TELE COMMUNICATIONS INC /CO/
10-Q, 1999-08-13
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
Previous: TRIGEN ENERGY CORP, 10-Q, 1999-08-13
Next: UNION FINANCIAL BANCSHARES INC, 10QSB, 1999-08-13


<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>
 [an error occurred while processing this directive]

© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission