely distributed enterprise in which allocation of
certain resources, including IT support is decentralized. Accordingly, the
Company does not consolidate an IT budget. Therefore, total estimated year 2000
costs as a percentage of an IT budget are not available. There are currently no
planned IT projects being deferred due to year 2000 costs.
I-52
<PAGE> 54
During 1999, the Company has continued to enter into certain strategic
acquisition transactions wherein the Company has acquired or will acquire in the
future cable systems and other businesses from third parties. To adequately
address any year 2000 impact from these acquisitions, the PMO has instituted a
mergers and acquisition program whereby members of the PMO evaluate the year
2000 readiness of any cable systems or other businesses which have been or will
be acquired in the future to determine the year 2000 readiness of such systems
or businesses. The PMO monitors such systems'/businesses' year 2000 readiness
from the signing of the letters of intent or definitive agreements through the
closing of the proposed transactions. In certain circumstances, the PMO actively
oversees the year 2000 remediation efforts of systems or businesses to be
acquired in an effort to coordinate remediation approaches prior to closing.
Please note that the information set forth in this section concerning
progress by phase and other matters applies only to systems or businesses owned
and operated by the Company or its affiliates as of June 30, 1999 and does not
include information for systems or equipment acquired after June 30, 1999.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. Management
believes that its year 2000 program will significantly reduce the Company's
risks associated with the changeover to the year 2000 and has implemented
certain contingency plans to minimize the effect of any potential year 2000
related disruptions. The risks and the uncertainties discussed below and the
associated contingency plans relate to systems, software, equipment, and
services that the Company has deemed critical in regard to customer service,
business operations, financial impact or safety.
Satellite system failures could prevent the delivery of programming to
cable headends and disrupt service to customers. The Company is in the process
of securing transponder space on alternate satellites in the event of such
failures.
The failure of addressable controllers contained in the cable system
headends could disrupt the delivery of premium services to customers and could
necessitate crediting customers for failure to receive such premium services. In
this unlikely event, management expects that it will identify and transmit the
lowest cost programming tier. Unless other contingency plans are developed with
the programmers, premium and adult content channels would not likely be
transmitted until the addressable controller had been repaired.
Customer service networks and/or automated voice response systems
failure could prevent access to customer account information, hamper
installation scheduling and disable the processing of pay-per-view requests. The
Company plans to have its customer service representatives answer telephone
calls from customers in the event of outages and expects to retrieve needed
customer information manually from the billing service provider.
A failure of the services provided by billing systems service providers
could result in a loss of customer records which could disrupt the ability to
bill customers for a protracted period. The Company plans to prepare electronic
backup records of its customer billing information prior to the year 2000 to
allow for data recovery. In addition, the Company continues to monitor the year
2000 readiness of its key customer-billing suppliers.
I-53
<PAGE> 55
Advertising revenue could be adversely affected by the failure of
certain equipment which could impede or prevent the insertion of advertising
spots in the Company's programming. The Company anticipates that it can minimize
such effect by manually resetting the dates each day until the equipment is
repaired.
The Company owns investments in numerous cable programming operators
and other businesses. The market value of the Company's investment in these
entities could be adversely impacted by material failures of such entities to
address year 2000 remediation issues (including supplier and vendor issues)
related to their programming services and businesses. Further, due to tax and
strategic considerations, the Company has a limited ability to dispose of these
investments if year 2000 issues develop. Therefore, as a contingency plan, the
Company has undertaken an extensive effort to verify and in certain cases assist
in the year 2000 remediation efforts of companies in which it has significant
investments.
Security and fire protection systems failure could leave facilities
vulnerable to intrusion and fire. The Company expects to return such systems to
normal functioning by turning the power off and then on again ("power off/on").
The Company also plans to have additional security staff on site and plans to
implement a backup plan for communicating with local fire and police
departments. Also, certain personal computers interface with and control
elevators, escalators, wireless systems, public access systems and certain
telephony systems. In the event such computers cease operating, conducting a
power off/on is expected to resume normal functioning. If a power off/on does
not resume normal functioning, management expects to resolve the problem by
resetting the computer to a pre-designated date which precedes the year 2000.
In the event that the local public utility cannot supply power, the
Company expects to supply power for a limited time to the Company's cable
headends, NDTC and office sites through backup generators.
The financial impact of any or all of the above worst-case scenarios
has not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios.
If critical systems related to the Company's cable TV and programming
services are not successfully remediated, the Company could face claims of
breach of contract from customers of NDTC, from parties to cable system sale or
exchange agreements, from certain programming providers, from advertisers and
from other cable TV businesses that rely on the Company's programming services.
The Company has not determined the possible losses from any such claims of
breach of contract.
I-54
<PAGE> 56
MATERIAL CHANGES IN RESULTS OF OPERATIONS
GENERAL
As described in notes 1 and 2 to the accompanying consolidated
financial statements, for financial reporting purposes the AT&T Merger and the
related Restructuring are deemed to have occurred on March 1, 1999. Accordingly,
the financial statements for periods prior to March 1, 1999 are referred to
herein as Old TCI, and the financial statements for periods subsequent to
February 28, 1999 are referred to herein as New TCI. Due to the March 1, 1999
application of purchase accounting in connection with the AT&T Merger, the
predecessor consolidated financial statements of Old TCI are not comparable to
the successor consolidated financial statements of New TCI.
I-55
<PAGE> 57
Summarized operating data with respect to New TCI and Old TCI is
presented below for the indicated periods:
<TABLE>
<CAPTION>
New TCI Old TCI
----------- -----------------------------
Four months Two months Six months
ended ended ended
June 30, February 28, June 30,
1999 1999 1998
----------- ------------ ----------
amounts in millions
<S> <C> <C> <C>
Revenue $ 1,902 | $ 1,145 $ 3,720
|
Operating expenses 746 | 467 1,448
Selling, general and administrative expenses 483 | 322 904
Year 2000 costs 31 | 11 1
AT&T merger costs 27 | 65 10
Stock compensation 74 | 366 412
Reserve for loss arising from contingent obligation 50 | -- --
Write-off of in-process research and development costs 594 | -- --
Depreciation and amortization 569 | 277 868
------- | ------- -------
2,574 | 1,508 3,643
------- | ------- -------
|
Operating income (loss) (672) | (363) 77
|
Interest expense (310) | (161) (535)
Interest and dividend income 6 | 13 39
Share of losses of Liberty Media Group (601) | -- --
Share of losses of the Other Affiliates, net (377) | (161) (589)
Minority interests in earnings of consolidated |
subsidiaries, net (58) | (26) (65)
Gains on issuance of equity interests by subsidiaries -- | 389 38
Gain on issuance of stock by equity investee -- | -- 201
Gains on disposition of assets, net -- | 144 1,099
Other, net 5 | 8 (18)
------- | ------- -------
(1,335) | 206 170
------- | ------- -------
|
Earnings (loss) before income taxes and extraordinary |
loss (2,007) | (157) 247
|
Income tax benefit (expense) 237 | (119) (177)
------- | ------- -------
|
Earnings (loss) before extraordinary loss (1,770) | (276) 70
|
Extraordinary loss, net of income tax benefit -- | (5) (23)
------- | ------- -------
|
Net earnings (loss) $(1,770) | $ (281) $ 47
======= | ======= =======
</TABLE>
I-56
<PAGE> 58
Due to the consummation of the AT&T Merger, the Company's 1999
statement of operations includes information reflecting the four-month period
ended June 30, 1999 and the two-month period ended February 28, 1999. Prior to
March 1, 1999 the Company consolidated the operations of Liberty/Ventures Group,
and subsequent to February 28, 1999 the Company accounted for its ownership
interests in Liberty Media Group under the equity method. The following
discussion of the Company's results of operations includes a section that
addresses the combined operating results of the former TCI Group, @Home (under
the consolidated method prior to the second quarter of 1999 and under the equity
method thereafter, see note 6 to the accompanying consolidated financial
statements), NDTC and WTCI (collectively, the "Adjusted TCI Group") and a
section that addresses the combined operating results of Liberty/Ventures Group,
exclusive of @Home, NDTC and WTCI (the "Adjusted Liberty/Ventures Group").
I-57
<PAGE> 59
ADJUSTED TCI GROUP
For purposes of the following table and discussion, the combined
operating results of Adjusted TCI Group for the four months ended June 30, 1999
have been combined with the combined operating results of Adjusted TCI Group for
the two months ended February 28, 1999 in order to provide a meaningful basis
for comparing the six months ended June 30, 1999 and 1998. Depreciation,
amortization and certain other line items included in the operating results of
Adjusted TCI Group are not necessarily comparable between periods as the
three-month and four-month successor periods ended June 30, 1999 include the
effects of purchase accounting adjustments related to the AT&T Merger, and prior
predecessor periods do not. The combining of predecessor and successor
accounting periods is not acceptable under generally accepted accounting
principles. See note 2 to the accompanying consolidated financial statements.
The unaudited combined results of operations for Adjusted TCI Group are as
follows:
<TABLE>
<CAPTION>
Adjusted TCI Group
--------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- --------- ------- --------
amounts in millions
<S> <C> <C> <C> <C>
Revenue $ 1,419 $ 1,559 $ 2,843 $ 3,186
Operating expenses (558) (566) (1,133) (1,185)
Selling, general and administrative expenses (360) (371) (729) (726)
Year 2000 costs (25) (1) (42) (1)
AT&T merger and integration costs (27) (10) (92) (10)
Stock compensation (119) (77) (257) (147)
Reserve for loss arising from contingent obligation (50) -- (50) --
Write-off of in-process research and development
costs -- -- (594) --
Depreciation and amortization (402) (403) (824) (806)
------- ------- ------- -------
Operating income (loss) (122) 131 (878) 311
Interest expense (241) (230) (446) (506)
Share of losses of the Other Affiliates, net (300) (67) (471) (65)
Minority interests in earnings of consolidated
subsidiaries, net (43) (33) (78) (66)
Gain on issuance of equity interests by subsidiary -- -- 17 --
Gain on issuance of stock by equity investee -- 201 -- 201
Gains (losses) on disposition of assets, net -- 30 129 541
Other, net (3) 2 25 (2)
------- ------- ------- -------
Earnings (loss) before income taxes and
extraordinary loss (709) 34 (1,702) 414
Income tax benefit (expense) 222 (64) 325 (223)
------- ------- ------- -------
Earnings (loss) before extraordinary loss (487) (30) (1,377) 191
Extraordinary loss, net of income tax benefit -- (13) (5) (23)
------- ------- ------- -------
Net earnings (loss) $ (487) $ (43) $(1,382) $ 168
======= ======= ======= =======
</TABLE>
I-58
<PAGE> 60
Acquisitions and Dispositions
-----------------------------
Since January 1, 1998, Adjusted TCI Group has contributed cable
television systems serving approximately 3,368,000 customers to a number of
joint ventures in which Adjusted TCI Group has retained non-controlling
ownership interests. Contribution transactions during the six months ended June
30, 1999 accounted for approximately 614,000 of such contributed customers. In
addition, during the second quarter of 1999, the Company discontinued using the
consolidation method to account for its ownership interest in @Home and began to
account for its ownership interest in @Home under the equity method. Adjusted
TCI Group also has completed certain other acquisitions and dispositions since
January 1, 1998. The above-described transactions adversely affect the
comparability of operating results between periods. Accordingly, in the
following discussion, the collective effects of such acquisitions and
dispositions are sometimes excluded in order to provide a more meaningful basis
of comparison.
Revenue and Expenses
--------------------
Adjusted TCI Group's revenue decreased $140 million or 9% for the three
months ended June 30, 1999, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions and dispositions, revenue increased
$101 million or 8%. Revenue from domestic cable customers accounted for a 6%
increase in revenue, primarily due to the net effect of a 4% increase in basic
revenue, an increase in revenue from digital products, an increase in
pay-per-view revenue and a 4% decrease in traditional premium revenue. The
Company experienced a 3% increase in its average basic rate, an increase of 1%
in the number of average basic customers, a 10% decrease in its average rate for
traditional premium services and a 6% increase in the number of average
traditional premium subscriptions. Additionally, revenue increases from NDTC and
WTCI accounted for a 2% increase in Adjusted TCI Group revenue.
Adjusted TCI Group's revenue decreased $343 million or 11% for the six
months ended June 30, 1999, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions and dispositions, revenue increased
$190 million or 7%. Revenue from domestic cable customers accounted for a 6%
increase in revenue, primarily due to the net effect of a 4% increase in basic
revenue, an increase in revenue from digital products, an increase in
pay-per-view revenue and a 3% decrease in traditional premium revenue. The
Company experienced a 2% increase in its average basic rate, an increase of 2%
in the number of average basic customers, a 9% decrease in its average rate for
traditional premium services and a 5% increase in the number of average
traditional premium subscriptions. Additionally, revenue increases from NDTC and
WTCI accounted for a 1% increase in Adjusted TCI Group revenue.
Adjusted TCI Group's operating expenses decreased $8 million or 1% for
the three months ended June 30, 1999, as compared to the corresponding prior
year period. Exclusive of the effects of acquisitions and dispositions and the
deconsolidation of @Home, operating expenses increased $100 million or 22%.
Higher programming costs accounted for approximately one half of such increase.
It is anticipated that Adjusted TCI Group's programming costs will continue to
increase in future periods. The remaining increase relates primarily to higher
labor costs and launch and development costs related to the roll-out of Adjusted
TCI Group's digital video products and other new service offerings.
I-59
<PAGE> 61
Adjusted TCI Group's operating expenses decreased $52 million or 4% for
the six months ended June 30, 1999, as compared to the corresponding prior year
period. Exclusive of the effects of acquisitions and dispositions, operating
expenses increased $187 million or 20%. Higher programming costs accounted for
approximately one half of such increases. It is anticipated that Adjusted TCI
Group's programming costs will continue to increase in future periods. The
remaining increase relates primarily to higher labor costs and launch and
development costs related to the roll-out of Adjusted TCI Group's digital video
products and other new service offerings.
Adjusted TCI Group's selling, general and administrative expenses
decreased $11 million or 3% for the three months ended June 30, 1999, as
compared to the corresponding prior year period. Exclusive of the effects of
acquisitions and dispositions, the expenses increased $25 million or 7%. The
increase is due primarily to increases in salaries and billing costs.
Adjusted TCI Group's selling, general and administrative expenses
increased $3 million or less than 1% for the six months ended June 30, 1999, as
compared to the corresponding prior year period. Exclusive of the effects of
acquisitions, the expenses increased $57 million or 9%. The increase is due
primarily to increases in salaries and billing costs.
Adjusted TCI Group's year 2000 costs include fees and other expenses
incurred directly in connection with Adjusted TCI Group's comprehensive efforts
to review and correct computer systems, equipment and related software to ensure
readiness for the year 2000. See detailed discussion above.
AT&T merger and integration costs incurred by Adjusted TCI Group
include investment advisory, legal and accounting fees, and other incremental
costs directly related to the AT&T Merger. See note 2 to the accompanying
consolidated financial statements
Adjusted TCI Group records stock compensation relating to restricted
stock awards, options and/or stock appreciation rights granted by the Company to
certain employees and directors. The amount of expense associated with stock
compensation for Adjusted TCI Group is based on the vesting of the related stock
options and stock appreciation rights and the market price of the underlying
common stock as of the date of the accompanying consolidated financial
statements. The estimated compensation liability relating to vested stock
appreciation rights has been recorded as of June 30, 1999, and is subject to
future adjustment based upon market values and, ultimately, on the final
determination of market values when such rights are exercised. See note 2 to the
accompanying consolidated financial statements.
During the second quarter of 1999, the Company recorded a charge of $50
million to provide for additional estimated losses that were expected to result
from the Contribution Agreement. See note 13 to the accompanying consolidated
financial statements.
The write-off of in-process research and development costs of $594
million during March 1999 reflects the value, as of the date of the AT&T Merger,
of New TCI's research and development projects which have not yet reached
technological feasibility and which have no alternative for future use. Such
costs included @Home's in-process research and development projects. During the
second quarter of 1999, the Company ceased to consolidate @Home and began to
account for its investment in @Home under the equity method of accounting.
Accordingly, the Company will no longer report on the in-process research and
development projects of @Home. The projects identified for New TCI related to
the Company's efforts to offer voice over Internet protocol, cost savings
efforts for cable telephony implementation and product integration efforts for
advanced set-top devices that would enable the Company to offer next-generation
digital services. Although there are significant technological issues to
overcome in order to successfully complete the acquired in-process research and
development, the Company expects successful completion. The Company currently
anticipates that (i) it will deploy equipment to offer voice over Internet
protocol to two cities in the year 2001, (ii) field deployable devices will be
available by the end of the year with respect to the Company's cost savings
efforts for cable telephony implementation, and (iii) field trials will begin in
mid-year 2000 for next-generation digital services. If, however, the Company is
unable to establish technological feasibility and produce a commercially viable
product/service, then anticipated incremental future cash flows attributable to
expected profits from such new product/service may not be realized. See note 2
to the accompanying consolidated financial statements.
I-60
<PAGE> 62
Adjusted TCI Group's depreciation and amortization expense decreased $1
million or less than 1% and increased $18 million or 2% for the three and six
months ended June 30, 1999, respectively, as compared to the corresponding prior
year period. Such changes include $35 million and $77 million increases in
amortization expense and $36 million and $59 million decreases in depreciation
expense for the three and six month periods, respectively. The increase in
amortization expense is primarily attributable to the effects of purchase
accounting during the three and four months ended June 30, 1999. Such increase
in amortization expense is partially offset by the effects of dispositions. The
decrease in depreciation expense includes the net effect of (i) decreases
attributable to dispositions and purchase accounting, and (ii) increases
attributable to capital expenditures and acquisitions. See note 2 to the
accompanying consolidated financial statements.
Other Income and Expenses
-------------------------
Adjusted TCI Group's interest expense increased $8 million or 3% and
decreased $71 million or 14% for the three and six months ended June 30, 1999,
respectively, as compared to the corresponding prior year period. The increase
for the three months ended June 30, 1999 is due to an increase in Adjusted TCI
Group's debt balances as a result of amounts borrowed by Adjusted TCI Group on
March 9, 1999 from AT&T pursuant to the AT&T Notes. See note 8 to the
accompanying consolidated financial statements. The decrease for the six months
ended June 30, 1999 is primarily the result of lower weighted average debt
balances resulting from debt reductions attributable to certain disposition
transactions in 1998 and the first quarter of 1999.
Adjusted TCI Group's investments in the Other Affiliates are comprised
of limited partnerships and other entities that are primarily engaged in the
domestic cable television business or other communications services businesses.
Adjusted TCI Group's share of losses of the Other Affiliates was $300 million
and $471 million for the three and six months ended June 30, 1999, respectively,
as compared to $67 million and $65 million for the corresponding prior year
periods. Such increases are primarily attributable to (i) increases of $137
million and $169 million during the three and six months ended June 30, 1999 in
the amortization of the excess carrying value of the Company's investments in
the Other Affiliates due to the application of purchase accounting and (ii)
increases of $91 million and $233 million during the three and six months ended
June 30, 1999, respectively, in the Company's share of losses of CSC, @Home and
certain of the Other Affiliates (exclusive of the effects of purchase
accounting) that were formed or otherwise acquired during the eighteen-month
period ended June 30, 1999. For additional information, see notes 2, 6 and 7 to
the accompanying consolidated financial statements. Additionally, Adjusted TCI
Group's share of the Other Affiliates' losses during the six months ended June
30, 1998 includes Adjusted TCI Group's share of gains recognized by two
affiliates in connection with certain transactions.
I-61
<PAGE> 63
Minority interests in earnings of consolidated subsidiaries aggregated
$43 million and $78 million for the three and six months ended June 30, 1999,
respectively, as compared to $33 million and $66 million in the corresponding
prior year periods. Such amounts include dividends on the Trust Preferred
Securities and other preferred securities of TCI subsidiaries attributed to
Adjusted TCI Group of $36 million and $71 million during the three and six month
periods ended June 30, 1999, respectively, and $58 million and $95 million
during the three and six month periods ended June 30, 1998, respectively. See
note 9 to the accompanying consolidated financial statements. Through the first
quarter of 1999, such dividends were offset in part by the minority interests
share of the losses of @Home. As described in note 6 to the accompanying
consolidated financial statements, during the second quarter of 1999, the
Company ceased to consolidate @Home and began to account for @Home under the
equity method of accounting.
During the two months ended February 28, 1999, @Home issued 1.1 million
common shares. Due to the resulting increase in @Home's equity, net of the
dilution of Adjusted TCI Group's ownership interest in @Home, Adjusted TCI Group
recognized a gain of $17 million.
Gains on disposition of assets during the six months ended June 30,
1999 includes a $123 million gain related to the February 1999 sale of certain
cable television systems serving approximately 145,000 customers. Adjusted TCI
Group's gains on disposition of assets of $541 million during the six months
ended June 30, 1998 are primarily attributable to the March 4, 1998 contribution
of cable television systems to CSC. For additional information, see notes 6 and
7 to the accompanying consolidated financial statements.
During 1999 and 1998, Adjusted TCI Group recognized extraordinary
losses on early extinguishment of debt which related to prepayment penalties and
the retirement of deferred loan costs. Such extraordinary losses were $5
million for the six months ended June 30, 1999 as compared to $23 million for
the corresponding prior year period and are stated net of related deferred
income tax benefits.
Net Earnings (Loss)
-------------------
As a result of the above-described fluctuations in Adjusted TCI Group's
results of operations, Adjusted TCI Group's net loss of $481 million for the
three months ended June 30, 1999 changed by $438 million, as compared to
Adjusted TCI Group's net loss (before preferred stock dividend requirements) of
$43 million for the three months ended June 30, 1998. Adjusted TCI Group's net
loss (before preferred stock dividend requirements) of $1,382 million for the
six months ended June 30, 1999 changed by $1,550 million, as compared to
Adjusted TCI Group's net earnings (before preferred stock dividend requirements)
of $168 million for the six months ended June 30, 1998.
I-62
<PAGE> 64
ADJUSTED LIBERTY/VENTURES GROUP
The consolidated operating results of the Company for the two months
ended February 28, 1999 and the three and six months ended June 30, 1998 include
the operations of entities attributed to the Liberty/Ventures Group during such
periods. For the three and four months ended June 30, 1999, the Company's
investment in Liberty Media Group was accounted for under the equity method. The
following table presents certain combined operating information of Adjusted
Liberty/Ventures Group (Liberty/Ventures Group exclusive of @Home, NDTC and
WTCI) for the periods in which such information was included in the Company's
consolidated financial statements:
<TABLE>
<CAPTION>
Adjusted Liberty/Ventures Group
---------------------------------------------------------
Two months Three months Six months
ended ended ended
February 28, 1999 June 30, 1998 June 30, 1998
----------------- ------------- -------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 240 $ 343 $ 660
Operating costs and expenses:
Operating, selling, general and administrative 192 302 567
Stock compensation 183 106 265
Depreciation and amortization 22 28 55
----- ----- -----
397 436 887
----- ----- -----
Operating loss (157) (93) (227)
Other income (expense):
Interest expense (25) (23) (37)
Dividend and interest income 10 15 32
Share of losses of affiliates, net (67) (283) (522)
Minority interests in losses of attributed
subsidiaries (6) (7) (7)
Gains on dispositions, net 15 5 557
Gains on issuance of equity by affiliates and
subsidiaries 372 -- 38
Other, net (4) (2) --
----- ----- -----
295 (295) 61
----- ----- -----
Earnings (loss) before income taxes 138 (388) (166)
Income tax benefit (expense) (206) 133 46
----- ----- -----
Net loss $ (68) $(255) $(120)
===== ===== =====
</TABLE>
I-63
<PAGE> 65
The foregoing results of operations of Adjusted Liberty/Ventures Group
are not comparable in that the 1999 year-to-date period includes two months of
operations and the 1998 year-to-date period includes six months of operations.
In addition to fluctuations that are attributable to the different lengths of
the 1999 and 1998 periods, other factors have contributed to changes between
such periods. Such changes are discussed in relative terms below.
The combined revenue of Adjusted Liberty/Ventures Group includes
programming revenue charged to Adjusted TCI Group and non-affiliates. The
relative increase in revenues relates primarily to higher revenue from the
distribution of "Encore" premium movie services to cable operators, including
Adjusted TCI Group, and higher revenue from TV Guide, Inc.
Changes in Adjusted Liberty/Ventures Group's operating, selling,
general and administrative expenses relate primarily to the net effect of
decreases in costs due to certain dispositions and increases in costs due to
relatively higher costs to acquire programming content from suppliers. Higher
costs to acquire programming content are primarily due to an increase in first
run movie content as a percent of Encore's total movie content. Such first run
movies are generally obtained at higher costs than movies which are not first
run. Other miscellaneous increases include higher music rights costs, copyright
fees and marketing costs.
Adjusted Liberty/Ventures Group recorded stock compensation relating to
restricted stock awards, options and/or stock appreciation rights granted by the
Company to certain employees and directors of Adjusted Liberty/Ventures 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 end of the periods presented.
Adjusted Liberty/Ventures Group's interest and dividend income
consisted primarily of (i) dividends received on a series of Time Warner common
stock with limited voting rights, (ii) dividends received on preferred stock of
Fox Kids Worldwide, Inc. ("FKW Preferred Stock"), and (iii) interest income from
cash balances and other interest-earning assets. Dividends received on the Time
Warner common stock aggregated $3 million and $10 million, and dividends
received on the FKW Preferred Stock aggregated $5 million and $15 million,
during the two months ended February 28, 1999 and the six months ended June 30,
1998, respectively.
Investments in affiliates are comprise of limited partnerships and
other entities that are primarily engaged in programming and communications
services businesses. Adjusted Liberty/Ventures Group's share of losses of
affiliates were $67 million and $522 million during the two months ended
February 28, 1999 and the six months ended June 30, 1998, respectively.
I-64
<PAGE> 66
Adjusted Liberty/Ventures Group's share of losses for the two months
ended February 28, 1999 included its (i) share of losses of Telewest
Communications plc, which aggregated $38 million during the period, and (ii)
share of losses of other foreign affiliates, which aggregated $27 million during
the period.
Adjusted Liberty/Ventures Group's share of losses for the six months
ended June 30, 1998 included its (i) $324 million share of the losses of Sprint
Spectrum Holding Company, L.L.P., MinorCo, L.P. and PhillieCo Partnership I,
L.P. (the "PCS Ventures"), (ii) $121 million share of the losses of various
foreign affiliates and (iii) $77 million share of the losses of Fox/Liberty
Networks ("Fox Sports"). As a result of a November 1998 transaction, Adjusted
Liberty/Ventures Group no longer accounts for its investment in the PCS Ventures
under the equity method. Prior to the first quarter of 1998, Adjusted
Liberty/Ventures Group had no obligation, nor intention, to fund Fox Sports.
During 1998, Adjusted Liberty/Ventures Group made the determination to provide
funding to Fox Sports based on specific transactions consummated by Fox Sports.
Consequently, Adjusted Liberty/Ventures Group's share of losses of Fox Sports
for 1998 includes previously unrecognized losses of Fox Sports of approximately
$64 million. Losses for Fox Sports were not recognized in prior periods due to
the fact that Adjusted Liberty/Ventures Group's investment in Fox Sports was
less than zero.
Adjusted Liberty/Ventures Group's gain on disposition of $557 million
during the six months ended June 30, 1998 is primarily the result of Adjusted
Liberty/Ventures Group's sale to Time Warner of the business of Southern
Satellite Systems, Inc. and certain of its subsidiaries.
Gains on issuance of equity interests by subsidiaries were $372 million
and $38 million during the two months ended February 28, 1999 and the six months
ended June 30, 1998, respectively. The 1999 gains relate primarily to the
issuance of common stock by UVSG, in connection with its acquisition of the
business of TV Guide. The 1998 gains primarily relate to the February 1998
equity issuance by Liberty/Ventures Group's then subsidiary, Superstar/Netlink
Group LLC. See note 7 to the accompanying consolidated financial statements.
The Company's share of the losses of Liberty Media Group was $601
million for the four months ended June 30, 1999. If Adjusted Liberty/Ventures
Group had been deconsolidated January 1, 1998, the Company's share of Adjusted
Liberty/Ventures Group's net losses would have been $669 million and $120
million for the six months ended June 30, 1999 and 1998, respectively. The
increase in such Liberty Media Group losses is primarily attributable to a $373
million increase in Liberty Media Group's stock compensation and higher
depreciation and amortization due primarily to the application of purchase
accounting in connection with the AT&T Merger.
I-65
<PAGE> 67
MATERIAL CHANGES IN FINANCIAL CONDITION
As described in greater detail in note 2 to the accompanying
consolidated financial statements, on March 9, 1999, TCI was acquired by AT&T in
a merger and TCI thereby became a subsidiary of AT&T. The AT&T Merger also
resulted in the deconsolidation of the businesses and assets attributed to
Liberty Media Group at the time of the AT&T Merger.
Pursuant to the Merger Agreement, immediately prior to the AT&T Merger,
certain assets previously attributed to TCI Ventures Group (including, among
others, the shares of AT&T Common Stock received in the merger of AT&T and TCG,
the stock of @Home attributed to TCI Ventures Group, the assets and business of
NDTC and TCI Ventures Group's equity interest in WTCI) were transferred to TCI
Group in exchange for approximately $5.5 billion in cash. Also, upon
consummation of the AT&T Merger, through a new tax sharing agreement between
Liberty Media Group and AT&T, Liberty Media Group became entitled to the benefit
of approximately $2.0 billion of net operating loss carryforwards attributable
to all entities included in TCI's consolidated federal income tax return as of
the date of the AT&T Merger. Such net operating loss carryforwards are subject
to adjustment by the Internal Revenue Service and are subject to limitations on
usage which may affect the ultimate amount utilized. Additionally, certain
warrants to purchase shares of GI previously attributed to TCI Group were
transferred to Liberty/Ventures Group in exchange for approximately $176 million
in cash. The transfer of certain immaterial assets was also effected. TCI funded
the $5.5 billion payment to Liberty/Ventures Group through borrowings from AT&T.
Such borrowings are evidenced by a $5.5 billion promissory note. Such promissory
note accrues interest at LIBOR, plus 15 basis points, and is due and payable on
demand on or before March 9, 2004.
Immediately prior to the AT&T Merger, TCI consummated the
Restructuring. The Restructuring included merging TCI's cable subsidiary, TCIC,
into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of
TCIC have been assumed by TCI, including TCIC's public debt. In connection with
TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred
Stock, Series A, was converted into 2.119 shares of TCI Group Series A Stock,
and such shares of TCI Group Series A Stock were subsequently converted into
AT&T Common Stock in connection with the AT&T Merger. All other public
securities issued by subsidiaries of TCIC (other than Pacific) otherwise
remained unaffected. Furthermore, as part of the Restructuring, (i) AT&T loaned
TCI $5.5 billion pursuant to a promissory note, (ii) certain asset transfers
were made between TCI and its subsidiaries, (iii) 123,896 shares of Series F
Preferred Stock, which were held by subsidiaries of TCI, were converted into
185,428,946 shares of TCI Group Series A Stock (which in turn were converted
into 215,755,850 shares of AT&T Common Stock in the AT&T Merger and continue to
be held by subsidiaries of TCI), (iv) the remaining 154,411 shares of Series F
Preferred Stock which were formerly held by subsidiaries of TCI were distributed
to TCI through a series of liquidations and canceled, and (v) 125,728,816 shares
of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock,
6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty
Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each
formerly held by subsidiaries of TCI, were distributed to TCI through a series
of liquidations and canceled.
I-66
<PAGE> 68
After the AT&T Merger, under the terms of the Exchangeable Preferred
Stock of Pacific, each share of that preferred stock is exchangeable, from and
after August 1, 2001, for approximately 6.3375 shares of AT&T Common Stock,
subject to certain anti-dilution adjustments. Additionally, after the AT&T
Merger, Pacific may elect to make any dividend, redemption or liquidation
payment on the Exchangeable Preferred Stock in cash, by delivery of shares of
AT&T Common Stock or by a combination of the foregoing forms of consideration.
As a result of the deconsolidation of Liberty Media Group in connection
with the AT&T Merger, Liberty Media Group's liquidity sources (including the
$5.5 billion payment from TCI) will be used towards the liquidity requirements
of Liberty Media Group and will not represent a source of liquidity to TCI.
Conversely, TCI anticipates that Liberty Media Group will not require funds from
TCI to satisfy Liberty Media Group's liquidity requirements.
The Company's lines of credit were terminated in March 1999 and,
accordingly, such lines of credit no longer represent a source of liquidity for
the Company. To the extent that funds generated by the Company's operating
activities are not sufficient to meet its liquidity needs, the Company
anticipates that it would obtain additional financing from AT&T or external
sources. No assurance can be given that any such additional financing could be
obtained on terms acceptable to the Company.
TCI's restricted cash is primarily comprised of proceeds received in
connection with certain asset dispositions. Such proceeds, which aggregated $32
million at June 30, 1999, are designated to be reinvested in certain identified
assets for income tax purposes.
During the four months ended June 30, 1999, the two months ended
February 28, 1999, and the six months ended June 30, 1998 the Company had
Operating Cash Flow of $673 million, $356 million and $1,368 million,
respectively. Operating Cash Flow is a measure of value and borrowing capacity
within the cable television industry and is not intended to be a substitute for
cash flows provided by operating activities, a measure of performance prepared
in accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
The Company's operating activities provided (used) cash of $123
million, $(196 million) and $552 million during the four months ended June 30,
1999, the two months ended February 28, 1999, and the six months ended June 30,
1998, respectively. Net cash provided by operating activities generally reflects
net cash from operations of TCI available for TCI's liquidity needs after taking
into consideration the aforementioned additional substantial costs of doing
business not reflected in Operating Cash Flow. Following the deconsolidation of
Liberty Media Group in connection with the AT&T Merger and the deconsolidation
of @Home during the second quarter of 1999, Liberty Media Group's and @Home's
operating activities are no longer included in the Company's consolidated
statements of cash flows.
I-67
<PAGE> 69
Cash provided by (used in) the Company's investing activities
aggregated $(1,245 million), $475 million and $(119 million) during the four
months ended June 30, 1999, the two months ended February 28, 1999, and the six
months ended June 30, 1998, respectively. Following the deconsolidation of
Liberty Media Group in connection with the AT&T Merger and the deconsolidation
of @Home during the second quarter of 1999, Liberty Media Group's and @Home's
investing activities are no longer included in the Company's consolidated
statements of cash flows. The Company's investing activities include a reduction
in the Company's cash and cash equivalents of $401 million during the four
months ended June 30, 1999 resulting from the deconsolidation of @Home.
The amount of capital expended by TCI for property and equipment was
$1,013 million, $297 million and $560 million during the four months ended June
30, 1999, the two months ended February 28, 1999, and the six months ended June
30, 1998, respectively. Such expenditures relate primarily to TCI's cable
distribution systems. TCI estimates that total capital expenditures will be
approximately $3.5 billion in 1999. No assurance can be given that actual
capital costs will not exceed such estimated capital costs. Additionally, the
foregoing estimate does not include customer specific capital costs required to
deliver local telephony services. TCI cannot reasonably estimate such costs
since the actual capital costs will be largely dependent upon the extent of
customer penetration and the average per-unit-cost to install customer premise
equipment.
During the two months ended February 28, 1999, the Company completed a
transaction whereby the Company contributed cable television systems to an
entity in which the Company had an approximate 80% ownership interest. Through a
series of transactions, including the contribution of cash by a third party in
exchange for an ownership interest, the Company's ownership interest in such
majority-owned entity was diluted to a non-controlling 50% ownership interest.
In connection with the associated dilution of the Company's ownership interest,
the Company deconsolidated assets and liabilities related to cable television
systems serving approximately 614,000 customers. The deconsolidated liabilities
included $210 million of debt owed to external parties and $709 million of
intercompany debt owed to the Company. In connection with such transaction, the
Company has agreed to take certain steps to support compliance by such entity
with its payment obligations under certain debt instruments. See note 7 to the
accompanying consolidated financial statements.
During February 1999, the Company sold cable television assets
serving approximately 145,000 customers to an unaffiliated third party for
approximately $300 million.
Several agreements have been announced which may result in the
acquisition and disposition of cable television systems by TCI. In addition, the
Company has entered into agreements to sell certain of its investments in the
Other Affiliates. See notes 6 and 7 to the accompanying consolidated financial
statements.
During the second quarter of 1999, @Home consummated a merger agreement
with Excite. Under the terms of the merger agreement, @Home issued approximately
116 million shares of its common stock (as adjusted for a June 1999 two-for-one
stock split) for all of the outstanding common stock of Excite. As a result of
the merger, the Company's economic interest in @Home decreased from 38.8% to
26.5%. Due to the resulting increase in @Home's equity, net of the dilution of
the Company's ownership interest in @Home, the Company recorded a $466 million
increase to "Additional paid-in capital" and a $298 million increase to
"Deferred income tax liability." For additional information see note 6 to the
accompanying consolidated financial statements.
I-68
<PAGE> 70
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. As a result of such merger, TCI received in exchange for all of
its interest in TCG, 70,429,248 shares of AT&T Common Stock. Such AT&T common
stock was transferred from TCI Ventures Group to TCI Group in connection with
the AT&T Merger. See note 2 to the accompanying consolidated financial
statements. New TCI treats its investment in AT&T Common Stock as an investment
in its parent. Accordingly, TCI's investment in AT&T Common Stock is reflected
as a reduction of TCI's equity. The Company does not expect that it will receive
dividends on its investment in AT&T Common Stock.
During February and March, 1999, Old TCI terminated certain equity swap
facilities. In connection with the termination of such transactions, Old TCI
received aggregate cash payments of $677 million. For additional information see
note 10 to the accompanying consolidated financial statements.
Many of the Company's subsidiaries operate in the telecommunications
industry which has experienced and is expected to continue to experience (i)
rapid and significant changes in technology, (ii) ongoing improvements in the
capacity and quality of such services, (iii) frequent and new product and
service introductions, and (iv) enhancements and changes in end-user
requirements and preferences. The degree to which these changes will affect such
entities and the ability of such entities to compete in their respective
businesses cannot be predicted. If markets fail to develop, develop more slowly
than expected, or become highly competitive, the Company's operating results and
financial condition may be materially adversely affected.
TCI is committed to purchase billing services from a third party
pursuant to three successive five year agreements. Pursuant to such arrangement,
TCI is obligated at June 30, 1999 to make minimum payments aggregating
approximately $1.5 billion through 2012. Such minimum payments are subject to
inflation and other adjustments pursuant to the terms of the underlying
agreements.
TCI has agreed to make fixed monthly payments to an entity attributed
to Liberty Media Group pursuant to an affiliation agreement. The fixed annual
commitments increase annually from $190 million in 1999 to $267 million in 2003,
and will increase with inflation through 2022. In addition, pursuant to certain
agreements between TCI and an entity attributed to Liberty Media Group, TCI is
obligated at June 30, 1999 to make minimum revenue payments through 2017 license
fee payments through 2007 aggregating approximately $392 million to such
attributed entity. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
I-69
<PAGE> 71
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $77
million at June 30, 1999. The Company also has agreed to take certain steps to
support debt compliance with respect to obligations aggregating $1,690 million
of certain cable television partnerships in which the Company has
non-controlling ownership interests. See notes 7 and 13 to the accompanying
consolidated financial statements. 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. Following the
deconsolidation of Liberty Media Group in connection with the AT&T Merger, notes
payable and other obligations guaranteed by entities attributed to Liberty Media
Group are no longer included with those of TCI.
During 1999, a subsidiary of the Company entered into a Contribution
Agreement with certain shareholders of Phoenixstar pursuant to which the Company
would, to the extent it is relieved of $166 million of contingent liabilities
currently owed to certain creditors of Phoenixstar and its subsidiaries,
contribute up to $166 million to Phoenixstar to the extent necessary to satisfy
liabilities of Phoenixstar. During the second quarter of 1999 and the fourth
quarter of 1998, the Company recorded charges of $50 million and $90 million,
respectively, to provide for the estimated losses that were expected to result
from the Contribution Agreement. During the second quarter of 1999, the Company
contributed approximately $114 million to Phoenixstar as partial satisfaction of
this obligation. The Company's remaining obligation under the Contribution
Agreement will expire in 2001.
The Company is obligated and/or has guaranteed Liberty Media Group's
obligation to pay fees for the rights to exhibit certain films that are released
by various producers through 2017. Based on customer levels at June 30, 1999,
these agreements require minimum payments aggregating approximately $317
million. The aggregate amount of the Film Licensing Obligations under these
license agreements is not currently estimable because such amount is dependent
upon the number of qualifying films released theatrically by certain motion
picture studios as well as the domestic theatrical exhibition receipts upon the
release of such qualifying films. Nevertheless, required aggregate payments
under the Film Licensing Obligations could prove to be significant.
TCI is a party to affiliation agreements with programming suppliers.
Pursuant to certain of such agreements, TCI is committed to carry such
suppliers' programming on its cable systems. Additionally, certain of such
agreements provide for penalties and charges in the event the programming is not
carried or not delivered to a contractually specific number of customers.
I-70
<PAGE> 72
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 are designed and manufactured to be
compatible and interoperable with the OpenCable(TM) architecture specifications
adopted by CableLabs, the cable television industry's research and development
consortium, in November 1997. NDTC has agreed that Approved Purchasers will
purchase, in the aggregate, a minimum of 6.5 million set-top devices during
calendar years 1998, 1999 and 2000 at an average price of $318 per set-top
device. The 1998 purchase commitment of 1.5 million set-top devices was met.
During the six months ended June 30, 1999, approximately 930,000 set-top devices
had been purchased related to the 1999 commitment of 1,750,000 devices. 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. In connection with the AT&T Merger,
such warrants were transferred to Liberty/Ventures Group in exchange for
approximately $176 million in cash. To the extent that such warrants do not vest
because TCI fails to meet its purchase commitments, TCI is required to repay a
proportional amount of such cash to Liberty Media Group. NDTC has the right to
terminate the Digital Terminal Purchase Agreement if, among other reasons, GI
fails to meet a material milestone designated in the Digital Terminal Purchase
Agreement with respect to the development, testing and delivery of advanced
digital set-top devices.
On July 17, 1998, the Company acquired 21.4 million shares of common
stock of GI in exchange for (i) certain of the assets of NDTC's set-top
authorization business, (ii) the license of certain related software to GI,
(iii) a $50 million promissory note from the Company to GI, and (iv) a nine-year
revenue guarantee from the Company in favor of GI. In connection therewith, NDTC
also entered into a services agreement pursuant to which it will provide certain
postcontract services to GI's set-top authorization business. The 21.4 million
shares of GI common stock are, in addition to other transfer restrictions,
restricted as to their sale by NDTC for a three-year period. The Company
recorded its investment in such shares at fair value which included a discount
attributable to the above-described liquidity restriction. As a result of the
deconsolidation of Liberty Media Group, the 21.4 million shares of GI common
stock are no longer included in the Company's consolidated assets. The $346
million excess of the fair value of GI common stock received in 1998 over (i)
the book value of certain assets transferred from NDTC to GI, and (ii) the $42
million present value of the promissory note due from the Company to GI, was
deferred by the Company. A portion of such excess equal to the $160 million
present value of the annual amounts specified by the revenue guarantee is being
amortized to revenue over nine years in proportion to such annual guaranteed
amounts. The remaining $186 million excess is being amortized to revenue on a
straight-line basis over the nine-year period that NDTC is required to perform
postcontract services.
The Company leases business offices, has entered into converter lease
agreements, pole rental agreements, transponder lease agreements and uses
certain equipment under lease arrangements.
The Company's various partnerships and other affiliates accounted for
by the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities, through net cash provided by their own operating activities
and, in certain circumstances, through required capital contributions from their
partners.
I-71
<PAGE> 73
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company may enter into Interest Rate Swaps pursuant to which
it (i) pays fixed interest rates and receives variable interest rates and (ii)
pays variable interest rates and receives fixed interest rates. During the six
months ended June 30, 1998, the Company's net payments pursuant to the Fixed
Rate Agreements were $1 million. At December 31, 1998, all of the Company's
Fixed Rate Agreements had expired, therefore, no such payments were made in
1999. The Company's net receipts pursuant to the Variable Rate Agreements during
the four months ended June 30, 1999, the two months ended February 28, 1999 and
the six months ended June 30, 1998, were $9 million, $1 million and $4 million,
respectively. At June 30, 1999, the Company would be entitled to receive $15
million upon termination of the Variable Rate Agreements.
In addition to the Variable Rate Agreements, the Company entered into
fixed Interest Rate Swaps pursuant to which it pays a variable rate based on
LIBOR (6.1% at June 30, 1999) and receives a variable rate based on CMT (5.9% at
June 30, 1999) on a notional amount of $400 million through September 2000; and
pays a variable rate based on LIBOR (6.0% at June 30, 1999) and receives a
variable rate based on CMT (6.0% at June 30, 1999) on notional amounts of $95
million through February 2000. During each of the four months ended June 30,
1999, the two months ended February 28, 1999 and the six months ended June 30,
1998, the Company's net payments pursuant to such agreements were $1 million. At
June 30, 1999, the Company would be required to pay less than $1 million to
terminate such Interest Rate Swaps.
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, the Company does not anticipate that
it will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, as of June 30, 1999, the Company
does not anticipate material near-term losses in future earnings, fair values or
cash flows resulting from derivative financial instruments. See note 8 to the
accompanying consolidated financial statements for additional information
regarding Interest Rate Swaps.
At June 30, 1999, after considering the net effect of the
aforementioned Interest Rate Swaps, the Company had $7.7 billion (or 78%) of
fixed rate debt due to non-affiliates and $2.2 billion (or 22%) of variable-rate
debt due to non-affiliates. In addition, at June 30, 1999, the Company had
outstanding variable rate indebtedness under the AT&T Notes of $7.3 billion.
TCI's interest rate exposure is primarily to changes in LIBOR rates.
I-72
<PAGE> 74
TELE-COMMUNICATIONS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There were no new material legal proceedings or material developments
in previously reported legal proceedings during the quarter ended June
30, 1999 to which TCI or any of its consolidated subsidiaries is a
party or of which any of its property is the subject, except as
follows:
DMX Shareholders Litigation.
----------------------------
As previously reported, in September 1996, a putative class action
complaint was filed with the Delaware Chancery Court in C.A. No 15206
by a stockholder of DMX Inc. ("DMX"). The defendants in the action
included DMX, TCI and the directors of DMX (Jerold H. Rubinstein, Donne
F. Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr., Kent Burkhart, J.C.
Sparkman and Menon Bhaskar). This case was dismissed March 11, 1999 and
will not be reported on in the future.
C. Lamont Smith, et al. v. Mile Hi Cable Partners, et al.
---------------------------------------------------------
As previously reported, on December 9, 1996, C. Lamont Smith and The
Black Movie Channel, LLC filed suit in the District Court for the City
and County of Denver against subsidiaries of Tele-Communications, Inc.
(TCI Communications, Inc.; Mile Hi Cable Partners, LP; Liberty Media
Corporation and Encore Media Corporation); Black Entertainment
Television; Steve Santamaria; Media Management Group, Inc. and Virginia
Butler. On June 10, 1999, the Colorado Court of Appeals affirmed in
part and reversed in part the trial courts dismissal of the plaintiffs
claims against Liberty Media Corporation and Encore Media Corporation
as well as plaintiffs' first, second, fifth, and a portion of the
twelfth claim for relief against the remaining Company defendants. The
appellate court affirmed the dismissal of plaintiffs' claims for breach
of contract, breach of the implied covenant of good faith and fair
dealing, and breach of fiduciary duty. The court reversed the dismissal
of the plaintiffs' misappropriation and unjust enrichment claims and
remanded the case for further proceedings. The deadline for plaintiffs
to file a writ of certiorari with the Colorado Supreme Court is July
26, 1999. Based upon the facts available, management believes that,
although no assurance can be given as to the outcome of this action,
the ultimate disposition should not have a material adverse effect upon
the financial condition of the Company.
II-1
<PAGE> 75
TELE-COMMUNICATIONS, INC.
Item 6. Exhibit and Reports on Form 8-K.
(a) Exhibit -
(27) Tele-Communications, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30,
1999:
None.
II-2
<PAGE> 76
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: August 13, 1999 By: /s/ Leo J. Hindery, Jr.
------------------------------------
Leo J. Hindery, Jr.
President and Chief
Operating Officer
Date: August 13, 1999 By: /s/ Ann M. Koets
-------------------------------
Ann M. Koets
Executive Vice President
and Chief Financial Officer
(Chief Accounting Officer)
II-3
<PAGE> 77
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
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. THE SUMMARY FINANCIAL INFORMATION FOR
THE TWO MONTH PERIOD ENDED FEBRUARY 28, 1999 IS FOR OLD TCI PRIOR TO THE AT&T
MERGER. THE SUMMARY FINANCIAL INFORMATION FOR THE FOUR MONTH PERIOD ENDED JUNE
30, 1999 IS FOR NEW TCI SUBSEQUENT TO THE AT&T MERGER.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 2-MOS 4-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 MAR-01-1999
<PERIOD-END> FEB-28-1999 JUN-30-1999
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 490
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 7,104
<DEPRECIATION> 0 270
<TOTAL-ASSETS> 0 77,949
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 9,915
0 0
0 0
<COMMON> 0 53,058
<OTHER-SE> 0 (3,792)
<TOTAL-LIABILITY-AND-EQUITY> 0 77,949
<SALES> 0 0
<TOTAL-REVENUES> 1,145 1,902
<CGS> 0 0
<TOTAL-COSTS> 467 746
<OTHER-EXPENSES> 277 569
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 161 310
<INCOME-PRETAX> (157) (2,007)
<INCOME-TAX> 119 (237)
<INCOME-CONTINUING> (276) (1,770)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (5) 0
<CHANGES> 0 0
<NET-INCOME> (281) (1,770)
<EPS-BASIC> (.42)<F1> 0
<EPS-DILUTED> (.43)<F1> 0
<FN>
<F1>PRIMARY AND DILUTED EARNINGS PER SHARE REPRESENT EARNINGS PER SHARE OF TCI
GROUP STOCK.
</FN>
</TABLE>