<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment # 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Earliest Event Reported: January 7, 1999
Date of Report: January 11, 1999
TELE-COMMUNICATIONS, INC.
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(Exact name of Registrant as specified in its charters)
State of Delaware
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(State or other jurisdiction of incorporation)
0-20421 84-1260157
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(Commission File Number) (I.R.S. Employer Identification No.)
5619 DTC Parkway
Englewood, Colorado 80111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
<PAGE> 2
Item 5. Other Events
As reported on the Company's Current Report on Form 8-K, dated July 1,
1998, the Company intends, subject to stockholder approval, to merge with a
subsidiary of AT&T Corp. (the "Merger") and, independent of whether the Merger
is consummated, to combine Liberty Media Group and TCI Ventures Group (the
"Combination"). Exhibit 99.1 sets forth the following financial statements,
including notes thereto, of the Company and the combined Liberty/Ventures Group:
(a) the consolidated balance sheets of the Company as of September 30, 1998 and
December 31, 1997 and 1996, (b) the consolidated statements of operations,
stockholders' equity and cash flows of the Company for each of the fiscal years
in the three-year period ended December 31, 1997 and for the nine-month periods
ended September 30, 1998 and 1997, (c) the combined balance sheets of the
Liberty/Ventures Group as of September 30, 1998 and December 31, 1997 and 1996,
and (d) the combined statements of operations, equity and cash flows of the
Liberty/Ventures Group for each of the fiscal years in the three-year period
ended December 31, 1997 and for the nine-month periods ended September 30, 1998
and 1997. In addition, Exhibit 99.1 sets forth management's discussion and
analysis of results of operations of the Company for the years ended December
31, 1997, 1996 and 1995 and for the nine months ended September 30, 1998 and
1997.
The Company is filing this Current Report on Form 8-K in order to cause
the information set forth in Exhibit 99.1 to be incorporated by reference into
the joint proxy statement/prospectus of the Company and AT&T, dated January 7,
1999, relating to the Merger and the Combination.
Item 7. Financial Statements and Exhibits
(c) Exhibits
(99.1) Financial Statements
Tele-Communications, Inc.:
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Years ended December 31, 1997, 1996 and 1995
Independent Auditors' Report
Consolidated Balance Sheets,
December 31, 1997 and 1996
Consolidated Statements of Operations,
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows,
Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements,
December 31, 1997, 1996 and 1995
Liberty/Ventures Group:
Independent Auditors' Report
Combined Balance sheets,
December 31, 1997 and 1996
Combined Statements of Operations,
Years ended December 31, 1997, 1996 and 1995
Combined Statements of Equity,
Years ended December 31, 1997, 1996 and 1995
Combined Statements of Cash Flows,
Years ended December 31, 1997, 1996 and 1995
Notes to Combined Financial Statements,
December 31, 1997, 1996 and 1995
Tele-Communications, Inc.:
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Nine Months ended September 30, 1998 and 1997
Consolidated Balance Sheets,
September 30, 1998 and December 31, 1997 (unaudited)
Consolidated Statements of Operations,
Nine months ended September 30, 1998 and 1997 (unaudited)
Consolidated Statement of Stockholders' Equity,
Nine months ended September 30, 1998 (unaudited)
Consolidated Statements of Cash Flows,
Nine months ended September 30, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements,
September 30, 1998 (unaudited)
Liberty/Ventures Group:
Combined Balance Sheets,
September 30, 1998 and December 31, 1997 (unaudited)
Combined Statements of Operations,
Nine months ended September 30, 1998 and 1997 (unaudited)
Combined Statement of Equity,
Nine months ended September 30, 1998 (unaudited)
Combined Statements of Cash Flows,
Nine months ended September 30, 1998 and 1997 (unaudited)
Notes to Combined Financial Statements,
September 30, 1998 (unaudited)
<PAGE> 3
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 hereunto duly authorized.
Date: January 11, 1999
TELE-COMMUNICATIONS, INC.
(Registrant)
By: /s/ Stephen M. Brett
-------------------------
Stephen M. Brett
Executive Vice President,
General Counsel and
Secretary
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<S> <C>
99.1 Financial Statements
</TABLE>
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TELE-COMMUNICATIONS, INC.
FINANCIAL INFORMATION
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TELE-COMMUNICATIONS, INC.
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Numbers
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<S> <C>
TELE-COMMUNICATIONS, INC.:
Management's Discussion and Analysis of Financial Condition and Results
of Operations, Years ended December 31, 1997, 1996 and 1995 3
Independent Auditors' Report 50
Consolidated Balance Sheets,
December 31, 1997 and 1996 51
Consolidated Statements of Operations,
Years ended December 31, 1997, 1996 and 1995 53
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1997, 1996 and 1995 55
Consolidated Statements of Cash Flows,
Years ended December 31, 1997, 1996 and 1995 58
Notes to Consolidated Financial Statements,
December 31, 1997, 1996 and 1995 59
LIBERTY/VENTURES GROUP:
Independent Auditors' Report 132
Combined Balance Sheets,
December 31, 1997 and 1996 133
Combined Statements of Operations,
Years ended December 31, 1997, 1996 and 1995 135
Combined Statements of Equity,
Years ended December 31, 1997, 1996 and 1995 136
Combined Statements of Cash Flows,
Years ended December 31, 1997, 1996 and 1995 137
Notes to Combined Financial Statements,
December 31, 1997, 1996 and 1995 139
TELE-COMMUNICATIONS, INC.:
Management's Discussion and Analysis of Financial Condition and Results
of Operations, Nine months ended September 30, 1998 and 1997 182
Consolidated Balance Sheets,
September 30, 1998 and December 31, 1997 (unaudited) 224
Consolidated Statements of Operations,
Nine months ended September 30, 1998 and 1997 (unaudited) 226
Consolidated Statement of Stockholders' Equity,
Nine months ended September 30, 1998 (unaudited) 227
Consolidated Statements of Cash Flows,
Nine months ended September 30, 1998 and 1997 (unaudited) 228
Notes to Consolidated Financial Statements,
September 30, 1998 (unaudited) 229
</TABLE>
1
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TELE-COMMUNICATIONS, INC.
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Numbers
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<S> <C>
LIBERTY/VENTURES GROUP:
Combined Balance Sheets,
September 30, 1998 and December 31, 1997 (unaudited) 269
Combined Statements of Operations,
Nine months ended September 30, 1998 and 1997 (unaudited) 271
Combined Statement of Equity,
Nine months ended September 30, 1998 (unaudited) 272
Combined Statements of Cash Flows,
Nine months ended September 30, 1998 and 1997 (unaudited) 273
Notes to Combined Financial Statements,
September 30, 1998 (unaudited) 275
</TABLE>
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Years ended December 31, 1997, 1996 and 1995
Tele-Communications, Inc. ("TCI" or the "Company") is currently traded
through six separate series of common stock which represent three targeted
groups of assets. "TCI Group", which is traded through Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share ("TCI Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock, par value
$1.00 per share ("TCI Group Series B Stock", and together with the TCI Group
Series A Stock, the "TCI Group Stock"), is intended to reflect the separate
performance of TCI's domestic cable and communications business. "Liberty Media
Group", which is traded trough Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, par value $1.00 per share ("Liberty Group Series A Stock")
and Tele-Communications, Inc. Series B Liberty Media Group Common Stock, par
value $1.00 per share ("Liberty Group Series B Stock", and together with the
Liberty Group Series A Stock, the "Liberty Group Stock"), is intended to reflect
the separate performance of TCI's assets which produce and distribute
programming services. "TCI Ventures Group", which is traded through
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, par value
$1.00 per share ("TCI Ventures Group Series A Stock") and Tele-Communications,
Inc. Series B TCI Ventures Group Common Stock, par value $1.00 per share ("TCI
Ventures Group Series B Stock", and together with the TCI Ventures Group Series
A Stock, the "TCI Ventures Group Stock"), is 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.
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue the Liberty Group Series A Stock and
Liberty Group Series B Stock. Additionally, the stockholders of TCI approved the
redesignation of the previously authorized Class A and Class B common stock into
TCI Group Series A Stock and TCI Group Series B Stock. On August 10, 1995, TCI
distributed in the form of a dividend (the "Liberty Distribution"), 2.25 shares
of Liberty Group Stock (as adjusted for stock dividends - see below) for each
four shares of TCI Group Stock owned.
On August 28, 1997, the stockholders of TCI authorized the Board to
issue the TCI Ventures Group Stock. Prior to stockholder approval to issue the
TCI Ventures Group Stock, TCI commenced the offers (the "Exchange Offers") to
exchange shares of TCI Ventures Group Stock for shares of TCI Group Stock in the
ratio of two shares of the applicable series of TCI Ventures Group Stock in
exchange for each share of the corresponding series of TCI Group Stock properly
tendered. On September 10, 1997, 188,661,300 shares of TCI Group Series A Stock
and 16,266,400 shares of TCI Group Series B Stock were exchanged for 377,322,600
shares of TCI Ventures Group Series A Stock and 32,532,800 shares of TCI
Ventures Group Series B Stock, respectively (the "TCI Ventures Exchange").
Effective February 6, 1998, the Company issued stock dividends to
holders of Liberty Group Stock (the "1998 Liberty Stock Dividend") and TCI
Ventures Group Stock (the "Ventures Stock Dividend"). The 1998 Liberty Stock
Dividend consisted of one share of Liberty Group Stock for every two shares of
Liberty Group Stock owned. The Ventures Stock Dividend consisted of one share of
TCI Ventures Group Stock for every one share of TCI Ventures Group Stock owned.
The 1998 Liberty Stock Dividend and the Ventures Stock Dividend have been
treated as stock splits, and accordingly, all share and per share amounts
presented have been restated to reflect the 1998 Liberty Stock Dividend and the
Ventures Stock Dividend.
3
<PAGE> 5
On June 24, 1998, the Board announced its intention, subject to
shareholder approval, to combine Liberty Media Group and TCI Ventures Group
(collectively, "Liberty/Ventures Group"). Under the terms of the proposed
combination (the "Liberty/Ventures Combination"), each outstanding share of TCI
Ventures Group Series A Stock will be reclassified as .52 of a share of Liberty
Group Series A Stock (following the Liberty/Ventures Combination, the
"Liberty/Ventures Group Series A Stock") and each outstanding share of TCI
Ventures Group Series B Stock, will be reclassified as .52 of a share Liberty
Group Series B Stock (following the Liberty/Ventures Combination, the
"Liberty/Ventures Group Series B Stock").
Following the Liberty/Ventures Combination the Liberty/Ventures Group
Series A Stock and the Liberty/Ventures Group Series B Stock (and collectively,
the "Liberty/Ventures Group Stock") will represent one hundred percent of the
equity value attributable to Liberty/Ventures Group. The Liberty/Ventures
Combination will not result in any transfer of assets or liabilities of TCI or
any of its subsidiaries or affect the rights of creditors of TCI or of holders
of TCI's or any of its subsidiaries' debt.
Collectively, all of the aforementioned targeted groups of assets are
referred to as "Groups" and individually, may be referred to herein as a
"Group."
The following discussion and analysis has been prepared in conjunction
with the solicitation of shareholder approval of the proposed Liberty/Ventures
Combination, and accordingly, includes references to the prepared
Liberty/Ventures Group and analysis of the financial condition and results of
operations of the proposed Liberty/Ventures Group. The Liberty Media Group and
TCI Ventures Group will continue to exist until such time as the
Liberty/Ventures Combination or another shareholder approved transaction is
consummated.
Certain statements included herein constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company (or entities in which the Company has
interests), or industry results, to differ materially from future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other factors include, among others:
general economic and business conditions and industry trends; the regulatory and
competitive environment of the industries in which the Company, and the entities
in which the Company has interests, operate; uncertainties inherent in new
business strategies, new product launches and development plans; rapid
technological changes; the acquisition, development and/or financing of
telecommunications networks and services; the development and provision of
programming for new television and telecommunications technologies; future
financial performance, including availability, terms and deployment of capital;
the ability of vendors to deliver required equipment, software and services;
availability of qualified personnel; changes in, or failure or inability to
comply with, government regulations, including, without limitation, regulations
of the Federal Communications Commission ("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.
4
<PAGE> 6
Targeted Stock
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group and Liberty/Ventures Group for the
purpose of preparing their respective combined financial statements of each such
Group, the capital structure of TCI, which encompasses the TCI Group Stock and
Liberty/Ventures Group Stock, does not affect legal title to such assets or
responsibility for such liabilities of TCI or any of its subsidiaries. TCI and
its subsidiaries each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock and Liberty/Ventures Group Stock are
common stockholders of TCI and are subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities. The
issuance of Liberty/Ventures Group Stock will not affect the rights of creditors
of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of the separate Groups
and the market prices of shares of TCI Group Stock and Liberty/Ventures Group
Stock. In addition, net losses of any portion of TCI, dividends or distributions
on, or repurchases of, any series of common stock, and dividends on, or certain
repurchases of preferred stock would reduce funds of TCI legally available for
dividends on all series of common stock. Accordingly, financial information of
any one Group should be read in conjunction with the financial information of
TCI and the other Groups.
The common stockholders' equity value of Liberty/Ventures Group that,
at any relevant time, is attributed to TCI Group, and accordingly not
represented by outstanding Liberty/Ventures Group Stock, is referred to as
"Inter-Group Interest." Prior to consummation of the Liberty Distribution and
TCI Ventures Exchange, TCI Group had a 100% Inter-Group Interest in Liberty
Media Group and TCI Ventures Group, respectively. Following consummation of the
Liberty Distribution and TCI Ventures Exchange, TCI Group no longer has
Inter-Group Interests in Liberty Media Group and TCI Ventures Group,
respectively. For periods in which an Inter-Group Interest exists, TCI Group
accounts for its Inter-Group Interest in a manner similar to the equity method
of accounting. Following consummation of the Liberty/Ventures Combination, an
Inter-Group Interest would be created with respect to Liberty/Ventures Group
only if a subsequent transfer of cash or other property from TCI Group to
Liberty/Ventures Group is specifically designated by the Board as being made to
create an Inter-Group Interest or if outstanding shares of Liberty/Ventures
Group Stock are purchased with funds attributable to TCI Group. Management of
TCI believes that generally accepted accounting principles require that
Liberty/Ventures Group be consolidated with TCI Group for all periods in which
TCI Group held an Inter-Group Interest in Liberty/Ventures Group.
Dividends on TCI Group Stock or Liberty/Ventures Stock are payable at
the sole discretion of the Board out of the lesser of assets of TCI legally
available for dividends or the available dividend amount with respect to each
Group, as defined. Determinations to pay dividends on TCI Group Stock or
Liberty/Ventures Group Stock are based primarily upon the financial condition,
results of operations and business requirements of the applicable Group and TCI
as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
is (unless the Board otherwise provides) specifically attributed to and
reflected in the combined financial statements of the Group that includes the
entity which incurred the debt or issued the preferred stock or, in case the
entity incurring the debt or issuing the preferred stock is Tele-Communications,
Inc., the TCI Group. The Board could, however, determine from time to time that
debt incurred or preferred stock issued by entities included in a Group should
be specifically attributed to and reflected in the combined financial statements
of one of the other Groups to the extent that the debt is incurred or the
preferred stock is issued for the benefit of such other Group.
5
<PAGE> 7
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective liquidity
requirements, the cash needs of one Group may exceed the liquidity sources of
such Group. In such circumstances, the other Group may transfer funds to such
Group. TCI Group has provided and will continue to provide centralized cash
management functions under which cash receipts of certain entities included in
the Liberty/Ventures Group could be remitted to TCI Group and certain cash
disbursements of the Liberty/Ventures Group could be funded by TCI Group on a
daily basis. Such transfers of funds among the Groups will be reflected as
borrowings or, if determined by the Board, in the case of a transfer from TCI
Group to Liberty/Ventures Group, reflected as the creation of, or increase in,
TCI Group's Inter-Group Interest in Liberty/Ventures Group or, in the case of a
transfer from Liberty/Ventures Group to TCI Group, reflected as a reduction in
TCI Group's Inter-Group Interest in Liberty/Ventures Group. There are no
specific criteria for determining when a transfer will be reflected as a
borrowing or as an increase or reduction in an Inter-Group Interest. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs of TCI,
the financing needs and objectives of the Groups, the investment objectives of
the Groups, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
Loans from one Group to another Group generally will bear interest at
such rates and have such repayment schedules and other terms as are established
from time to time by, or pursuant to procedures established by, the Board. The
Board expects to make such determinations, either in specific instances or by
setting generally applicable policies from time to time, after consideration of
such factors as it deems relevant, including, without limitation, the needs of
TCI, the use of proceeds by and creditworthiness of the recipient Group, the
capital expenditure plans of and investment opportunities available to each
Group and the availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group reflect its net loans or
advances to or loans or advances from the other Group. Similarly, the respective
combined statements of operations of the Groups reflect interest income or
expense, as the case may be, associated with such loans or advances and the
respective combined statements of cash flows of the Groups reflect changes in
the amounts of loans or advances deemed outstanding. Net loans or advances
between Groups have been and will continue to be included as a component of each
respective Group's combined equity in the combined financial statements.
Although any increase in TCI Group's Inter-Group Interest in
Liberty/Ventures Group resulting from an equity contribution by TCI Group to
Liberty/Ventures Group or any decrease in such Inter-Group Interest resulting
from a transfer of funds from Liberty/Ventures Group to the TCI Group would be
determined by reference to the market value of the Liberty/Ventures Group Series
A Stock as of the date of such transfer. Such an increase could occur at a time
when such shares could be considered undervalued and such a decrease could occur
at a time when such shares could be considered overvalued.
6
<PAGE> 8
All financial impacts of issuances and purchases of shares of TCI Group
Stock or Liberty/Ventures Group Stock, the proceeds of which are attributed to
TCI Group or Liberty/Ventures Group, respectively, will be to such extent
reflected in the combined financial statements of TCI Group or Liberty/Ventures
Group, respectively. All financial impacts of issuances of shares of
Liberty/Ventures Group Stock, the proceeds of which are attributed to TCI Group
in respect of a reduction in TCI Group's Inter-Group Interest in
Liberty/Ventures Group, will be to such extent reflected in the combined
financial statements of TCI Group. Financial impacts of dividends or other
distributions on TCI Group Stock or Liberty/Ventures Group Stock, will be
attributed entirely to TCI Group or Liberty/Ventures Group, respectively, except
that dividends or other distributions on Liberty/Ventures Group Stock will (if
at the time there is an Inter-Group Interest in Liberty/Ventures Group) result
in TCI Group being credited, and Liberty/Ventures Group being charged (in
addition to the charge for the dividend or other distribution paid), with an
amount equal to the product of the aggregate amount of such dividend or other
distribution paid or distributed in respect of outstanding shares of
Liberty/Ventures Group Stock and a fraction of the numerator of which is
Liberty/Ventures Group "Inter-Group Interest Fraction" and the denominator of
which is Liberty/Ventures Group "Outstanding Interest Fraction" (both as
defined). Financial impacts of repurchases of Liberty/Ventures Group Stock, the
consideration for which is charged to TCI Group, will be to such extent
reflected in the combined financial statements of TCI Group and will result in
an increase in the TCI Group's Inter-Group Interest in Liberty/Ventures Group.
7
<PAGE> 9
Magness Settlement
On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the Estate
of Bob Magness (the "Magness Estate"), the late founder and former Chairman of
the Board of TCI in exchange (the "Exchange") for an equal number of shares of
TCI Group Series B Stock (which shares are entitled to ten votes per share)
owned by the Magness Estate, (b) the Magness Estate sold (the "Sale") the shares
of TCI Group Series A Stock received in the Exchange, together with
approximately 1.5 million shares of TCI Group Series A Stock that the Magness
Estate previously owned (collectively, the "Option Shares"), to two investment
banking firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment Bankers
whereby TCI has the option, but not the obligation, to purchase the Option
Shares at any time on or before June 16, 1999 (the "Option Period"). The
preceding transactions are referred to collectively as the "June 16 Stock
Transaction". During the Option Period, the Company and the Investment Bankers
are to settle quarterly any increase or decrease in the market value of the
Option Shares. If the market value of the Option Shares exceeds the Investment
Bankers' cost, Option Shares with a fair value equal to the difference between
the market value and cost will be segregated from the other Option Shares in an
account at the Investment Bankers. If the market value of the Option Shares is
less than the Investment Bankers' cost, the Company, at its option, will settle
such difference with shares of TCI Group Series A Stock or TCI Ventures Group
Series A Stock or, subject to certain conditions, with cash or letters of
credit. In addition, the Company is required to pay the Investment Bankers a
quarterly fee equal to the London Interbank Offered Rate ("LIBOR") plus 1% on
the Sale Price, as adjusted for payments made by the Company pursuant to any
quarterly settlement with the Investment Bankers. Due to the Company's ability
to settle quarterly price fluctuations and fees with shares of TCI Group Series
A Stock or TCI Ventures Group Series A Stock the Company records all amounts
received or paid under this arrangement as increases or decreases, respectively,
to equity. During the fourth quarter of 1997, the Company repurchased 4,000,000
shares of TCI Group Series A Stock from one of the Investment Bankers for an
aggregate cash purchase price of $66 million. Additionally, as a result of the
Exchange Offers and certain open market transactions that were completed to
obtain the desired weighting of TCI Group Series A Stock and TCI Ventures Group
Series A Stock, the Investment Bankers disposed of 4,210,308 shares of TCI Group
Series A Stock and acquired 23,407,118 shares (as adjusted for the Ventures
Stock Dividend) of TCI Ventures Group Series A Stock during the last half of
1997 such that the Option Shares were comprised of 16,402,082 shares of TCI
Group Series A Stock and 23,407,118 shares (as adjusted for the Ventures Stock
Dividend) of TCI Ventures Series A Stock at December 31, 1997. At December 31,
1997, the market value of the Option Shares exceeded the Investment Bankers'
cost by $325 million. Pursuant to a certain Letter Agreement, dated June 16,
1997, between Dr. Malone, TCI's Chairman and Chief Executive Officer, and the
Magness Estate, Dr. Malone agreed to waive certain rights of first refusal with
respect to shares of Series B TCI Group Stock beneficially owned by the Magness
Estate. Such rights of first refusal arise from a letter agreement, dated June
17, 1988, among Bob Magness, Kearns-Tribune Corporation and Dr. Malone, pursuant
to which Dr. Malone was granted a right of first refusal to acquire any shares
of TCI Group Series B Stock which the other parties proposed to sell. As a
result of Dr. Malone's rights under such June 17, 1988 letter agreement, such
waiver was necessary in order for the Magness Estate to consummate the Exchange
and the Sale.
In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from TCI up to
30,545,864 shares of the Series B TCI Group Stock acquired by TCI from the
Magness Estate pursuant to the Exchange. Such acquisition may be made in
exchange for either, or any combination of, shares of Series A TCI Group Stock
owned by Dr. Malone (exchanged on a one for one basis), or cash in an amount
equal to the average closing sale price of the Series B TCI Group Stock for the
five trading days preceding the acquisition.
8
<PAGE> 10
In connection with certain legal procedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob Magness'
sons, Sharon Magness, Bob Magness' surviving second wife and the original
personal representatives of the Magness Estate advanced various claims, causes
of action, demands, complaints and requests against one or more of the others.
In addition, Kim Magness and Gary Magness, in a Complaint And Request To Void
Sale Of TCI Stock, And For Damages And Surcharge, filed on October 29, 1997 (the
"Voiding Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal representatives of
the Magness Estate. Among other matters, the Voiding Action challenged the June
16 Stock Transaction on various fiduciary bases and requested recision of such
transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon Magness, the
Magness Estate, the Estate of Betsy Magness (the first wife of Bob Magness) and
Dr. Malone agreed to settle their respective claims against each other relating
to the Magness Estate and the June 16 Stock Transaction, in each case without
any of those parties admitting any of the claims or allegations against that
party (the "Magness Settlement").
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that 10,201,041 shares of TCI Group Series A Stock and
11,666,506 shares (as adjusted for the Ventures Stock Dividend) of TCI Ventures
Group Series A Stock were returned to TCI as authorized but unissued shares, and
the Magness Estate returned to the Investment Bankers the portion of the Sales
Price attributable to such returned shares. TCI then issued to the Magness
Estate 10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares (as
adjusted for the Ventures Stock Dividend) of TCI Ventures Series B Stock. In
addition, as part of the Magness Settlement, TCI issued 1,339,415 shares of TCI
Group Series B Stock to the Estate of Betsy Magness in exchange for an equal
number of shares of TCI Group Series A Stock and issued 1,531,834 shares of TCI
Ventures Group Series B Stock for an equal number of shares of TCI Ventures
Group Series A Stock.
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr. Malone and
Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the
Malones granted to TCI the right to acquire any shares of TCI stock which are
entitled to cast more than one vote per share (the "High-Voting Shares") owned
by the Malones, which currently consist of an aggregate of approximately 60
million High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third persons. In
either such event, TCI has the right to acquire the shares at a maximum price
equal to the then relevant market price of shares of "low-voting" Series A Stock
plus a ten percent premium. The Malones also agreed that if TCI were ever to be
sold to another entity, then the maximum premium that the Malones would receive
on their High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid $150 million
to the Malones in consideration of them entering into the Malone Call Agreement.
9
<PAGE> 11
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain cases, on
behalf of the Estate of Betsy Magness and the Magness Estate (collectively, the
"Magness Family") also entered into a call agreement with TCI (with
substantially the same terms as the one entered into by the Malones, including a
call on the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of approximately 49
million High-Voting Shares. The Magness Family was paid $124 million by TCI in
consideration of them entering into the Magness Call Agreement. Additionally, on
February 9, 1998, the Magness Family entered into a shareholders' agreement (the
"Shareholders' Agreement") with the Malones and TCI under which (i) the Magness
Family and the Malones agree to consult with each other in connection with
matters to be brought to the vote of TCI's shareholders, subject to the proviso
that if they cannot mutually agree on how to vote the shares, Dr. Malone has an
irrevocable proxy to vote the High-Voting Shares owned by the Magness Family,
(ii) the Magness Family may designate a nominee for the Board and Dr. Malone has
agreed to vote his High Voting Shares for such nominee and (iii) certain "tag
along rights" have been created in favor of the Magness Family and certain "drag
along rights" have been created in favor of the Malones. In addition, the Malone
Right granted by TCI to Dr. Malone to acquire 30,545,864 shares of TCI Group
Series B Stock has been reduced to an option to acquire 14,511,570 shares of TCI
Group Series B Stock. Pursuant to the terms of the Shareholders' Agreement, the
Magness Family has the right to participate in the reduced Malone Right on a
proportionate basis with respect to 12,406,238 shares of the 14,511,570 shares
subject to the Malone Right.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") will be reflected
as a $274 million reduction of additional paid-in capital. The Call Payments
will be allocated to each of the Groups based upon the number of shares of each
Group (before giving effect to the 1998 Liberty Stock Dividend and the Ventures
Stock Dividend) that were subject to the Malone Call Agreement and the Magness
Call Agreement. Accordingly, $134 million and $140 million of the Call Payments
will be allocated to TCI Group and Liberty/Ventures Group, respectively.
Inflation
Inflation has not had a significant impact on TCI's results of
operations during the three-year period ended December 31, 1997.
10
<PAGE> 12
Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 128, Earnings Per Share, ("SFAS 128") in
February of 1997. SFAS 128 establishes new computation, presentation and
disclosure requirements for earnings per share ("EPS"). SFAS 128 requires
companies with complex capital structures to present basic and diluted EPS.
Basic EPS is measured as the income or loss available to common shareholders
divided by the weighted average outstanding common shares for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per
share basis of potential common shares (e.g., convertible securities, options,
etc.) as if they had been converted at the beginning of periods presented.
Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from diluted
EPS. The Company adopted SFAS 128 as of December 31, 1997 and has restated all
prior period EPS data, as required. SFAS 128 did not have a material impact on
EPS for all periods presented.
During 1997, the FASB also issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying of comprehensive income and
its components in the financial statements. It does not, however, require a
specific format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining its preferred format.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Year 2000
During 1997, the Company began an enterprise-wide comprehensive review
of its computer systems and related software to ensure systems properly
recognize the year 2000 and continue to process business information. The
systems being evaluated include all internal use software and devices and those
systems and devices that manage the distribution of the Company's, as well as
third parties' products. Additionally, the Company has initiated a program of
communications with its significant suppliers, customers and affiliated
companies to determine the readiness of these third parties and the impact on
the Company as a consequence of their own year 2000 issues.
Over the past three years, the Company began an effort to convert a
substantial portion of its financial applications to commercial products which
are anticipated to be year 2000 ready, or to outsource portions of its financial
applications to third party vendors who are expected to be year 2000 ready.
Notwithstanding such effort, the Company is in the process of finalizing its
assessment of the impact of year 2000. The Company is utilizing both internal
and external resources to identify, correct or reprogram, and test systems for
year 2000 readiness. To date, the Company has inventoried substantially all of
its cable systems and is currently evaluating the results of such inventory. The
Company expects that it will have to modify or replace certain portions of its
cable distribution plant, although the Company has not yet completed its
assessment. Confirmations have been received from certain primary suppliers
indicating that they are either year 2000 ready or have plans in place to ensure
readiness. As part of the Company's assessment of its year 2000 issue, it is
evaluating the level of validation it will require of third parties to ensure
their year 2000 readiness. The Company's manual assessment of the impact of the
year 2000 date change should be complete by mid-1998.
11
<PAGE> 13
Management of the Company has not yet determined the cost associated
with its year 2000 readiness efforts and the related potential impact on the
Company's results of operations. Amounts expended to date have not been
material, although there can be no assurance that costs ultimately required to
be paid to ensure the Company's year 2000 readiness will not have an adverse
effect on the Company's financial position. Additionally, there can be no
assurance that the systems of other companies on which the Company relies will
be converted in time or that any such failure to convert by another company will
not have an adverse effect on the Company's financial condition or position.
SUMMARY OF OPERATIONS
GENERAL
Summarized operating data with respect to TCI is presented below for
the indicated periods:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 (b) 1996 (a) 1995 (a)
---------- ---------- ----------
<S> <C> <C> <C>
Revenue $ 7,570 8,022 6,506
Operating, selling, general and administrative expenses (4,595) (5,746) (4,518)
Stock compensation (488) 13 (57)
Impairment of intangible assets (15) -- --
Restructuring charges -- (41) (17)
Depreciation and amortization (1,623) (1,616) (1,372)
---------- ---------- ----------
Operating income 849 632 542
Interest expense (1,160) (1,096) (1,010)
Share of losses of affiliates, net (930) (450) (213)
Gain on dispositions of assets and sale of stock 573 1,605 337
Other, net (127) (128) 33
---------- ---------- ----------
Earnings (loss) before income taxes (795) 563 (311)
Income tax benefit (expense) 234 (271) 128
---------- ---------- ----------
Net earnings (loss) $ (561) 292 (183)
========== ========== ==========
</TABLE>
- -------------------
(a) Restated - see note 13 to the accompanying consolidated financial
statements of TCI.
(b) Restated - see note 19 to the accompanying consolidated financial
statements of TCI.
12
<PAGE> 14
The Company's domestic cable and communications businesses and assets
are included in TCI Group. Upon consummation of the proposed Liberty/Ventures
Combination, the Company's programming businesses and assets which are currently
included in Liberty Media Group, and the Company's principal international
businesses and assets and the Company's remaining non-cable and non-programming
domestic businesses and assets which are currently included in TCI Ventures
Group, will be included in Liberty/Ventures Group. The operating results of each
of TCI Group and Liberty/Ventures Group are separately discussed below.
TCI GROUP
TCI Group operates principally in the domestic cable and communications
industry. The table below sets forth, for the periods presented, the percentage
relationship that certain items bear to revenue. This summary provides trend
data relating to the normal recurring operations of TCI Group. Other items of
significance are discussed under separate captions below.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------------
1997 1996 (a) 1995 (a)
----------------------- ----------------------- -----------------------
dollar amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Revenue 100% $ 6,429 100% $ 5,881 100% $ 4,827
Operating expenses (36) (2,293) (38) (2,230) (35) (1,686)
Selling, general and administrative expenses (21) (1,370) (28) (1,635) (25) (1,216)
Stock compensation (3) (192) -- 23 (1) (40)
Restructuring charges -- -- -- (37) -- --
Depreciation and amortization (22) (1,427) (24) (1,406) (25) (1,199)
-------- -------- -------- -------- -------- --------
Operating income 18% $ 1,147 10% $ 596 14% $ 686
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
(a) Restated - see notes 1 and 12 to the combined financial statements of
TCI Group, which are included in the Company's December 31, 1997 Annual
Report on Form 10-K.
The operation of TCI Group's cable television systems is regulated at
the federal, state and local levels. The Cable Communications Policy Act of 1984
(the "1984 Cable Act"), the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of 1996 (the
"1996 Telecom Act" and together with the 1992 Cable Act, the "Cable Acts")
established rules under which TCI Group's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are regulated if a
complaint is filed by a customer or if the appropriate franchise authority is
certified by the FCC to regulate rates. At December 31, 1997, approximately 71%
of TCI Group's basic customers were served by cable television systems that were
subject to such rate regulation.
During the year ended December 31, 1997, 73% of TCI Group's revenue was
derived from Regulated Services. As noted above, any increases in rates charged
for Regulated Services are regulated by the Cable Acts. Moreover, competitive
factors may limit TCI Group's ability to increase its service rates.
13
<PAGE> 15
TCI Group has completed a number of acquisitions during the three-year
period ended December 31, 1997. The most significant of such acquisitions was
consummated on July 31, 1996 when TCI Group acquired from Viacom, Inc. an entity
that owned cable television assets valued at $2.326 billion at the acquisition
date. Upon consummation of such acquisition (the "Viacom Acquisition"), the
acquired entity was renamed TCI Pacific Communications, Inc. ("TCI Pacific").
For additional information concerning the Viacom Acquisition, see note 6 to the
combined financial statements of TCI Group, which are included in the Company's
Annual Report on Form 10-K. The following table sets forth summary information
with respect to the operating results of TCI Pacific that have been included in
TCI Group's results of operations since the July 1, 1996 acquisition date
(amounts in millions):
<TABLE>
<CAPTION>
Year ended Five months ended
December 31, 1997 December 31, 1996
----------------- ---------------------
<S> <C> <C>
Revenue $ 509 216
Operating costs and expenses before
depreciation and amortization (295) (133)
Depreciation and amortization (121) (45)
------------ ------------
Operating income $ 93 38
============ ============
</TABLE>
Through December 4, 1996, TCI Group had an investment in Primestar
Partners L.P. ("Primestar"). Primestar provided programming and marketing
support to each of its cable partners who provided satellite television service
to their customers. On December 4, 1996, TCI distributed (the "Satellite
Spin-off") to the holders of shares of TCI Group Stock all of the issued and
outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At
the time of the Satellite Spin-off, Satellite's assets and operations included
TCI Group's interest in Primestar, TCI Group's business of distributing
Primestar programming and two communications satellites. As a result of the
Satellite Spin-off, Satellite's operations subsequent to December 4, 1996 are
not consolidated with those of TCI Group.
The following table sets forth summary information with respect to the
operating results of Satellite for the period from January 1, 1996 through date
of the Satellite Spin-off (amounts in millions):
<TABLE>
<S> <C>
Revenue $ 377
Operating expenses (373)
Depreciation (166)
------------
Operating loss $ (162)
============
</TABLE>
TCI Group's revenue increased 9% and 22% for the years ended December
31, 1997 and 1996, respectively, as compared to the prior year. Exclusive of the
effects of acquisitions, the Satellite Spin-off and another disposition, revenue
from TCI Group's customers accounted for 3% of such 1997 increase in revenue,
primarily as a result of a 7% increase in basic revenue and a 4% decrease in
premium revenue. TCI Group experienced a 9% increase in its average basic rate,
a 1% decrease in the number of average basic customers, a 7% increase in its
average premium rate and an 11% decrease in the number of average premium
subscriptions. In addition, TCI Group's revenue increased 9% due to acquisitions
and decreased 6% due to the Satellite Spin-off and another disposition.
Advertising sales and other revenue accounted for the remaining 3% increase in
revenue.
14
<PAGE> 16
Exclusive of the effects of acquisitions, revenue from TCI Group's
customers accounted for 8% of such 1996 increase in revenue, primarily as a
result of a 10% increase in basic revenue and a 1% decrease in premium revenue.
TCI Group experienced an 8% increase in its average basic rate, a 4% increase in
the number of average basic customers, an 11% decrease in its average premium
rate and an 11% increase in the number of average premium subscriptions. In
addition, TCI Group's revenue increased 8% due to acquisitions and increased 4%
due to an increase in TCI Group's satellite customers through the date of the
Satellite Spin-off. Advertising sales and other revenue accounted for the
remaining 2% increase in revenue.
Operating expenses increased 3% and 32% for the years ended December
31, 1997 and 1996, respectively. Exclusive of the effects of acquisitions, the
Satellite Spin-off and another disposition, such expenses increased 5% and 20%,
respectively. Programming expenses accounted for the majority of such increases.
TCI Group cannot determine whether and to what extent increases in the cost of
programming will affect its future operating costs. However, due to TCI Group's
obligations under a 25 year affiliation agreement (the "EMG Affiliation
Agreement") with Encore Media Group LLC ("Encore Media Group"), a subsidiary of
TCI that is a member of Liberty/Ventures Group, it is anticipated that TCI
Group's programming costs with respect to the "STARZ!" and "Encore" premium
services will increase in 1998 and future periods. See note 14 to the combined
financial statements of TCI Group, which are included in the Company's Annual
Report on Form 10-K.
Selling, general and administrative expenses decreased 16% and
increased 34% for the years ended December 31, 1997 and 1996, respectively.
Exclusive of the effects of acquisitions, the Satellite Spin-off and another
disposition, such expenses decreased 6% and increased 17%, respectively. The
1997 decrease is due primarily to lower marketing costs due primarily to launch
and other incentives from programming suppliers, a reduction in salaries and
related payroll expenses due to work force reductions in the fourth quarter of
1996 and other reductions in general and administrative expenses in 1997. The
1996 increase is due primarily to an increase in salaries and related payroll
expenses, as well as increased marketing and general and administrative
expenses.
During the fourth quarter of 1996, TCI Group restructured certain of
its operating and accounting functions. In connection with such restructuring,
TCI Group recognized a charge of $37 million related primarily to work force
reductions. Through December 31, 1997, $24 million of such charge had been paid.
Depreciation expense decreased 4% and increased 20% for the years ended
December 31, 1997 and 1996, respectively. The 1997 decrease represents the net
effect of a decrease due to the Satellite Spin-off and another disposition that
more than offset increases attributable to acquisitions and capital
expenditures. The 1996 increase is attributable to acquisitions and capital
expenditures.
Amortization expense increased 14% and 12% for the years ended December
31, 1997 and 1996, respectively. Such increases are primarily attributable to
the effects of acquisitions.
Certain corporate general and administrative costs are charged to
Liberty/Ventures Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are set at
levels that management believes to be reasonable and that would approximate the
costs Liberty/Ventures Group would incur for comparable services on a
stand-alone basis. During the years ended December 31, 1997, 1996 and 1995,
Liberty/Ventures Group was allocated $13 million, $11 million and $7 million,
respectively, in corporate general and administrative costs by TCI Group.
15
<PAGE> 17
TCI Group records stock compensation relating to restricted stock
awards, options and/or stock appreciation rights granted by TCI to certain TCI
Group employees and members of the Board. 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 December 31, 1997. The expense associated with stock appreciation rights is
subject to future adjustment based upon market value fluctuation and,
ultimately, on the final determination of market value when the rights are
exercised.
Other Income and Expenses
TCI Group's interest expense increased $76 million or 7% from 1996 to
1997 and $60 million or 6% from 1995 to 1996. The increase in 1997 is primarily
the result of higher average debt balances, as a result of the Viacom
Acquisition on July 31, 1996. The 1996 increase is the net result of higher
average debt balances, partially offset by a decrease due to a lower weighted
average interest rate. TCI Group's weighted average interest rate on borrowings
was 7.7%, 7.7% and 8.1% during 1997, 1996 and 1995, respectively.
During the years ended December 31, 1997 and 1996, TCI Group purchased,
in the open market, certain notes payable which had an aggregate principle
balance of $409 million and $904 million, respectively. Fixed interest rates on
notes payable ranged from 8.75% to 10.13% for purchases made during 1997, and
ranged from 7.88% to 10.44% for purchases made during 1996. In connection with
such purchases, TCI Group recognized losses on early extinguishment of debt of
$39 million and $62 million during the years ended December 31, 1997 and 1996,
respectively. Such losses related to prepayment penalties amounting to $33
million and $60 million for the years ended December 31, 1997 and 1996,
respectively, and the retirement of deferred loan costs.
Also, during the year ended December 31, 1996, certain TCI subsidiaries
attributed to TCI Group terminated, at such attributed subsidiaries' option,
certain revolving bank credit facilities with aggregate commitments of
approximately $2 billion and refinanced certain other bank credit facilities. In
connection with such termination and refinancings, TCI Group recognized a loss
on early extinguishment of debt of $9 million related to the retirement of
deferred loan costs.
TCI Group's investments in affiliates are comprised of limited
partnerships and other entities that are primarily engaged in the domestic cable
business. TCI Group's share of losses of affiliates were $90 million, $79
million and $3 million in 1997, 1996 and 1995, respectively. The 1997 increase
is primarily due to TCI Group's share of losses of a 49%-owned cable television
partnership that was acquired by TCI Group in July 1996. The 1996 increase is
primarily due to TCI Group's share of (i) a 1996 nonrecurring charge by an
equity investee to recognize a decline in the market value of certain securities
and (ii) the 1996 losses of the aforementioned 49%-owned cable television
partnership.
Minority interests in earnings of consolidated subsidiaries aggregated
$168 million, $82 million and $3 million for the years ended December 31, 1997,
1996 and 1995, respectively. The majority of the 1997 and 1996 amounts represent
the accrual of dividends on the company-obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Trust Preferred Securities"),
holding solely subordinated debt securities of TCI Communications, Inc., issued
in 1997 and 1996 and the accrual of dividends on certain preferred securities
issued in August 1996 by TCI Pacific in connection with the Viacom Acquisition.
See notes 6 and 10 to the combined financial statements of TCI Group, which are
included in the Company's Annual Report on Form 10-K.
16
<PAGE> 18
Net Loss
As a result of the above-described fluctuations in the Company's
results of operations, (i) TCI Group's net loss (before earnings (loss) of
Liberty Media Group and TCI Ventures Group and preferred stock dividend
requirements) of $150 million for the year ended December 31, 1997 changed by
$356 million, as compared to TCI Group's net loss (before earnings (loss) of
Liberty Media Group and TCI Ventures Group and preferred stock dividend
requirements) of $506 million for the year ended December 31, 1996, and (ii) TCI
Group's net loss (before earnings (loss) of Liberty Media Group and TCI Ventures
Group and preferred stock dividend requirements) of $506 million for the year
ended December 31, 1996 changed by $319 million, as compared to TCI Group's net
loss (before earnings (loss) of Liberty Media Group and TCI Ventures Group and
preferred stock dividend requirements) of $187 million for the year ended
December 31, 1995.
LIBERTY/VENTURES GROUP
At December 31, 1997, Liberty/Ventures Group consisted principally of
the following assets and their related liabilities: (i) TCI's businesses which
provide programming services including production, acquisition and distribution
through all available formats and media of branded entertainment, educational
and informational programming and software, including multimedia products, (ii)
TCI's businesses engaged in electronic retailing, direct marketing, advertising
sales relating to programming services, infomercials and transaction processing,
(iii) TCI's businesses engaged in international cable, telephony and programming
businesses (iv) TCI's principal interests in the telephony business ("TCI
Telephony") consisting primarily of TCI's investment in a series of partnerships
formed to engage in the business of providing wireless communications services,
using the radio spectrum for broadband personal communications services ("PCS"),
to residential and business customers nationwide under the Sprint(R) brand (a
registered trademark of Sprint Communications Company, L.P.) (the "PCS
Ventures"), TCI's 28% equity interest (representing a 41% voting interest) in
Teleport Communications Group, Inc. ("TCG"), a competitive local exchange
carrier, and Western Tele-Communications, Inc. ("WTCI"), a wholly-owned
subsidiary of TCI that provides long distance transport of video, voice and data
traffic and other telecommunications services to interexchange carriers on a
wholesale basis using primarily a digital broadband microwave network located
throughout a 12 state region, (v) TCI's businesses engaged in high speed
multimedia Internet services, and (vi) other assets, including the National
Digital Television Center, Inc. ("NDTC"), which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets. A significant portion of Liberty/Ventures Group's operations are
conducted through corporations and partnerships in which Liberty/Ventures Group
holds a 20%-50% ownership interest. As Liberty/Ventures Group generally accounts
for such ownership interests using the equity method of accounting, the
financial condition and results of operations of such entities are not reflected
on a combined basis within Liberty/Ventures Group's combined financial
statements.
During July 1997, Liberty/Ventures Group, TCI Group and a corporation
which held the 10% minority interest in Encore Media Corporation ("EMC") that
Liberty/Ventures Group did not already own entered into a series of transactions
pursuant to which the businesses of "Encore," a movie premium programming
service, and "STARZ!," a first-run movie premium programming service, were
contributed to Encore Media Group. Upon completion of the transaction,
Liberty/Ventures Group owned 80% of Encore Media Group and TCI Group owned the
remaining 20%. In connection with these transactions, the 10% minority interest
in EMC was exchanged for approximately 2.4 million shares of Liberty Group
Series A Stock, which was accounted for as an acquisition of a minority
interest.
17
<PAGE> 19
Liberty/Ventures Group received its 80% ownership interest in Encore
Media Group in exchange for (i) the contribution of its 49.9% interest in QE+
Ltd. ("QE+"), a limited partnership which distributed STARZ! prior to the
formation of Encore Media Group, (ii) the contribution of EMC, (iii) the
issuance of a $307 million note payable to TCI Group (the "EMG Promissory
Note"), (iv) the cancellation and forgiveness of amounts due for certain
services provided to QE+ equal to 4% of the gross revenue of QE+ (the "STARZ
Content Fees") and (v) the termination of an option to increase Liberty/Ventures
Group's ownership interest in QE+.
TCI Group received the remaining 20% interest in Encore Media Group and
the aforementioned consideration from Liberty/Ventures Group in exchange for the
contribution of TCI Group's 50.1% ownership interest in QE+ and certain capital
contributions made by TCI Group to QE+. In addition, TCI Group entered into the
EMG Affiliation Agreement pursuant to which TCI Group will pay monthly fixed
amounts in exchange for unlimited access to all of the existing Encore and
STARZ! services.
Upon formation of Encore Media Group, the operations of STARZ! are
included in the combined financial results of Liberty/Ventures Group. The EMG
Promissory Note is included in amounts due to related parties.
Effective December 31, 1997, Liberty/Ventures Group and TCI Group
agreed to amend the above transactions. Pursuant to the amendment, the above
described series of transactions were rescinded, retroactive to July 1, 1997.
Such rescission was given effect as of December 31, 1997 for financial reporting
purposes. Simultaneously, Liberty/Ventures Group and TCI Group entered into a
new agreement whereby the EMG Affiliation Agreement was amended to permanently
reduce the monthly fixed amounts for the life of the contract, TCI Group's 20%
ownership interest in Encore Media Group was eliminated and the EMG Promissory
Note was reduced by $32 million. The amounts to be paid to Encore Media Group
pursuant to the EMG Affiliation Agreement were reduced to amounts which reflect
current market prices. See note 11 to the accompanying combined financial
statements of Liberty/Ventures Group.
Effective July 11, 1997, pursuant to an Agreement and Plan of Merger,
dated as of February 6, 1997, as amended, by and among TCI, TCI Music Inc. ("TCI
Music"), TCI Merger Sub, a wholly-owned subsidiary of TCI Music ("DMX Merger
Sub") and DMX Inc. ("DMX"), DMX Merger Sub was merged with and into DMX, with
DMX as the surviving corporation (the "DMX Merger"). As a result of the DMX
Merger, stockholders of DMX became stockholders of TCI Music.
18
<PAGE> 20
Effective with the DMX Merger, TCI beneficially owned approximately
45.7% of the outstanding shares of the Series A Common Stock, $.01 par value per
share, of TCI Music (the "TCI Music Series A Common Stock") and 100% of the
outstanding shares of Series B Common Stock, $.01 par value per share, of TCI
Music (the "TCI Music Series B Common Stock," and together with the TCI Music
Series A Common Stock, the "TCI Music Common Stock"), which represented 89.6% of
the equity and 98.7% of the voting power of TCI Music. Simultaneously with the
DMX Merger, Liberty/Ventures Group acquired the TCI-owned TCI Music Common Stock
by issuing an $80 million promissory note (the "Music Note") to TCI and agreeing
to reimburse TCI for any amounts required to be paid by TCI pursuant to TCI's
contingent obligation under a rights agreement among TCI, TCI Music and the
rights agent (the "Rights Agreement") whereby TCI granted to each stockholder
who became a stockholder of TCI Music pursuant to the DMX Merger, one right (a
"Right") with respect to each whole share of TCI Music Series A Common Stock
acquired by such shareholder in the DMX Merger. Each Right entitles the holder
to require TCI to purchase from such holder one share of TCI Music Series A
Common Stock for $8.00 per share, subject to reduction by the aggregate amount
per share of any dividend and certain other distributions, if any, made by TCI
Music to its stockholders, and, payable at the election of TCI, in cash, a
number of shares of TCI Group Series A Stock, having an equivalent value or a
combination thereof, if during the one-year period beginning on the effective
date of the DMX Merger, the price of TCI Music Series A Common Stock does not
equal or exceed $8.00 per share for a period of at least 20 consecutive trading
days. TCI Music was included in the combined financial statements of
Liberty/Ventures Group as of the date of the DMX Merger. See note 11 to the
accompanying combined financial statements of Liberty/Ventures Group.
In January 1997, Liberty/Ventures Group's voting interest in Flextech
p.l.c. ("Flextech"), a company engaged in the distribution and production of
programming for multi-channel video distribution systems in the United Kingdom
("UK"), was reduced to 50% and Liberty/Ventures Group ceased to include the
financial results of Flextech in its combined results of operations and began to
account for Flextech using the equity method of accounting. See note 5 to the
accompanying combined financial statements of Liberty/Ventures Group.
As of April 29, 1996, Liberty/Ventures Group and The News Corporation
Limited ("News Corp.") formed two sports programming Ventures both of which are
accounted for using the equity method. In the United States, Liberty/Ventures
Group and News Corp. formed Fox/Liberty Networks LLC ("Fox Sports") into which
Liberty/Ventures Group contributed interests in its national and regional sports
networks and into which News Corp. contributed its "fx" cable network and
certain other assets. Liberty/Ventures Group received a 50% interest in Fox
Sports and a distribution of $350 million in cash.
Internationally, News Corp. and Liberty/Ventures Group formed a venture
("Fox Sports International") to operate previously existing sports services in
Latin America and Australia and a variety of new sports services throughout the
world, except in Asia and in the United Kingdom, Japan and New Zealand where
prior arrangements preclude an immediate collaboration. Liberty/Ventures Group
owns 50% of Fox Sports International with News Corp. owning the other 50%. News
Corp. contributed various international sports rights and certain trademark
rights. Liberty/Ventures Group contributed Prime Deportiva, a Spanish language
sports service distributed in Latin America and in Hispanic markets in the
United States; an interest in Torneos y Competencias S.A., an Argentinean sports
programming and production business; various international sports and satellite
transponder rights and cash. Liberty/Ventures Group also contributed its 50%
interest in Premier Sports and All-Star Sports. Both are Australian 24-hour
sports services available via multichannel, multipoint distribution systems or
cable television. See note 5 to the accompanying combined financial statements
of Liberty/Ventures Group.
19
<PAGE> 21
Pursuant to an agreement among Liberty/Ventures Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty/Ventures Group contributed to
BDTV INC. ("BDTV-I"), in August 1996, an option (the "Silver King Option") to
purchase 2 million shares of Class B common stock of Silver King Communications,
Inc. ("Silver King") (which shares represented voting control of Silver King at
such time) and $4 million in cash, representing the exercise price of the Silver
King Option. BDTV-I is a corporation formed by Liberty/Ventures Group and Mr.
Diller pursuant to the BDTV Agreement, in which Liberty/Ventures Group owns over
99% of the equity and none of the voting power (except for protective rights
with respect to certain fundamental corporate actions) and Mr. Diller owns less
than 1% of the equity and all of the voting power. BDTV-I exercised the Silver
King Option shortly after its contribution, thereby becoming the controlling
stockholder of Silver King. Such change in control of Silver King had been
approved by the FCC in June 1996, subject, however, to the condition that the
equity interest of Liberty/Ventures Group in Silver King not exceed 21.37%
without the prior approval of the FCC (the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by
merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN
Merger") where HSN is the surviving corporation and a subsidiary of Silver King
following the HSN Merger. Liberty/Ventures Group accounted for the HSN Merger as
a sale of a portion of its investment in HSN and accordingly, recorded a pre-tax
gain of approximately $47 million. In order to effect the HSN Merger in
compliance with the FCC Order, Liberty/Ventures Group agreed to defer receiving
certain shares of Silver King that would otherwise have become issuable to it in
the HSN Merger until such time as it was permitted to own such shares. As a
result, the HSN Merger was structured so that Liberty/Ventures Group received:
(i) 15.6 million shares of Class B common stock of Silver King, all of which
shares Liberty/Ventures Group contributed to BDTV II INC. ("BDTV-II", and
collectively with BDTV-I and BDTV III INC., "BDTV"), (ii) the contractual right
(the "Contingent Right") to be issued up to an additional 5.2 million shares of
Class B common stock of Silver King from time to time upon the occurrence of
certain events which would allow Liberty/Ventures Group to own additional shares
in compliance with the FCC Order (including events resulting in the dilution of
Liberty/Ventures Group's percentage equity interest), and (iii) 739,000 shares
of Class B common stock and 17.6 million shares of common stock of HSN
(representing approximately 19.9% of the equity and voting power of HSN).
BDTV-II is a corporation formed by Liberty/Ventures Group and Barry Diller
pursuant to the BDTV Agreement, in which the relative equity ownership and
voting power of Liberty/Ventures Group and Mr. Diller are substantially the same
as their respective equity ownership and voting power in BDTV-I. Pursuant to an
Exchange Agreement between Liberty/Ventures Group and Silver King, the shares of
HSN held by Liberty/Ventures Group following the HSN Merger are mandatorily
exchangeable from time to time for shares of common stock and Class B common
stock of Silver King (in the same ratio as the merger ratio in the HSN Merger)
either upon the occurrence of certain events or changes in laws, rules or
regulations which would entitle Liberty/Ventures Group to own directly a greater
number of shares of Silver King or in connection with the sale of the shares of
Silver King to be received in the exchange to a third party who would be
entitled to own such shares under applicable law.
As a result of the HSN Merger, HSN is no longer included in the
combined financial results of Liberty/Ventures Group. Although Liberty/Ventures
Group no longer possesses voting control over HSN, it continues to have an
indirect equity interest in HSN through its ownership of the equity securities
of BDTV, as well as a direct interest in HSN which would be exchangeable into
shares of Silver King. Accordingly, HSN is accounted for using the equity
method. Subsequent to the HSN Merger, the surviving corporation changed its name
to HSN, Inc. ("HSNI").
20
<PAGE> 22
On April 25, 1995, Tele-Communications International, Inc. ("TINTA")
acquired a 51% ownership interest in Cablevision S.A. and certain affiliated
companies ("Cablevision") an entity engaged in the multi-channel video
distribution business in Buenos Aires, Argentina. On October 9, 1997, TINTA sold
a portion of its 51% interest in Cablevision to unaffiliated third parties (the
"Buyers") for cash proceeds of $120 million. In addition, on October 9, 1997,
Cablevision issued 3.5 million shares of stock in the aggregate to the Buyers
for $80 million in cash and notes receivable with an aggregate principal amount
of $240 million, plus accrued interest at LIBOR, due within the earlier of two
years or at the request of Cablevision's board of directors. The 1997
transactions (collectively, the "Cablevision Sale") reduced TINTA's interest in
Cablevision to 26.2%. The Buyers also purchased the additional 39% interest in
Cablevision that TINTA had the right to acquire. As a result of the Cablevision
Sale, effective October 1, 1997, TINTA ceased to consolidate Cablevision and
began to account for Cablevision using the equity method of accounting. See note
5 to the accompanying combined financial statements of Liberty/Ventures Group.
On January 25, 1996, the stockholders of United Video Satellite Group,
Inc. ("UVSG") adopted the Agreement and Plan of Merger dated as of July 10,
1995, as amended, among UVSG, TCI and TCI Merger Sub, Inc. ("UVSG Merger Sub"),
pursuant to which UVSG Merger Sub was merged into UVSG, with UVSG as the
surviving corporation (the "UVSG Merger"). Liberty/Ventures Group acquired 12.4
million shares of UVSG Class B common stock and 2.1 million shares of UVSG Class
A common stock, together representing approximately 39% of the issued and
outstanding common stock of UVSG and approximately 85% of the total voting power
of UVSG common stock immediately after the UVSG Merger, resulting in UVSG
becoming a majority-controlled entity of Liberty/Ventures Group. The UVSG Merger
has been accounted for by the purchase method. Accordingly, the results of
operations of UVSG have been combined with those of Liberty/Ventures Group since
January 25, 1996 and Liberty/Ventures Group recorded UVSG's assets and
liabilities at fair value.
SUMMARY OF OPERATIONS
Liberty/Ventures Group's programming services include production,
acquisition and distribution through all available formats and media of branded
entertainment, educational and informational programming and software, including
multimedia products ("Entertainment and Information Programming Services").
Liberty/Ventures Group's international services include businesses which provide
programming services and operating television, telephone and Internet
distribution networks around the world ("International Services").
Liberty/Ventures Group operates NDTC which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets ("Digital Compression and Authorization Services") and Liberty/Ventures
Group is engaged in the business of providing high speed multimedia Internet
services ("Internet Services"). Through December 20, 1996 (the date of the HSN
Merger), Liberty/Ventures Group was also engaged in electronic retailing, direct
marketing, advertising sales relating to programming services, infomercials and
transaction processing ("Electronic Retailing Services"). To enhance the
reader's understanding, separate financial data has been provided below for
Entertainment and Information Programming Services, International Services,
Digital Compression and Authorization Services, Internet Services and Electronic
Retailing Services, which includes a retail function. Liberty/Ventures Group
holds significant equity investments, the results of which are not a component
of operating income, but are discussed below under "Other Income and Expense".
Other items of significance are discussed separately below.
21
<PAGE> 23
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------
1997 (a) 1996 1995
----------------------- ----------------------- -----------------------
dollar amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Entertainment and Information
Programming Services $ 967 74% $ 855 38% $ 571 33%
International Services 220 17 315 14 191 11
Digital Compression and Authorization
Services 94 7 75 4 53 3
Internet Services 7 1 1 -- -- --
Electronic Retailing Services -- -- 984 44 920 52
Corporate and other 11 1 7 -- 17 1
-------- -------- -------- -------- -------- --------
$ 1,299 100% $ 2,237 100% $ 1,752 100%
======== ======== ======== ======== ======== ========
Cost of sales, operating, selling,
general and administrative:
Entertainment and Information
Programming Services $ (823) 76% $ (708) 36% $ (527) 31%
International Services (145) 13 (274) 14 (165) 10
Digital Compression and Authorization
Services (58) 5 (44) 2 (31) 2
Internet Services (49) 5 (24) 1 (3) --
Electronic Retailing Services -- -- (911) 46 (962) 56
Corporate and other (15) 1 (11) 1 (18) 1
-------- -------- -------- -------- -------- --------
$ (1,090) 100% $ (1,972) 100% $ (1,706) 100%
======== ======== ======== ======== ======== ========
Depreciation, amortization, other non-cash
charges and stock compensation
Entertainment and Information
Programming Services $ (129) 19% $ (79) 34% $ (61) 32%
International Services (71) 10 (64) 28 (36) 19
Digital Compression and Authorization
Services (33) 5 (29) 13 (19) 10
Internet Services (189) 28 (2) 1 -- --
Electronic Retailing Services -- -- (37) 16 (42) 22
Corporate and other (258) 38 (18) 8 (32) 17
-------- -------- -------- -------- -------- --------
$ (680) 100% $ (229) 100% $ (190) 100%
======== ======== ======== ======== ======== ========
Operating income (loss):
Entertainment and Information
Programming Services $ 15 $ 68 $ (17)
International Services 4 (23) (10)
Digital Compression and Authorization
Services 3 2 3
Internet Services (58) (25) (3)
Electronic Retailing Services -- 36 (84)
Corporate and other (262) (22) (33)
-------- -------- --------
$ (298) $ 36 $ (144)
======== ======== ========
</TABLE>
(a) Restated - see note 19 to the accompanying consolidated financial
statements of TCI.
22
<PAGE> 24
Entertainment and Information Programming Services
Effective January 25, 1996, the results of operations of UVSG have been
combined with those of Liberty/Ventures Group. As of April 29, 1996,
Liberty/Ventures Group's regional sports programming businesses were no longer
included in the combined financial results of Liberty/Ventures Group. In
addition, effective January 1, 1997, the operations for TV Network Corporation
were discontinued and, therefore, revenue from such operations was not realized
in 1997. However, beginning July 1, 1997, upon formation of Encore Media Group,
the operations of STARZ! are included in the combined financial results of
Liberty/Ventures Group. And, as of July 11, 1997 the operations of TCI Music are
also included in the combined financial results of Liberty/Ventures Group.
Consequently, the amounts in the table above are not comparable year to year.
The following table sets forth the aggregate impact of these acquisitions and
dispositions on the results of operations of Liberty/Ventures Group for the
years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Revenue $ 635 574 383
Operating, selling, general and
administrative expenses (569) (496) (390)
Depreciation, amortization, other non-cash
charges and stock compensation (43) (54) (51)
-------- -------- --------
Operating income (loss) $ 23 24 (58)
======== ======== ========
</TABLE>
Excluding the effect of the acquisitions and dispositions described
above, revenue from Entertainment and Information Programming Services increased
18% or $51 million for the year ended December 31, 1997, as compared to the year
ended December 31, 1996. The increase is primarily attributable to higher
revenue from the distribution of the Encore services, including the thematic
multiplex services ("Multiplex"). During the year ended December 31, 1997,
revenue from distribution of the Encore services increased as a result of higher
revenue from TCI due to a higher number of units, the EMG Affiliation Agreement,
and an increase in the number of Encore and Multiplex units distributed by other
cable operators and direct broadcast satellite ("DBS") operators, when compared
to the year ended December 31, 1996.
Operating, selling, general and administrative expenses from
Entertainment and Information Programming Services, as adjusted for the effect
of acquisitions and dispositions, increased 20% or $42 million for the year
ended December 31, 1997 compared to the year ended December 31, 1996.
Programming costs associated with the Encore services including Multiplex
increased $5 million for the year due to more recent programming being
purchased. Encore incurred approximately $2 million for costs associated with
the transition to digital technology during 1997. Increased national advertising
for Encore was responsible for approximately $20 million of the increase during
the year ended December 31, 1997 compared to 1996. Increased marketing support
payments to distributors accounted for $13 million of the increase in Encore's
operating, selling, general and administrative expenses for 1997 over 1996. The
remaining increase in operating, selling, general and administrative expenses
from the Entertainment and Information Programming Services was due to
additional personnel and related costs supporting the overall growth of the
businesses within Liberty/Ventures Group.
23
<PAGE> 25
Depreciation, amortization, other non-cash charges and stock
compensation of Entertainment and Information Programming Services increased $61
million or 244% during the year ended December 31, 1997, as compared to 1996,
excluding the effect of the acquisitions and dispositions described above.
Encore Media Group's stock compensation increased by $44 million during the year
ended December 31, 1997. In addition, ETC w/tci, Inc. ("ETC"), a developer and
distributor of for-profit education, training and communications services and
products, recorded a $15 million charge to operations during 1997 for the
impairment of certain of its intangible assets.
Revenue from Entertainment and Information Programming Services
increased 49% or $93 million for the year ended December 31, 1996, compared to
the year ended December 31, 1995 excluding the effect of the acquisitions and
dispositions described above. Revenue from the distribution of the Encore
services increased approximately $50 million from 1995 to 1996. Approximately
$22 million of this increase was related to Multiplex. Multiplex units increased
103% from 6 million at December 31, 1995 to approximately 12.2 million units at
December 31, 1996. Encore subscribers increased 39% to approximately 11 million
at December 31, 1996 resulting in an increase in revenue of approximately $23
million in 1996. Average rates per subscriber were essentially unchanged during
these periods. The remaining increase in Encore's revenue in 1996 was due to
increased management fees from affiliates. Revenue from ETC increased $41
million or 81% from 1995 to 1996. Such increase is attributable to the June 1995
acquisition of CareerTrack, Inc. The remaining increase in revenue for
Entertainment and Information Programming Services is related to increases in
revenue from affiliate fees from Southern Satellite Systems, Inc. ("Southern")
and the increase in the STARZ Content Fees.
Excluding the effect of the acquisitions and dispositions described
above, operating, selling, general and administrative expenses increased 55% or
$75 million for the year ended December 31, 1996, compared to the year ended
December 31, 1995. Programming costs for Encore increased approximately $13
million primarily due to upgrading the quality of programming on all Encore and
Multiplex channels. Charges for satellite transponder facilities and other
related operating activities for Encore increased approximately $2 million
during the year ended December 31, 1996 compared to 1995. The overall growth of
Encore led to an increase of approximately $4 million in marketing and other
general and administrative costs during the year ended December 31, 1996, as
compared to 1995. Operating, selling, general and administrative expenses from
ETC increased $56 million or 110% from 1995 to 1996. The 1996 increase is
attributable to the June 1995 acquisition of CareerTrack, Inc.
Depreciation, amortization, other non-cash charges and stock
compensation of Entertainment and Information Programming Services, excluding
the effect of the acquisitions and dispositions described above, increased $15
million or 150% during the year ended December 31, 1996 compared to 1995.
Encore's stock compensation increased by approximately $14 million.
Revenue from TCI Music contributed $23 million to the revenue from
Entertainment and Information Programming Services for the year ended December
31, 1997. Additionally, revenue from STARZ! contributed $102 million to revenue
for 1997. As discussed above, operations for TCI Music and STARZ! were not
included in the combined financial results of Liberty/Ventures Group for the
year ended December 31, 1996. Operating, selling, general and administrative
expenses for Entertainment and Information Programming Services for the year
ended December 31, 1997 included $14 million from the operations of TCI Music
and $148 million from the operations of STARZ!.
24
<PAGE> 26
Revenue from UVSG contributed $508 million and $410 million to the
revenue from Entertainment and Information Programming Services for the years
ended December 31, 1997 and 1996, respectively. As described above, the results
of operations for UVSG were not included in the combined financial results for
the year ended December 31, 1995. Operating income from Entertainment and
Information Programming Services for the years ended December 31, 1997 and 1996
include $69 million and $37 million, respectively, from the operations of UVSG.
International Services
This information reflects the results of operations of TINTA. Effective
January 1, 1997, TINTA ceased to consolidate Flextech and began to account for
Flextech using the equity method of accounting. As a result, Flextech's results
of operations for the year ended December 31, 1997 were not included in the
combined financial results of Liberty/Ventures Group for 1997. Additionally,
effective October 1, 1997, TINTA ceased to consolidate Cablevision and began to
account for Cablevision using the equity method of accounting. Accordingly,
effective October 1, 1997, the results of operations of Cablevision were no
longer included in the combined financial results of Liberty/Ventures Group. The
following table sets forth the aggregate results of operations of Flextech and
Cablevision that were included in International Services as of the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Revenue $ 174 284 168
Operating costs and expenses before
depreciation and amortization (105) (245) (132)
Depreciation and amortization (41) (49) (30)
-------- -------- --------
Operating income (loss) $ 28 (10) 6
======== ======== ========
</TABLE>
Revenue from International Services decreased by $95 million or 30%
during the year ended December 31, 1997 as compared to 1996. Such decrease is
primarily attributable to the deconsolidation of Flextech and Cablevision.
Excluding the impact of these transactions, revenue from International Services
increased by $15 million or 48% during 1997 over 1996. This increase is
primarily attributable to increased cable revenue from an acquisition in 1997 by
TINTA's Puerto Rico subsidiary (the "Puerto Rico Subsidiary").
Operating, selling, general and administrative expenses for the
International Services decreased $129 million or 47% during the year ended
December 31, 1997 compared to the prior year. Similarly, the decrease is
primarily attributable to the deconsolidation of Flextech and Cablevision.
Excluding the impact of these transactions, operating, selling, general and
administrative expenses from International Services increased $11 million during
the year ended December 31, 1997 compared to 1996. This increase was primarily
attributable to increased expenses at the Puerto Rico Subsidiary due to an
acquisition during 1997.
Revenue from International Services increased $124 million or 65%
during the year ended December 31, 1996 as compared to the corresponding prior
year period. Such increase was comprised of an increase in cable revenue of $78
million or 55% and an increase in programming revenue from Flextech of $46
million or 97% during the year ended December 31, 1996. The increase in cable
revenue is primarily attributable to the effect of the acquisition of
Cablevision as well as an acquisition made by Cablevision. A significant
component of the increase in programming revenue is attributable to acquisitions
made by Flextech in 1996.
25
<PAGE> 27
Operating, selling, general and administrative expenses increased $109
million or 66% for the year ended December 31, 1996, as compared to the
corresponding prior year period. Programming costs and expenses increased $64
million during 1996, a 103% increase. Such increase is attributable to
acquisitions made by Flextech in 1996 and higher programming costs during 1996.
TINTA cable costs and expenses increased $44 million or 48% during the year
ended December 31, 1996, primarily as a result of the acquisitions of
Cablevision and the acquisition made by Cablevision, and increased programming
costs.
During 1996, TINTA revised its estimate of future revenue to be earned
from certain programming rights. As a result of such revisions, TINTA recorded
an impairment charge of $9 million in 1996 to reduce the carrying value of the
affected programming rights.
Digital Compression and Authorization Services
This information reflects the results of NDTC. Revenue from Digital
Compression and Authorization Services increased $19 million and $22 million or
25% and 42% during the years ended December 31, 1997 and December 31, 1996
compared to the corresponding previous years, respectively. Operating, selling,
general and administrative expenses from Digital Compression and Authorization
Services increased $14 million and $13 million or 32% or 42% during the years
ended December 31, 1997 and 1996 compared to the corresponding previous years,
respectively. A significant number of NDTC's major customers are affiliates of
TCI including entities attributed to Liberty/Ventures Group, and NDTC derives a
substantial portion of its revenue from such affiliated companies. For the years
ended December 31, 1997, 1996 and 1995 revenue from services provided to TCI and
its consolidated subsidiaries accounted for 41%, 34% and 39%, respectively, of
NDTC's total revenue.
Internet Services
This information reflects the results of operations of At Home
Corporation ("@Home"). Revenue from Internet Services increased $6 million
during the year ended December 31, 1997 compared to the previous year.
Operating, selling, general and administrative expenses increased $25 million or
104% during 1997 compared to 1996.
Electronic Retailing Services
This information reflects the results of HSN, which were included in
the combined financial results of Liberty/Ventures Group through the date of the
HSN Merger. HSN's primary business is electronic retailing conducted by Home
Shopping Club, Inc. ("HSC").
For the year ended December 31, 1996, revenue from Electronic Retailing
Services increased $64 million, or 7% as compared to 1995. Net sales reflected
an increase of 11.5% in the number of packages shipped and a decrease of 8.5% in
the average price per unit sold. For the year ended December 31, 1996, gross
profit for Electronic Retailing Services increased $62 million, or 20%, compared
to 1995. As a percentage of net sales, gross profit increased to 39% from 34%.
The dollar increases in HSN's and HSC's gross profit relate to the higher sales
volume. The comparative increases in HSN's gross profit percentage relate to
warehouse sales and other promotional events held during 1995 which reduced
gross profit in these periods and a 1996 product sales mix which was composed of
higher gross profit merchandise.
26
<PAGE> 28
Operating, selling, general and administrative expenses decreased $51
million or 5% during 1996 compared to 1995. Excluding cost of sales, operating,
selling, general and administrative expenses were 31% of sales in 1996, compared
with 39% of sales in 1995. In late 1995 and the first quarter of 1996,
management of HSN instituted measures aimed at streamlining operations primarily
by reducing its work force and taking other actions to reduce operating
expenses. These changes resulted in reductions in operating expenses in 1996
compared with the same period in 1995.
Additionally, $4 million of the restructuring charges for the year
ended December 31, 1995, represents costs incurred in connection with the
closing of HSN's Reno, Nevada, distribution center, which was accomplished in
June 1995. The decision to close the Reno distribution center was based on an
evaluation of HSN's overall distribution strategy.
Corporate and Other
This information includes general corporate expenses, Liberty/Ventures
Group's intercompany eliminations and the results of operations of WTCI. For
each of the years ended December 31, 1997, 1996 and 1995, WTCI's six largest
customers accounted in the aggregate for approximately 65%, 70% and 70%,
respectively, of WTCI's consolidated gross revenue. WTCI's six largest
customers' master service contracts all contain many service orders with
remaining terms varying from 1 month to approximately 15 months.
Stock compensation for corporate and other for 1997 was $209 million.
The adjustment to stock compensation during 1996 was $7 million resulting in an
increase of $216 million during the year ended December 31, 1997 compared to
1996. Estimated compensation relating to stock appreciation rights has been
recorded through December 31, 1997 pursuant to APB Opinion No. 25. Such estimate
is subject to future adjustment based upon vesting and market value, and
ultimately, on the final determination of market value when such rights are
exercised.
Certain TCI corporate general and administrative costs are charged to
Liberty/Ventures Group at rates set at the beginning of each year based on
projected utilization for that year. During the years ended December 31, 1997,
1996 and 1995, Liberty/Ventures Group was allocated approximately $13 million,
$11 million and $7 million, respectively, in corporate general and
administrative costs by TCI Group.
Other Income and Expense
Interest expense excluding interest expense to related parties was $57
million, $68 million and $55 million in 1997, 1996 and 1995, respectively.
Because the operations of HSN have not been included in the combined financial
results of Liberty/Ventures Group since December 20, 1996, interest expense
related to HSN accounted for a decrease of $10 million in Liberty/Ventures
Group's interest expense for the year ended December 31, 1997 compared to 1996.
The 1996 increase in the outstanding debt balance is primarily attributable to
the issuance of 4-1/2% Convertible Subordinated Debentures (the "TINTA
Debentures") and borrowings under Communications Capital Corp.'s credit
facility.
27
<PAGE> 29
Dividend and interest income excluding interest income from related
parties was $57 million, $39 million and $27 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Dividends amounting to $13
million were received on a new series of 30 year non-convertible 9% preferred
stock of Fox Kids Worldwide, Inc. ("FKW") (the "FKW Preferred Stock") beginning
in August 1997. A full year of dividends amounting to $19 million on shares of a
certain series of Time Warner, Inc. ("Time Warner") common stock with limited
voting rights (the "TW Exchange Stock"), offset by the loss of dividends on
Turner Broadcasting Systems, Inc. ("TBS") common stock, accounted for $11
million of the increase in 1997. Dividend income in 1996 increased compared to
1995 due to dividends amounting to $5 million received on the TW Exchange Stock
in December of 1996. Interest income from related parties decreased $8 million
and increased $14 million during the years ended December 31, 1997 and 1996,
respectively, due to changes in the outstanding balance of amounts loaned to
TCI.
Liberty/Ventures Group's share of losses of affiliates was $850
million, $372 million and $210 million during the years ended December 31, 1997,
1996 and 1995, respectively.
Liberty/Ventures Group's share of losses from its investment in the PCS
Ventures was $493 million, $133 million and $34 million during the years ended
December 31, 1997, 1996 and 1995, respectively. The PCS Ventures include Sprint
Spectrum Holding Company, L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or
the "Sprint PCS Partnership"), and PhillieCo Partnership I, L.P. ("PhillieCo").
The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint
Corporation ("Sprint"), Comcast Corporation ("Comcast"), Cox Communications,
Inc. ("Cox") and Liberty/Ventures Group. The partners of PhillieCo are
subsidiaries of Sprint, Cox and Liberty/Ventures Group. Liberty/Ventures Group
has a 30% interest as a partner in each of the Sprint PCS Partnerships and a 35%
interest as a partner in PhillieCo. The increases in the share of losses are
attributed primarily to selling, general and administrative costs associated
with Sprint Spectrum's efforts to increase its customer base and Sprint
Spectrum's share of losses in American PCS L.P. It is expected that Sprint PCS
will continue to incur significant operating losses and significant negative
cash flow from operating activities during the next several years while it
expands its PCS network and builds its customer base. Sprint PCS's operating
profitability will depend upon many factors, including, among others, its
ability to market its products and services successfully, achieve its projected
market penetration, manage customer turnover rates effectively and price its
products and services competitively. There can be no assurance that Sprint PCS
will achieve or sustain operating profitability or positive cash flow from
operating activities in the future. If Sprint PCS does not achieve and maintain
operating profitability and positive cash flow from operating activities on a
timely basis, it may not be able to meet its debt service requirements.
28
<PAGE> 30
Telewest Communications plc ("Telewest"), has incurred losses since its
inception. Liberty/Ventures Group's share of Telewest's net losses increased $36
million or 33% and $39 million or 56% during 1997 and 1996, respectively. Such
increases are primarily attributable to (i) increases in interest expense due to
an increase in Telewest's outstanding debt balances, (ii) increases in
depreciation and amortization resulting from Telewest's construction of cable
television and telephony networks which has increased Telewest's assets that are
subject to depreciation and (iii) changes in foreign currency transaction
losses. In connection with a previous merger transaction, Telewest issued United
States ("U.S.") dollar denominated senior debentures (the "Telewest
Debentures"). Changes in the exchange rate used to translate the Telewest
Debentures into U.K. pounds sterling ("(pound)") and the adjustment of a foreign
currency option contract to market value caused Telewest to experience
unrealized foreign currency transaction gains (losses) of $(39 million), $2
million and $(23 million) during 1997, 1996 and 1995, respectively. It is
anticipated that Telewest will continue to experience realized and unrealized
foreign currency transaction gains and losses throughout the term of the
Telewest Debentures, which mature in 2006 and 2007, if not redeemed earlier.
The share of losses from Liberty/Ventures Group's investment in TCG was
$66 million for the year ended December 31, 1997 which represents a $15 million
increase as compared to 1996. The share of losses from TCG was $51 million for
the year ended December 31, 1996 which represents an increase of $21 million, as
compared to the share of losses of $30 million for the year ended December 31,
1995. The increases in the share of losses are largely attributed to costs
incurred by TCG in the expansion of their local telecommunications networks,
increased depreciation expense and increased interest expense partially offset
by an increase in telecommunications services revenue attributed to increased
sales of services in existing and new markets. TCG has incurred net losses since
its inception due to the acquisition, installation, development and expansion of
its existing and new telecommunications networks and the associated initial
operating expenses of such networks. These networks generally incur negative
cash flow from operating activities and operating losses until an adequate
customer base and revenue stream for such networks have been established. In
January 1998, TCG entered into certain agreements pursuant to which it agreed to
be acquired by AT&T Corp.
During 1997, TCG issued approximately 6.6 million shares of its Class A
common stock for certain acquisitions. The total consideration paid by TCG
through the issuance of common stock for such acquisitions was approximately
$123 million. In addition, effective November 5, 1997, TCG consummated a public
offering of 7.3 million shares of its Class A common stock. TCG received net
proceeds from its sale of shares pursuant to such offering of $318 million
(after deducting expenses and fees). TCG conducted an initial public offering on
July 2, 1996 in which it sold 27 million shares of Class A common stock for
aggregate net proceeds of approximately $410 million. In connection with the
dilution of Liberty/Ventures Group's ownership interest in TCG that occurred in
connection with the above transactions, Liberty/Ventures Group recognized gains
aggregating $112 million and $13 million (before deducting deferred income tax
expense of approximately $43 million and $5 million, respectively) during the
years ended December 31, 1997 and 1996, respectively.
In August of 1997, Liberty/Ventures Group contributed its holdings in
International Family Entertainment, Inc. to FKW in exchange for the FKW
Preferred Stock. As a result of the exchange, Liberty/Ventures Group recognized
a gain of approximately $304 million. See note 7 to the accompanying combined
financial statements of Liberty/Ventures Group.
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In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs. On July
11, 1997 @Home completed an initial public offering (the "@Home IPO"), in which
10.4 million shares of @Home common stock were sold for cash proceeds of
approximately $100 million. As a result of @ Home's issuance of preferred stock
and the @Home IPO, Liberty/Ventures Group's economic interest in @Home decreased
from 43% to 39% which economic interest represents an approximate 72% voting
interest. In connection with the associated dilution of Liberty/Ventures Group's
ownership interest of @Home, Liberty/Ventures Group recognized a non-cash gain
of $60 million.
On July 18, 1995, TINTA completed an initial public offering (the
"TINTA IPO") in which 20 million shares of TINTA's Series A common stock were
sold to the public for net proceeds of approximately $301 million. In connection
with the TINTA IPO, Liberty/Ventures Group recognized a gain of $123 million.
On October 10, 1996, Time Warner and TBS consummated a merger (the
"TBS/Time Warner Merger") whereupon Liberty/Ventures Group received
approximately 50.6 million shares of TW Exchange Stock in exchange for its TBS
holdings. As a result of the TBS/Time Warner Merger, Liberty/Ventures Group
recognized a pre-tax gain of approximately $1.5 billion in the fourth quarter of
1996.
In connection with the dilution of Liberty/Ventures Group's ownership
interest in Telewest that occurred in connection with a 1995 merger transaction,
Liberty/Ventures Group recognized a gain of $165 million (before deducting the
related tax expense of $58 million) during the year ended December 31, 1995.
Included in net gains upon the disposition of assets of
Liberty/Ventures Group during 1997 is (i) a $49 million gain on the Cablevision
Sale and (ii) a $58 million gain on the sale of TINTA's indirect 13% interest in
Sky Network Television New Zealand, Ltd. The net gains upon the disposition of
assets of Liberty/Ventures Group during 1996 includes a gain attributable to the
sale of certain investments for aggregate proceeds of $73 million. The net gains
upon the disposition of assets of Liberty/Ventures Group during 1995 includes a
gain attributable to the sale of the cable television subsidiaries of IVS Cable
Holdings Limited, a subsidiary of Flextech.
The minority interests' share of net losses of attributed subsidiaries
was $25 million, $26 million and $20 million during the years ended December
31, 1997, 1996, and 1995, respectively. Such amounts include the minority
interests' share of earnings or losses for @Home, HSN, UVSG and TINTA.
Net Earnings (Losses)
Liberty/Ventures Group reported net earnings (losses) of $(411
million), $798 million and $4 million during the years ended December 31, 1997,
1996 and 1995, respectively. Included in such amounts was the recognition of
certain non-operating gains, net of non-operating losses aggregating $592
million, $1,571 million and $335 million during 1997, 1996 and 1995,
respectively. Liberty/Ventures Group would have reported net losses in all
periods presented excluding the impact of such gains. A significant portion of
the entities included in Liberty/Ventures Group's combined financial statements
generally have sustained losses since their respective inception dates. Any
improvements in such entities' results of operations are largely dependent upon
the ability of such entities to increase their respective subscriber bases while
maintaining pricing structures and controlling costs. There can be no assurance
that any such improvements will occur.
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LIQUIDITY AND CAPITAL RESOURCES
TCI GROUP
In January 1997, TCI Group acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that TCI Group did not previously own and certain
additional assets for aggregate consideration of approximately $970 million. TCI
Group issued approximately 16 million shares of TCI Group Series A Stock,
assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares
of Time Warner common stock valued at $41 million upon consummation of such
acquisition. Prior to the acquisition date, TCI Group accounted for its 50%
interest in TKR Cable under the equity method. This acquisition has been treated
as a step acquisition for accounting purposes. Accordingly, the results of
operations of TKR Cable have been combined with those of TCI Group since the
date of acquisition and TCI Group's aggregate cost basis in TKR Cable has been
allocated to TKR Cable's assets and liabilities based on their fair values.
During the year ended December 31, 1997, pursuant to a stock repurchase
program approved by the Board, TCI Group repurchased 4,000,000 shares of TCI
Group Series A Stock and 330,902 shares of TCI Group Series B Stock at an
aggregate cost of $72.9 million.
Effective July 31, 1997, a wholly-owned subsidiary of TCI and a member
of the TCI Group, merged with and into Kearns-Tribune Corporation
("Kearns-Tribune"). The merger was valued at approximately $808 million. TCI
exchanged 47.2 million shares of TCI Group Series A Stock for shares of
Kearns-Tribune which held 17.9 million shares of TCI Group Stock and 10.1
million shares of Liberty Group Stock. Immediately following the merger,
Liberty/Ventures Group purchased from TCI Group the 10.1 million shares of
Liberty Group Stock that were acquired in such transaction for $168 million in
cash. The merger of Kearns-Tribune has been accounted for by the purchase
method. Accordingly, the results of operations of Kearns-Tribune have been
combined with those of TCI Group since the date of acquisition, and TCI Group
has recorded Kearns-Tribune's assets and liabilities at fair value.
In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to the 1998 Liberty Stock Dividend and the Ventures Stock
Dividend) that were subject to the Malone Call Agreement and the Magness Call
Agreement. Accordingly, TCI Group paid $134 million during the first quarter of
1998 for its allocated share of the Call Payments. For additional information
see note 12 to the accompanying combined financial statements of TCI Group.
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<PAGE> 33
During the fourth quarter of 1997, TCI Group entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the Equity
Swap Facility, TCI Group has the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares ("Equity Swap
Shares") of TCI Group Series A Stock and TCI Ventures Group Series A Stock with
an aggregate purchase price of up to $300 million. TCI Group has the right, but
not the obligation, to purchase Equity Swap Shares through the September 30,
2000 termination date of the Equity Swap Facility. During such period, TCI Group
is to settle periodically any increase or decrease in the market value of the
Equity Swap Shares. If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from the other
Equity Swap Shares. If the market value of the Equity Swap Shares is less than
the Counterparty's cost, TCI Group, at its option, will settle such difference
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In addition, TCI
Group is required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares.
Due to TCI Group's ability to issue shares to settle periodic price fluctuations
and fees under the Equity Swap Facility, TCI Group records all amounts received
or paid under this arrangement as increases or decreases, respectively, to
equity. As of December 31, 1997, the Equity Swap Facility has acquired 345,000
shares of TCI Group Series A Stock and 380,000 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $3 million less than
the fair value of such Equity Swap Shares at December 31, 1997.
Prior to July 1, 1997, TCI Group had a 50.1% partnership interest in
QE+, a limited partnership interest which distributes "STARZ!," a first-run
movie premium programming service launched in 1994. Entities attributed to
Liberty/Ventures Group held the remaining 49.9% partnership interest. Also prior
to July 1, 1997, EMC (at the time a 90%-owned subsidiary of TCI and a member of
Liberty/Ventures Group) earned management fees from QE+ equal to 20% of managed
costs, as defined. In addition, Liberty/Ventures Group earned STARZ Content Fees
for certain services provided to QE+ equal to 4% of the gross revenue of QE+.
Such STARZ Content Fees aggregated $4 million, $4 million and $1 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
During July 1997, TCI Group, Liberty/Ventures Group, and the 10%
minority holder of EMC, entered into a series of transactions pursuant to which
the businesses of "Encore," a movie premium programming service, and STARZ! were
contributed to Encore Media Group. Upon completion of the transaction,
Liberty/Ventures Group owned 80% of Encore Media Group and TCI Group owned the
remaining 20%. In connection with these transactions the 10% minority interest
in EMC was exchanged for approximately 2.4 million shares of Liberty Group
Series A Stock.
Liberty/Ventures Group received its 80% ownership interest in Encore
Media Group in exchange for (i) the contribution of its 49.9% interest in QE+,
(ii) the contribution of EMC, (iii) the issuance of a $307 million note payable
to TCI Group, (iv) the cancellation and forgiveness of amounts due for STARZ!
Content Fees and (v) the termination of an option to increase Liberty/Ventures
Group's ownership interest in QE+.
TCI Group received the remaining 20% interest in Encore Media Group and
the aforementioned consideration from Liberty/Ventures Group in exchange for the
contribution of TCI Group's 50.1% ownership interest in QE+ and certain capital
contributions made by TCI Group to QE+. In addition, TCI Group entered into the
EMG Affiliation Agreement pursuant to which TCI Group will pay monthly fixed
amounts in exchange for unlimited access to all of the existing Encore and
STARZ! services.
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<PAGE> 34
Upon formation of Encore Media Group, TCI Group ceased to include QE+
in its combined financial statements, and began to account for its investment in
Encore Media Group using the equity method of accounting.
The EMG Promissory Note is included in amounts due from related parties.
Effective December 31, 1997, Liberty/Ventures Group and TCI Group
agreed to amend the above transactions. Pursuant to the amendment, the
above-described series of transactions were rescinded, retroactive to July 1,
1997. Such rescission was given effect as of December 31, 1997 for financial
reporting purposes. Simultaneously, Liberty/Ventures Group and TCI Group entered
into a new agreement whereby the EMG Affiliation Agreement was amended to
permanently reduce the monthly fixed amounts for the life of the contract. TCI
Group's 20% ownership interest in Encore Media Group was eliminated and the EMG
Promissory Note was reduced by $32 million. The amounts to be paid to Encore
Media Group pursuant to the EMG Affiliation Agreement were reduced to amounts
which reflect current market prices.
Due to the related party nature of the above-described transactions,
the $133 million excess of the consideration received over the carryover basis
of the assets transferred (including a deferred tax asset of $98 million) was
reflected as a decrease to combined deficit.
TCI Group's fixed annual commitments (as adjusted) pursuant to the EMG
Affiliation Agreement increase annually from $220 million in 1998 to $315
million in 2003, and will increase with inflation through 2022.
In January 1998, Liberty/Ventures Group's interest in an attributed
subsidiary which leases digital boxes under a capital lease was assigned to TCI
Group. In connection therewith, TCI Group assumed the capital lease obligations
totaling $176 million and paid $7 million in cash to Liberty/Ventures Group.
On March 4, 1998, TCI Group contributed to Cablevision Systems
Corporation ("CSC") certain of its cable television systems serving
approximately 830,000 basic customers in exchange for approximately 12.2 million
newly issued CSC Class A shares. Such shares represent an approximate 33% equity
interest in CSC's total outstanding shares and an approximate 9% voting interest
in CSC in all matters except for the election of directors, in which case TCI
Group has an approximate 47% voting interest in the election of one-fourth of
CSC's directors. CSC also assumed approximately $669 million of TCI Group's
debt. TCI Group has also entered into letters of intent with CSC which provide
for TCI Group to acquire a cable system in Michigan and an additional 3% of
CSC's Class A shares and for CSC to (i) acquire cable systems serving
approximately 250,000 basic customers in Connecticut and (ii) assume $110
million of TCI Group's debt. The ability of TCI Group to sell or increase its
investment in CSC is subject to certain restrictions and limitations set forth
in a stockholders agreement with CSC.
Including the above-described CSC transactions and another transaction
that closed in February 1998, TCI Group, as of February 28, 1998, has, since
January 1, 1997, contributed, or signed agreements or letters of intent to
contribute within the next twelve months, certain cable television systems (the
"Contributed Cable Systems") serving approximately 3.8 million basic customers
to joint Ventures in which TCI Group will retain non-controlling ownership
interests (the "Contribution Transactions"). Following the completion of the
Contribution Transactions, TCI Group will no longer consolidate the Contributed
Cable Systems. Accordingly it is anticipated that the completion of the
Contribution Transactions, as currently contemplated, will result in aggregate
estimated reductions (based on 1997 amounts) to TCI Group's debt, annual revenue
and annual operating income before depreciation, amortization and stock
compensation of approximately $4.6 billion, $1.7 billion and $783 million,
respectively. No assurance can be given that any of the pending Contribution
Transactions will be consummated.
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On July 31, 1996, pursuant to certain agreements entered into among TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI and a member of the TCI
Group, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC
acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which
owned Viacom's cable systems and related assets.
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to a new subsidiary of Viacom ("New
Viacom Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the
"Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged
by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any
obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class B Common
Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the
"Viacom Exchange Offer") a portion of their shares of Viacom Common Stock for
shares of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable
Sub Class A Stock"). Immediately following the completion of the Viacom Exchange
Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock
(the "Share Issuance") for $350 million (which was used to reduce Cable Sub's
obligations under the Loan Facility). At the time of the Share Issuance, the
Cable Sub Class A Stock received by Viacom stockholders pursuant to the Viacom
Exchange Offer automatically converted into 5% Class A Senior Cumulative
Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub
with a stated value of $100 per share (the "Stated Value"). The Exchangeable
Preferred Stock is exchangeable, at the option of the holder commencing after
the fifth anniversary of the date of issuance, for shares of TCI Group Series A
Stock at an exchange rate of 5.447 shares of TCI Group Series A Stock for each
share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred
Stock is subject to redemption, at the option of Cable Sub, after the fifth
anniversary of the date of issuance, initially at a redemption price of $102.50
per share and thereafter at prices declining ratably annually to $100 per share
on and after the eighth anniversary of the date of issuance, plus accrued and
unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is
also subject to mandatory redemption on the tenth anniversary of the date of
issuance at a price equal to the Stated Value per share plus accrued and unpaid
dividends. Amounts payable by Cable Sub in satisfaction of its optional or
mandatory redemption obligations with respect to the Exchangeable Preferred
Stock may be made in cash or, at the election of Cable Sub, in shares of TCI
Group Series A Stock, or in any combination of the foregoing. Upon completion of
the Viacom Acquisition, Cable Sub was renamed TCI Pacific.
The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of TCI Pacific have been combined with
those of TCI Group since the date of acquisition, and TCI Group recorded TCI
Pacific's assets and liabilities at fair value.
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<PAGE> 36
At December 31, 1997, TCI Group had approximately $1.6 billion of
availability in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although TCI
Group was in compliance with the restrictive covenants contained in its credit
facilities at said date, additional borrowings under the credit facilities are
subject to TCI Group's continuing compliance with the restrictive covenants
after giving effect to such additional borrowings. Such restrictive covenants
require, among other things, the maintenance of certain earnings, specified cash
flow and financial ratios (primarily the ratios of cash flow to total debt and
cash flow to debt service, as defined), and include certain limitations on
indebtedness, investments, guarantees, dispositions, stock repurchases and/or
dividend payments. For additional information regarding the material terms of
the lines of credit, see note 8 to the combined financial statements of TCI
Group, which are included in the Company's December 31, 1997 Annual Report on
Form 10-K.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of "Operating Cash
Flow" (operating income before depreciation, amortization, stock compensation
and other non-cash charges) ($2,766 million, $2,016 million and $1,925 million
1997, 1996 and 1995, respectively) to interest expense ($1,105 million, $1,029
million and $969 million in 1997, 1996 and 1995, respectively), is determined by
reference to the combined statements of operations. TCI Group's interest
coverage ratio was 250%, 196% and 199% for 1997, 1996 and 1995, respectively.
Management of TCI Group believes that the foregoing interest coverage ratio is
adequate in light of the relative predictability of its cable television
operations and interest expense. However, TCI Group's current intent is to
continue to reduce its outstanding indebtedness such that its interest coverage
ratio could be increased. There is no assurance that TCI Group will be able to
achieve such objective. Operating Cash Flow is a measure of value and borrowing
capacity within the cable television industry and is not intended to be a
substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the combined statements of cash flows. Net cash
provided by operating activities ($1,595 million, $1,004 million and $1,029
million in 1997, 1996 and 1995, respectively) generally reflects net cash from
the operations of TCI Group available for TCI Group's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow.
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<PAGE> 37
Amounts expended by TCI Group for its investing activities exceeded net
cash provided by operating activities during the years ended December 31, 1996
and 1995. However, during the year ended December 31, 1997, TCI Group's net cash
provided by operating activities exceeded amounts expended by its investing
activities. The amount of capital expended by TCI Group for property and
equipment was $538 million during 1997, as compared to $1,834 million and $1,591
million during 1996 and 1995, respectively. In light of TCI Group's plans to
upgrade the capacity of its cable distribution systems, and its plans to
increase the number of customers to digital video services, TCI Group
anticipates that its annual capital expenditures during the next several years
will significantly exceed the amount expended during 1997. In this regard, TCI
Group estimates that it will expend approximately $1.7 billion to $1.9 billion
over the next three years to expand the capacity of its cable distribution
systems. TCI Group expects that the actual amount of capital that will be
required in connection with its plans to increase the number of digital video
service customers will be significant. However, TCI Group cannot reasonably
estimate such actual capital requirement since such actual capital requirement
is dependent upon the extent of any customer increases and the average installed
per-unit cost of digital set-top devices. As described below, TCI is obligated
to purchase a significant number of digital set-top devices over the next three
years.
In the event TCI Group is unable to achieve such objectives, management
believes that net cash provided by operating activities, the ability of TCI
Group to obtain additional financing (including the available lines of credit
and access to public debt markets), issuances and sales of TCI's equity or
equity of its subsidiaries, attributable to TCI Group, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See TCI Group's combined statements of cash flows
included in the combined financial statements, which are included in the
Company's Annual Report on Form 10-K.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $191
million at December 31, 1997. With respect to TCI Group's guarantees of $166
million of such obligations, TCI Group has been indemnified for any loss, claim
or liability that TCI Group may incur, by reason of such guarantees. Although
there can be no assurance, management of TCI Group believes that it will not be
required to meet its obligations under such guarantees, or if it is required to
meet any of such obligations, that they will not be material to TCI Group.
TCI Group has agreed to make fixed monthly payments to Liberty/Ventures
Group pursuant to the EMG Affiliation Agreement. The fixed annual commitments
increase annually from $220 million in 1998 to $315 million in 2003, and will
increase with inflation through 2022.
TCI Group is a party to affiliation agreements with several of its
programming suppliers. Pursuant to these agreements, TCI Group is committed to
carry such suppliers programming on its cable systems. Several of these
agreements provide for penalties and charges in the event the programming is not
carried or not delivered to a contractually specific number of customers.
During the third quarter of 1997, TCI Group committed to purchase
billing services pursuant to three successive five year agreements. Pursuant to
such arrangement, TCI Group is obligated to make minimum payments aggregating
approximately $1.6 billion through 2012. Such minimum payments are subject to
inflation and other adjustments pursuant to the terms of the underlying
agreements.
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Pursuant to certain agreements between TCI and TCI Music, TCI Group is
obligated to make minimum revenue and license fee payments to TCI Music
aggregating approximately $445 million through 2017. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
TCI Group is a direct obligor or guarantor of the payment of certain
amounts that may be due pursuant to motion picture output, distribution and
license agreements. As of December 31, 1997, the amount of such obligations or
guarantees was approximately $120 million. The future obligations of TCI Group
with respect to these agreements is not currently determinable because such
amount is dependent upon the number of qualifying films released theatrically by
certain motion picture studios as well as the domestic theatrical exhibition
receipts upon the release of such qualifying films.
Effective as of December 16, 1997, NDTC, a member of Liberty/Ventures
Group, on behalf of TCI Group and other cable operators that may be designated
from time to time by NDTC ("Approved Purchasers"), entered into an agreement
(the "Digital Terminal Purchase Agreement") with General Instrument Corporation
(formerly NextLevel Systems, Inc., "GI") to purchase advanced digital set-top
devices. The hardware and software incorporated into these devices will be
designed and manufactured to be compatible and interoperable with the
OpenCable(TM) architecture specifications adopted by CableLabs, the cable
television industry's research and development consortium, in November 1997.
NDTC has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices over the next three years at an average
price of $318 per basic set-top device (including a required royalty payment).
GI agreed to provide NDTC and its Approved Purchasers the most favorable prices,
terms and conditions made available by GI to any customer purchasing advanced
digital set-top devices. In connection with NDTC's purchase commitment, GI
agreed to grant warrants to purchase its common stock proportional to the number
of devices ordered by each organization, which as of the effective date of the
Digital Terminal Purchase Agreement, would have represented at least a 10%
equity interest in GI (on a fully diluted basis). It is anticipated that the
value associated with such equity interest would be attributed to TCI Group upon
purchase and deployment of the digital set-top devices.
TCI Group's various partnerships and other affiliates accounted for by
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by TCI Group), through net
cash provided by their own operating activities and in certain circumstances
through required capital contributions from their partners.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into various interest rate exchange
agreements ("Interest Rate Swaps") pursuant to which it (i) paid fixed interest
rates and received variable interest rates through December 1997 (the "Fixed
Rate Agreements") and (ii) pays variable interest rates and receives fixed
interest rates ranging from 4.8% to 9.7% on notional amounts of $2,400 million
at December 31, 1997 (the "Variable Rate Agreements"). During the years ended
December 31, 1997, 1996 and 1995, TCI Group's net payments pursuant to the Fixed
Rate Agreements were $7 million, $14 million and $13 million, respectively; and
TCI Group's net receipts (payments) pursuant to the Variable Rate Agreements
were (less than $1 million), $15 million, and (less than $1 million),
respectively. At December 31, 1997, all of TCI Group's Fixed Rate Agreements had
expired.
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During the year ended December 31, 1996, TCI Group terminated certain
Variable Rate Agreements with an aggregate notional amount of $700 million. TCI
Group received $16 million upon such terminations. TCI Group will amortize such
termination settlement over the remainder of the original terms of such Variable
Rate Agreements.
In addition to the Variable Rate Agreements, TCI Group entered into an
Interest Rate Swap in September 1997 pursuant to which it pays a variable rate
based on the LIBOR rate (6.1% at December 31, 1997) and receives a variable rate
based on the Constant Maturity Treasury Index (6.4% at December 31, 1997) on a
notional amount of $400 million through September 2000. During the year ended
December 31, 1997, TCI Group's net receipts pursuant to such agreement
aggregated less than $1 million. At December 31, 1997, TCI Group would be
required to pay an estimated $3 million to terminate such Interest Rate Swap.
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, TCI Group does not anticipate that it
will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, TCI Group does not anticipate
material near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of December 31, 1997. For
additional information regarding Interest Rate Swaps, see note 8 to the combined
financial statements of TCI Group, which are included in the Company's December
31, 1997 Annual Report on Form 10-K.
At December 31, 1997, after considering the net effect of the
aforementioned Interest Rate Swaps, TCI Group had $6,104 million (or 43%) of
fixed rate debt and $8,002 million (or 57%) of variable-rate debt. TCI Group's
interest rate exposure was primarily to changes in LIBOR rates. The aggregate
hypothetical decrease in the fair value of TCI Group's fixed rate debt and
interest rate swaps as of December 31, 1997 that would have resulted from a
hypothetical adverse change of 10% in the related LIBOR rates is estimated to be
$390 million. The aggregate hypothetical loss in earnings and cash flows on an
annual basis on TCI Group's variable rate debt and interest rate swaps as of
December 31, 1997 that would have resulted from a hypothetical adverse change of
10% in the related LIBOR rates, sustained for one year, is estimated to be $49
million.
Approximately twenty-five percent of the franchises held by TCI Group,
involving approximately 4.8 million basic customers, expire within five years.
In connection with a renewal of a franchise, the franchising authority may
require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the Cable
Acts and other applicable federal, state and local law. Such provisions
establish an orderly process for franchise renewal which protects cable
operators against unfair denials of renewals when the operator's past
performance and proposal for future performance meet established standards. TCI
Group believes that its cable television systems generally have been operated in
a manner which satisfies such standards and allows for the renewal of such
franchises; however, there can be no assurance that the franchises for such
systems will be successfully renewed as they expire.
During 1997, TCI Group has continued to experience a competitive impact
from medium power and high power DBS operators that use high frequencies to
transmit signals that can be received by home satellite dishes ("HSDs") much
smaller in size than traditional HSDs. DBS operators have the right to
distribute substantially all of the significant cable television programming
services currently carried by cable television systems. Estimated DBS customers
nationwide increased from approximately 2.2 million at the end of 1995 to
approximately 6.2 million at the end of 1997, and TCI Group expects that
competition from DBS will continue to increase. However, TCI Group is unable to
predict what effect such competition will have on TCI Group's financial
position.
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LIBERTY/VENTURES GROUP
Liberty/Ventures Group's sources of funds include its available cash
balances, net cash provided by operating activities, cash distributions from
affiliates, dividend and interest receipts, proceeds from asset sales,
availability under certain credit facilities, and loans and/or equity
contributions from TCI Group. To the extent cash needs of Liberty/Ventures Group
exceed cash provided by Liberty/Ventures Group, TCI Group may transfer funds to
Liberty/Ventures Group. Conversely, to the extent cash provided by
Liberty/Ventures Group exceeds cash needs of Liberty/Ventures Group,
Liberty/Ventures Group may transfer funds to TCI Group.
In connection with the DMX Merger, TCI and TCI Music entered into a
Contribution Agreement. Pursuant to the Contribution Agreement, among other
things, until December 31, 2006, certain subsidiaries of TCI transferred to TCI
Music the right to receive all revenue from sales of DMX music services to their
residential and commercial subscribers, net of an amount equal to 10% of revenue
from such sales to residential subscribers and net of the revenue otherwise
payable to DMX as license fees for DMX music services under affiliation
agreements currently in effect.
Subsequently, TCI Music and TCI entered into an Amended and Restated
Contribution Agreement to be effective as of July 11, 1997 which provides, among
other things, for TCI to deliver, or cause certain of its subsidiaries to
deliver to TCI Music fixed monthly payments (subject to inflation and other
adjustments) through 2017.
On June 24, 1997 Liberty/Ventures Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern and certain of
its subsidiaries (together with Southern, the "Southern Business") through a
purchase of assets (the "Southern Option"). Liberty/Ventures Group received 6.4
million shares of TW Exchange Stock valued at $306 million in consideration for
the grant. Such amount has been reflected as a deferred option premium in the
accompanying combined financial statements of Liberty/Ventures Group. In
September 1997, Time Warner exercised the Southern Option. Pursuant to the
Southern Option, Time Warner acquired the Southern Business, effective January
1, 1998, for $213 million, which was paid in cash, together with the assumption
of certain liabilities on January 2, 1998. (See note 6 to the accompanying
combined financial statements of Liberty/Ventures Group). Subsequent to the
exercise of the Southern Option, cash provided by operating activities of
Southern is no longer available as a source of cash for Liberty/Ventures Group.
During the third quarter of 1997, Liberty/Ventures Group sold certain
assets (the "SUMMITrak Assets") to CSG Systems, Inc. ("CSG") for cash
consideration of $106 million, plus five-year warrants to purchase up to 1.5
million shares of CSG common stock at $24 per share and $12 million in cash,
once certain numbers of TCI affiliated customers are being processed on a CSG
billing system. Under certain circumstances, TCI may also be eligible to receive
certain other contingent royalties. In connection with the sale of the SUMMITrak
Assets, TCI Group committed to purchase billing services from CSG through 2012.
In light of such commitment, Liberty/Ventures Group has reflected the $30
million excess (after deducting deferred income taxes of $17 million) of the
cash received over the book value of the SUMMITrak Assets as an increase to
combined equity.
In January 1998, Liberty/Ventures Group's interest in an attributed
subsidiary, which leases certain digital boxes under a capital lease, was
assigned to TCI Group. In connection therewith the TCI Group assumed the capital
lease obligations totaling $176 million and paid $7 million in cash to
Liberty/Ventures Group.
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<PAGE> 41
As of December 31, 1997, Liberty/Ventures Group holds approximately 57
million shares of TW Exchange Stock. Holders of TW Exchange Stock are entitled
to receive dividends ratably with Time Warner common stock. Liberty/Ventures
Group received $19 million and $5 million in cash dividends for the years ended
December 31, 1997 and 1996, respectively. It is anticipated that Time Warner
will continue to pay dividends on its common stock and consequently
Liberty/Ventures Group will receive dividends on the TW Exchange Stock it holds.
However, there can be no assurance that such dividends will continue to be paid.
Liberty/Ventures Group received $13 million in cash dividends on the FKW
Preferred Stock during the year ended December 31, 1997. The FKW Preferred Stock
is a 30 year non-convertible 9% preferred stock with a stated value of $345
million.
Liberty/Ventures Group has a certain revolving line of credit which
provides for borrowings of up to $500 million. Borrowings of $292 million were
outstanding at December 31, 1997. As security for this indebtedness,
Liberty/Ventures Group pledged a portion of its TW Exchange Stock. At December
31, 1997, Liberty/Ventures Group had a revolving loan facility from TCI Group
(the "Revolving Credit Facility") which had a five-year term commencing on
September 10, 1997 and which permitted aggregate borrowings at any one time
outstanding of up to $500 million (subject to reduction as provided below).
Interest and a commitment fee on the Revolving Credit Facility are payable by
Liberty/Ventures Group to TCI Group on a quarterly basis. The maximum amount of
borrowings permitted under the Revolving Credit Facility will be reduced on a
dollar-for-dollar basis by up to $300 million if and to the extent that the
aggregate amount of any additional capital that TCI Telephony is required to
contribute to Sprint PCS Partnerships subsequent to consummation of the Exchange
Offers is less than $300 million. No borrowings were outstanding pursuant to the
Revolving Credit Facility at December 31, 1997. In March 1998, Liberty/Ventures
Group entered into a bank credit facility with a term of one year which provides
for aggregate borrowings of up to $400 million. If the available borrowings
under such bank credit facility are not sufficient to fund Liberty/Ventures
Group's capital requirements, no assurance can be given that Liberty/Ventures
Group will be able to obtain any required additional financing on terms
acceptable to it, or at all. TCI could raise additional capital for
Liberty/Ventures Group by, among other things, engaging in public offerings or
private placements of common stock or through issuance of debt securities or
preferred equity securities attributed to Liberty/Ventures Group.
Liberty/Ventures Group's failure to meet its contractual and other capital
requirements could have significant adverse consequences to a particular
operating company or affiliate and to Liberty/Ventures Group.
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<PAGE> 42
Liberty/Ventures Group's ability to obtain sufficient capital resources
to make its expected additional capital contributions to the Sprint PCS
Partnerships and other entities in which it has investments are limited. Encore
Media Group, Netlink USA ("Netlink"), WTCI and NDTC are the only wholly-owned
subsidiaries attributed to Liberty/Ventures Group that are operating companies
and such entities are currently Liberty/Ventures Group's only source of cash
provided by operating activities. As a result, Liberty/Ventures Group has
limited ability to generate funds internally to fund capital requirements and
limited cash flow from operating activities to support external financings. The
other operating companies attributed to Liberty/Ventures Group have other
investors, public or private, and the payment of dividends, or the making of
loans or advances by any one of such Liberty/Ventures Group attributed entities
to any other of such Liberty/Ventures Group attributed entities would be subject
to various business considerations, as well as any legal restrictions, including
pursuant to agreements among the investors. During 1997, Encore Media Group
obtained a new $625 million senior, secured facility (the "EMG Senior Facility")
in the form of a $225 million reducing revolving line of credit and a $400
million, 364-day revolving credit facility convertible to a term loan. The
credit agreement for the EMG Senior Facility contains certain provisions which
limit Encore Media Group as to additional indebtedness, sale of assets, liens,
guarantees, and distributions. Additionally, Encore Media Group must maintain
certain specified financial ratios. No borrowings were outstanding on the EMG
Senior Facility at December 31, 1997.
TINTA's business strategy requires that it have the ability to access
or raise sufficient funds to allow it to take advantage of new acquisition and
joint venture opportunities as they arise, which management of TINTA believes
will require substantial additional funds. TINTA's ability to obtain debt
financing to assist its operating companies and to meet its capital obligations
at other than the subsidiary level are limited because TINTA does not conduct
any operations directly. Furthermore, because TINTA's assets consist primarily
of ownership interests in foreign subsidiaries and affiliates, the repatriation
of any cash provided by such subsidiaries' and affiliates' operating activities
in the form of dividends, loans or other payments is subject to, among other
things, exchange rate fluctuations, tax laws and other economic considerations,
as well as applicable statutory and contractual restrictions. Moreover, the
liquidity sources of TINTA's foreign subsidiaries and affiliates are generally
intended to be applied towards the respective liquidity requirements of such
foreign subsidiaries and affiliates, and accordingly, do not represent a direct
source of liquidity to TINTA. Accordingly, with the exception of any liquidity
that may be provided to TINTA by the Puerto Rico Subsidiary, no assurance can be
given that TINTA will have access to any cash generated by its foreign operating
subsidiaries and affiliates.
TINTA has invested in most of its subsidiaries and affiliates with
strategic and local partners. Financial and operational considerations, as well
as laws that limit foreign equity positions, will likely require TINTA to
continue to invest with partners. Many foreign countries limit foreign
investment to a minority equity position or require the board of directors to be
largely independent, which, can result in TINTA having diminished ability to
implement strategies that TINTA may favor, or cause dividends or distributions.
Various partnerships and other affiliates of Liberty/Ventures Group
accounted for under the equity method finance a substantial portion of their
acquisitions and capital expenditures through borrowings under their own credit
facilities and net cash provided by their operating activities.
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<PAGE> 43
During the year ended December 31, 1997, pursuant to a stock repurchase
program approved by the Board, TCI purchased 916,500 shares of Liberty Group
Series A Stock in open market transactions and 219,937 shares of Liberty Group
Series A Stock from the spouse of an officer and director of TCI at an aggregate
cost to Liberty/Ventures Group of $18 million. During 1997, pursuant to a stock
repurchase program approved by the Board, TCI purchased 338,196 shares of TCI
Ventures Group Series A Stock in open market transactions at a cost to
Liberty/Ventures Group of $4 million.
Effective July 31, 1997, a wholly-owned subsidiary of TCI attributed to
TCI Group merged with and into Kearns-Tribune. TCI exchanged 47.2 million shares
of TCI Group Series A Stock for shares of Kearns-Tribune which held 17.9 million
shares of TCI Group Stock and 10.1 million shares of Liberty Group Series A
Stock. Liberty/Ventures Group paid TCI Group $168 million for the 10.1 million
shares of Liberty Group Stock that were acquired in such transaction.
During the third quarter of 1997, TCI commenced a tender offer (the
"Liberty Tender Offer") to purchase up to an aggregate of 22.5 million shares of
Liberty Group Stock at a price of $20 per share through October 3, 1997. During
the fourth quarter of 1997, TCI repurchased 21.7 million shares of Liberty Group
Series A Stock and 82,074 shares of Liberty Group Series B Stock at an aggregate
cost to Liberty/Ventures Group of approximately $435 million pursuant to the
Liberty Tender Offer. All of the above described stock purchases are reflected
as a reduction of combined equity in the accompanying combined financial
statements of Liberty/Ventures Group.
During the fourth quarter of 1997, TCI entered into the Equity Swap
Facility. Pursuant to the Equity Swap Facility, TCI has the right to direct the
Counterparty to use the Equity Swap Facility to purchase Equity Swap Shares of
TCI Group Series A Stock and TCI Ventures Group Series A Stock with an aggregate
purchase price of up to $300 million. TCI has the right, but not the obligation,
to purchase Equity Swap Shares through the September 30, 2000 termination date
of the Equity Swap Facility. During such period, TCI is to settle periodically
any increase or decrease in the market value of the Equity Swap Shares. If the
market value of the Equity Swap Shares exceeds the Counterparty's cost, Equity
Swap Shares with a fair value equal to the difference between the market value
and cost will be segregated from the other Equity Swap Shares. If the market
value of the Equity Swap Shares is less than the Counterparty's cost, TCI, at
its option, will settle such difference with shares of TCI Group Series A Stock
or TCI Ventures Group Series A Stock or, subject to certain conditions, with
cash or letters of credit. In addition, TCI is required to periodically pay the
Counterparty a fee equal to a LIBOR-based rate on the Counterparty's cost to
acquire the Equity Swap Shares. Due to TCI's ability to issue shares to settle
periodic price fluctuation and fees under the Equity Swap Facility, TCI records
all amounts received or paid under this arrangement as increases or decreases to
equity. As of December 31, 1997, the Equity Swap Facility has acquired 345,000
shares of TCI Group Series A Stock and 380,000 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $3 million less than
the fair value of such Equity Swap Shares at December 31, 1997. All of the TCI
Ventures Group Series A Stock held in the Equity Swap Facility is attributed to
Liberty/Ventures Group.
On January 12, 1998, TCI purchased 12.4 million shares of UVSG Series A
common stock held by Lawrence Flinn, Jr., UVSG's Chairman Emeritus, in exchange
for 12.7 million shares of TCI Ventures Group Series A Stock and 7.3 million
shares of Liberty Group Series A Stock. As a result of such transaction
Liberty/Ventures Group increased its ownership in the equity of UVSG to
approximately 73% and voting power increased to 93%.
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The board of directors of TINTA authorized TINTA to repurchase from
time to time up to 5% (approximately 5.3 million shares) of its outstanding
TINTA Series A common stock. Through December 31, 1997, TINTA had repurchased
3.4 million shares under such program for an aggregate purchase price of $42
million.
The board of directors of UVSG has authorized UVSG to repurchase from
time to time up to an aggregate of one million shares of UVSG's Class A common
stock using existing cash resources. Through December 31, 1997, UVSG had
repurchased 124,000 shares of stock for a total of $2 million.
The Music Note may be reduced by the payment of cash or the issuance by
TCI of shares of Liberty/Ventures Group Stock for the benefit of entities
attributed to TCI Group. Additionally, Liberty/Ventures Group may elect to pay
$50 million of the Music Note by delivery of a Stock Appreciation Rights
Agreement that will give TCI Group the right to receive 20% of the appreciation
in value of Liberty/Ventures Group's investment in TCI Music, to be determined
at July 11, 2002. The obligation under the Rights Agreement could be as high as
$65 million.
The EMG Promissory Note was repaid during the first quarter of 1998.
Liberty/Ventures Group intends to continue to develop its entertainment
and information programming services and has made certain financial commitments
related to the acquisition of programming. As of December 31, 1997, Encore Media
Group's future minimum obligation related to certain film licensing agreements
was $695 million. The amount of the total obligation is not currently estimable
because such amount is dependent upon the number of qualifying films released
theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying films.
Continued development may require additional financing and it cannot be
predicted whether Encore Media Group will obtain such financing. If additional
financing cannot be obtained, Encore Media Group could attempt to sell assets
but there can be no assurance that asset sales, if any, can be consummated at a
price and on terms acceptable to Encore Media Group. Further, Liberty/Ventures
Group and/or TCI could attempt to sell equity securities but, again, there can
be no certainty that such a sale could be accomplished on acceptable terms.
In connection with the Magness Settlement, reached in the litigation
brought against TCI and other parties in connection with the administration of
the Estate of Bob Magness, TCI made the Call Payments aggregating $274 million.
The Call Payments were allocated to each of the Groups. Accordingly,
Liberty/Ventures Group paid $140 million during the first quarter of 1998 for
its allocated share of the Call Payments. See note 11 to the accompanying
combined financial statements of Liberty/Ventures Group.
In February 1998, pursuant to an Investment Agreement among Universal
Studios, Inc. ("Universal"), HSNI, HSN and Liberty/Ventures Group, dated as of
October 1997 and amended and restated as of December 1997, HSNI consummated a
transaction (the "Universal Transaction") through which USA Networks Partners,
Inc., a subsidiary of Universal, sold its 50% interest in USA Networks, a New
York general partnership ("USAI") to HSNI and Universal contributed the
remaining 50% interest in USAI and its domestic television production and
distribution operations to HSNI. Subsequent to the Universal Transaction, HSNI
was renamed USAI. In connection with the Universal Transaction, Universal, HSNI,
HSN and Liberty/Ventures Group became parties to a number of other agreements
relating to, among other things, (i) the management of USAI, (ii) the purchase
and sale or other transfer of voting securities of USAI, including securities
convertible or exchangeable for voting securities of USAI, and (iii) the voting
of such securities.
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At the closing of the Universal Transaction, Universal (i) was issued 6
million shares of USAI's Class B Common Stock, 7 million shares of USAI's Common
Stock and 109 million common equity shares ("LLC Shares") of USANi LLC, a
limited liability company formed to hold all of the businesses of USAI and its
subsidiaries, except for its broadcasting business and its equity interest in
Ticketmaster Group, Inc. and (ii) received a cash payment of $1.3 billion.
Pursuant to an Exchange Agreement relating to the LLC Shares (the "LLC Exchange
Agreement"), 74 million of the LLC Shares issued to Universal are each
exchangeable for one share of USAI's Class B Common Stock and the remainder of
the LLC Shares issued to Universal are each exchangeable for one share of USAI's
Common Stock.
At the closing of the Universal Transaction, Liberty/Ventures Group was
issued 1.2 million shares of USAI's Class B Common Stock, representing all of
the remaining shares of USAI's Class B Common Stock issuable pursuant to
Liberty/Ventures Group's Contingent Right. Of such shares, 800,000 shares of
Class B Common Stock were contributed to BDTV IV Inc. ("BDTV-IV"), a
newly-formed entity having substantially the same terms as BDTV-I and BDTV-II
(with the exception of certain transfer restrictions). In addition,
Liberty/Ventures Group purchased 10 LLC Shares at the closing of the Universal
Transaction for an aggregate purchase price of $200. Liberty/Ventures Group has
also agreed to contribute $300 million in cash to USANI LLC by June 30, 1998 in
exchange for an aggregate of 15 million LLC Shares and/or shares of USAI's
Common Stock. Liberty/Ventures Group's cash purchase price will increase at an
annual interest rate of 7.5% beginning from the date of the closing of the
Universal Transaction through the date of Liberty/Ventures Group's purchase of
such securities. Pursuant to the LLC Exchange Agreement, each LLC Share issued
or to be issued to Liberty/Ventures Group is exchangeable for one share of
USAI's Common Stock.
In connection with the Universal Transaction, each of Universal and
Liberty/Ventures Group has been granted a preemptive right with respect to
future issuances of USAI's capital stock, subject to certain limitations, to
maintain their respective percentage ownership interests in USAI that they had
immediately prior to such issuances. In addition, with respect to issuances of
USAI's capital stock in certain specified circumstances, Universal will be
obligated to maintain the percentage ownership interest in USAI that it had
immediately prior to such issuances. In addition, USAI, Universal and
Liberty/Ventures Group have agreed that if the parties agree prior to June 30,
1998 (the date of mandatory cash contributions) on the identity of assets owned
by Liberty/Ventures Group that are to be contributed to USANi LLC and the form
and terms of such contributions, Liberty/Ventures Group will contribute those
assets in exchange for LLC Shares valued at $20 per share. If Liberty/Ventures
Group contributes such additional assets, Liberty/Ventures Group has the right
to elect to reduce the number of LLC Shares it is obligated to purchase for cash
by an amount equal to 45% of the value of the assets contributed by
Liberty/Ventures Group. If Liberty/Ventures Group exercises the option to
contribute assets and thereby reduces its cash contribution amount, Universal
will be required to purchase a number of additional LLC Shares (valued at $20
per share) equal to the value of Liberty/Ventures Group's asset contribution,
less the amount by which Liberty/Ventures Group's asset contribution is applied
towards reducing Liberty/Ventures Group's cash contribution. In addition,
Universal may purchase an additional number of LLC Shares (valued at $20 per
share), equal to the value of Liberty/Ventures Group's asset contribution which
is not applied towards reducing Liberty/Ventures Group's cash contribution.
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Sprint PCS's business plan will require additional capital financing
prior to the end of 1998. Sources of funding for Sprint PCS's capital
requirements may include vendor financing, public offerings or private
placements of equity and/or debt securities, commercial bank loans and/or
capital contributions from the Sprint PCS Partners. However, there can be no
assurance that any additional financing can be obtained on a timely basis, on
terms acceptable to Sprint PCS or the Sprint PCS Partners and within the
limitations contained in the agreements governing Sprint PCS's existing debt.
Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized management
to operate Sprint PCS in accordance with such budget. The Sprint PCS Partners
may mutually agree to make additional capital contributions. However, the Sprint
PCS Partners have no such obligation in the absence of an approved budget, and
there can be no assurance the Sprint PCS Partners will reach such an agreement
or approve the 1998 proposed budget. In addition, the failure by the Sprint PCS
Partners to approve a business plan may impair the ability of Sprint PCS to
obtain required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS Partners could result in the delay or
abandonment of Sprint PCS's development and expansion plans and expenditures,
the failure to meet regulatory requirements or other potential adverse
consequences.
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership board has
resulted in the occurrence of a "Deadlock Event" under the Sprint PCS
partnership agreement as of January 1, 1998. Under the Sprint PCS partnership
agreement, if one of the Sprint PCS Partners refers the budget issue to the
chief executive officers of the corporate parents of the Sprint PCS Partners for
resolution pursuant to specified procedures and the issue remains unresolved,
buy/sell provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS Partners of the interests of the other Sprint PCS
Partners, or, in certain circumstances, liquidation of Sprint PCS. Discussions
among the Sprint PCS Partners about restructuring their interests in Sprint PCS
in lieu of triggering such buy/sell procedures are ongoing. However, there is no
certainty the discussions will result in a change to the partnership structure
or will avert the triggering of the resolution and buy/sell procedures referred
to above or a liquidation of Sprint PCS.
@Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is in a very early state of development. As of
December 31, 1997 there were minimal subscribers to its @Home services. @Home
believes that the cash proceeds of approximately $100 million from its initial
public offering on July 11, 1997, together with existing cash, cash equivalents
and capital lease financing, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next 12 months. @Home may,
however, require additional funds if its estimates of working capital and/or
capital expenditure and/or lease financing requirements change or prove
inaccurate or in order for @Home to respond to unforeseen technological or
marketing hurdles or to take advantage of unanticipated opportunities. Over the
longer term, it is likely that @Home will require substantial additional funds
to continue to fund its infrastructure investment, product development,
marketing, sales and customer support needs. There can be no assurance that any
such funds will be available at the time or times needed, or available on terms
acceptable to @Home. If adequate funds are not available, or are not available
on acceptable terms, @Home may not be able to continue its network
implementation, to develop new products and services or otherwise to respond to
competitive pressures. Such inability could have a material adverse effect on
@Home's business, operating results and financial condition.
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@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home has
issued warrants to purchase 10.9 million shares of @Home's Series A common
stock. Of these warrants 10.2 million of such shares were exercisable as of
March 4, 1998.
During the period in which each of TCI, Cox, Comcast and CSC have
agreed (subject to certain exceptions and limitations) to use @Home as its
exclusive provider of high speed residential consumer Internet access services,
a stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996,
then TCI will be required to offer to sell a proportionate amount of its equity
in @Home to certain other stockholders of @Home at fair market value. Since June
1996, TCI has sold or transferred certain cable systems that reduce TCI's number
of base homes passed. In addition, TCI has announced the proposed sale or
transfer of additional cable systems that would further reduce TCI's number of
base homes passed. In the event that such cable systems continue to be exclusive
to @Home, such cable systems and their homes passed would continue to be
included in TCI's homes passed for purposes of determining whether or not TCI is
obligated to offer a portion of its equity interest in @Home to Cox, Comcast and
CSC, even though such cable systems are no longer owned or controlled by TCI. If
TCI does not require that such cable systems remain exclusive to @Home,
Liberty/Ventures Group could be required to sell shares to Cox, Comcast, CSC and
certain other stockholders of @Home, at fair market value. There can be no
assurance that, if Liberty/Ventures Group is required to sell shares of @Home,
the price paid to Liberty/Ventures Group would represent adequate consideration
to Liberty/Ventures Group because such fair market value may not adequately
reflect Liberty/Ventures Group's expectation of the long term value of such
investments in @Home. In addition to the exceptions to the general exclusivity
obligations, Cox and Comcast have the right to terminate the exclusivity
provisions with respect to TCI, Cox and Comcast in the event TCI does not attain
certain customer penetration levels for the @Home service relative to the
customer penetration levels of Cox and Comcast, as of June 4, 1999, and each
anniversary thereafter until 2002. Such termination could have a material
adverse effect on @Home and the value of Liberty/Ventures Group's interest in
@Home.
In addition, although TCI, Cox, Comcast and CSC are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.
Many of Liberty/Ventures Group's entities operate in industries,
primarily the telecommunications industry and the Internet services industry,
which have experienced and are expected to continue to experience (i) rapid and
significant changes in technology, (ii) ongoing improvements in the capacity and
quality of such services, (iii) frequent and new product and service
introductions, and (iv) enhancements and changes in end-user requirements and
preferences. The degree to which these changes will affect such entities and the
ability of such entities to compete in their respective businesses cannot be
predicted. Also, alternative technologies may develop for the provision of
services similar to those provided by such entities. Such entities may be
required to select in advance one technology over another, but it will be
impossible to predict with any certainty, at the time such entity is required to
make its investment, which technology will prove to be the most economic,
efficient or capable of attracting customer usage. Neither PCS systems nor the
delivery of Internet services over the cable infrastructure have any significant
commercial operating history in the United States and there can be no assurance
that operation of either of these businesses will become profitable. If markets
fail to develop, develop more slowly than expected, or become highly
competitive, Liberty/Ventures Group's operating results and financial condition
may be materially adversely affected.
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<PAGE> 48
The Satellite Home Viewer Act of 1988, as amended in 1994 (the "SHV
Act") provides for a "home satellite dish compulsory copyright license" for the
retransmission of network and superstation signals and programming to the home
satellite dish market. Under the terms of the SHV Act, satellite carriers are
responsible for paying copyright fees to a federal copyright fee collection
agency for the sale of superstation signals. On October 27, 1997, the Librarian
finalized his decision to accept the Copyright Arbitration Rate Panel's ("CARP")
recommendation that copyright fees for direct-to-home satellite carriage of
superstations and distant network television broadcast signals be raised to
$0.27 per subscriber, per month. The CARP also recommended that these increases
be retroactive to July 1, 1997, however, the Librarian ruled to effect the
change January 1, 1998. Superstation copyright fees previously ranged from $0.14
to $0.175 per subscriber, per month while network affiliate fees approximated
$0.06 per subscriber, per month. Several programming packagers of home satellite
services and distributors of programming to C-band direct-to-home programming
packagers have announced price increases to cover the increase in the copyright
fee. Accordingly, UVSG and Netlink anticipate that they may also be able to pass
the increases on to both their retail and direct-to-home wholesale customers via
price increases. Such increases may cause a decrease in the number of
subscribers to such services. The increased overall cost of Superstations
resulting from the increased copyright could also impact the purchasing
decisions made by program packagers and marketers of programs to the
direct-to-home industry. Various bills are being considered by Congress which if
enacted would amend and extend the satellite license and/or potentially change
the copyright royalty fee.
Certain of the countries in which TINTA has operating companies or in
which TINTA may operate in the future, may be subject to a substantially greater
degree of social, political and economic instability than is the case in other
countries. Risks associated with social, political and economic instability in a
particular country could materially adversely affect the results of operations
and financial condition of any subsidiary or affiliate of TINTA located within
such country or that has significant operations there (and thereby have a
potentially material adverse effect on the results of operations or financial
condition of TINTA) and could result in the loss of TINTA's investment in such
subsidiary or affiliate or the loss by such subsidiary or affiliate of its
assets in such country.
TINTA is exposed to foreign exchange risk caused by unfavorable and
potentially volatile fluctuations of the U.S. dollar (the functional currency of
TINTA) against the U.K. pound sterling, the Japanese yen, the Argentine peso and
various other foreign currencies that are the functional currencies of certain
of TINTA's operating subsidiaries and affiliates. Since the enactment of a
convertibility plan in April 1991, the Argentine government has maintained an
exchange rate of one Argentine peso to one U.S. dollar. No assurance can be
given that such an exchange rate will be maintained in future periods. Changes
in the value of the U.S. dollar against any foreign currency that is the
functional currency of an operating subsidiary or affiliate of TINTA will cause
TINTA to experience unrealized foreign currency translation losses or gains with
respect to amounts already invested in such foreign currencies. TINTA and
certain of its operating subsidiaries and affiliates are also exposed to foreign
currency risk to the extent that they enter into transactions denominated in
currencies other than their respective functional currencies.
47
<PAGE> 49
Because TINTA generally views its foreign operating subsidiaries and
affiliates as long-term investments, TINTA generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries. With respect to
funding commitments that are denominated in currencies other than the U.S.
dollar, TINTA historically has sought to reduce its exposure to short-term
(generally no more than 90 days) movements in the applicable exchange rates once
the timing and amount of such funding commitments become fixed. Although TINTA
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, TINTA believes that, given
the nature of its business, it is not possible or practical to eliminate TINTA's
exposure to unfavorable fluctuations in foreign currency exchange rates. As of
December 31, 1997, TINTA was not exposed to material near-term losses in future
earnings, fair values or cash flows resulting from derivative financial
instruments.
Flextech has undertaken to finance the working capital requirements of
one of the joint ventures (the "Principal Joint Venture") formed with BBC
Worldwide Limited ("BBC Worldwide"). If Flextech defaults in its funding
obligation to the Principal Joint Venture and fails to cure within 42 days after
receipt of notice from BBC Worldwide, BBC Worldwide is entitled, within the
following 90 days, to require that TINTA assume all of Flextech's funding
obligations to the Principal Joint Venture. Flextech is obligated to provide the
Principal Joint Venture with a primary credit facility of (pound)88 million
($145 million) and, subject to certain restrictions, a standby credit facility
of (pound)30 million ($50 million). Borrowings under the primary and standby
credit facility would be represented by shares of loan stock of the Principal
Joint Venture, bearing interest at 2% above LIBOR.
TINTA and/or other subsidiaries of TCI have guaranteed notes payable
and other obligations of certain of Liberty/Ventures Group's affiliates (the
"Guaranteed Obligations"). At December 31, 1997, the U.S. dollar equivalent of
the amounts borrowed pursuant to the Guaranteed Obligations was $26 million.
Certain of the Guaranteed Obligations allow for additional borrowings in future
periods. TINTA also has guaranteed the obligation of an affiliate to pay fees
for the license to exhibit certain films through the year 2000. If TINTA were to
fail to fulfill its obligations under the guarantees, the beneficiaries have the
right to demand an aggregate payment of approximately $46 million at December
31, 1997. Although TINTA has not had to perform under such guarantee to date,
TINTA cannot be certain that it will not be required to perform under such
guarantee in the future.
Effective as of December 16, 1997, NDTC, on behalf of TCIC and the
Approved Purchasers, entered into the Digital Terminal Purchase Agreement with
GI to purchase advanced digital set-top devices. The hardware and software
incorporated into these devices will be designed and manufactured to be
compatible and interoperable with the OpenCable(TM) architecture specifications
adopted by CableLabs, the cable television industry's research and development
consortium, in November 1997. NDTC has agreed that Approved Purchasers will
purchase, in the aggregate, a minimum of 6.5 million set-top devices during the
calendar years 1998, 1999 and 2000 at an average price of $318 per set-top
device. GI agreed to provide NDTC and its Approved Purchasers the most favorable
prices, terms and conditions made available by GI to any customer purchasing
advanced digital set-top devices. In connection with NDTC's purchase commitment,
GI agreed to grant warrants to purchase its common stock proportional to the
number of devices ordered by each organization, which as of the effective date
of the Digital Terminal Purchase Agreement, would have represented at least a
10% equity interest in GI (on a fully diluted basis). It is anticipated that the
value associated with such equity interest would be attributed to TCI Group upon
purchase and deployment of the digital set-top devices. 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.
48
<PAGE> 50
Also in December 1997, NDTC entered into a memorandum of understanding
with GI which contemplates the sale to GI of certain of the assets of NDTC's
set-top authorization business, the license of certain related technology to GI,
and an additional cash payment in exchange for approximately 21.4 million shares
of stock of GI. In connection therewith, NDTC would also enter into a service
agreement pursuant to which it will provide certain services to GI's set-top
authorization business. The transaction is subject to the signing of definitive
agreements; accordingly, there can be no assurance that it will be consummated.
The FCC has initiated a number of rulemakings to implement various
provisions of the 1996 Telecom Act. Among other things, the 1996 Telecom Act
also requires the FCC to establish rules and implementation schedules to ensure
that video programming is fully accessible to the hearing impaired through
closed captioning. On August 22, 1997, the FCC released new rules which will
require substantial closed captioning over an eight to ten year phase in period
with only limited exceptions. As a result, Liberty/Ventures Group's programming
interests are expected to incur significant additional costs for closed
captioning. A number of parties petitioned the FCC to reconsider various
provisions of these rules, and such petitions remain pending.
Netlink has entered into an agreement in principle with representatives
of the National Association of Broadcasters and of its television network
affiliate members. Netlink's wholesale C-band satellite business uplinks the
signals of broadcast televisions stations to C-Band packagers and marketers in
the United States and Canada. In uplinking and selling the signals of broadcast
television stations in the United States, Netlink's wholesale C-band satellite
business is subject to certain FCC regulations and Copyright Act provisions.
Pursuant to such regulations, Netlink's wholesale C-band satellite business may
only distribute the signals of network broadcast stations to "unserved
households" which are outside the Grade B contours of a primary station
affiliated with such network. The parties to the agreement will identify by zip
code those geographic areas which are "unserved" by network affiliated stations.
Depending upon finalization of the agreement and such identification, Netlink's
wholesale C-band satellite business may be required to disconnect a substantial
number of existing subscribers which would have a material adverse effect upon
the operations of the Netlink wholesale C-band business.
49
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited the accompanying consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tele-Communications,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements as of December 31, 1997 and
for the year then ended have been restated, as described in note 19.
KPMG Peat Marwick LLP
Denver, Colorado
March 20, 1998,
except for note 19
which is as of January 6, 1999
50
<PAGE> 52
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997** 1996*
------- -------
Assets amounts in millions
- ------
<S> <C> <C>
Cash and cash equivalents $ 284 444
Trade and other receivables, net 529 448
Prepaid expenses 83 81
Prepaid program rights 104 61
Committed program rights 115 136
Investments in affiliates, accounted for under the equity method,
and related receivables (notes 5 and 13) 3,048 2,985
Investment in Time Warner, Inc. ("Time Warner") (note 6) 3,555 2,027
Property and equipment, at cost:
Land 96 77
Distribution systems 10,784 10,039
Support equipment and buildings 1,558 1,541
------- -------
12,438 11,657
Less accumulated depreciation 4,759 4,129
------- -------
7,679 7,528
------- -------
Franchise costs 17,910 17,875
Less accumulated amortization 2,763 2,439
------- -------
15,147 15,436
------- -------
Other assets, net of amortization (note 14) 1,943 1,023
------- -------
$32,487 30,169
======= =======
</TABLE>
* Restated - see note 13.
** Restated - see note 19. (continued)
51
<PAGE> 53
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997** 1996*
-------- --------
Liabilities and Stockholders' Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 169 266
Accrued interest 258 274
Accrued programming expense 399 347
Other accrued expenses 997 812
Deferred option premium (note 6) 306 --
Debt (note 9) 15,250 14,926
Deferred income taxes (note 15) 6,108 5,962
Other liabilities 664 253
-------- --------
Total liabilities 24,151 22,840
-------- --------
Minority interests in equity of consolidated subsidiaries 1,684 1,493
Redeemable securities:
Preferred stock (note 10) 655 658
Common stock (note 2) 5 --
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts ("Trust Preferred Securities") holding solely
subordinated debt securities of TCI Communications, Inc. ("TCIC")
(note 11) 1,500 1,000
Stockholders' equity (note 12):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock,
$.01 par value -- --
Common stock, $1 par value:
Series A TCI Group. Authorized 1,750,000,000 shares; issued
605,616,143 shares in 1997 and 696,325,478 shares in 1996 606 696
Series B TCI Group. Authorized 150,000,000 shares; issued
78,203,044 shares in 1997 and 84,647,065 shares in 1996 78 85
Series A Liberty Media Group. Authorized 750,000,000 shares;
issued 344,962,521 shares in 1997 and 341,766,655 shares in 1996 345 342
Series B Liberty Media Group. Authorized 75,000,000 shares; issued
35,180,385 shares in 1997 and 31,784,053 shares in 1996 35 32
Series A TCI Ventures Group. Authorized 750,000,000 shares; issued
377,386,032 shares in 1997 377 --
Series B TCI Ventures Group. Authorized 75,000,000 shares; issued
32,532,800 shares in 1997 33 --
Additional paid-in capital 5,043 3,547
Cumulative foreign currency translation adjustment, net of taxes 4 26
Unrealized holding gains for available-for-sale securities, net of
taxes 774 15
Accumulated deficit (812) (251)
-------- --------
6,483 4,492
Treasury stock and common stock held by subsidiaries, at cost (note 12) (1,991) (314)
-------- --------
Total stockholders' equity 4,492 4,178
-------- --------
Commitments and contingencies (note 16)
$ 32,487 30,169
======== ========
</TABLE>
* Restated - see note 13.
** Restated - see note 19.
See accompanying notes to consolidated financial statements.
52
<PAGE> 54
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997** 1996* 1995*
------- ------- -------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue:
Communications and programming services $ 7,570 7,038 5,586
Net sales from electronic retailing services -- 984 920
------- ------- -------
7,570 8,022 6,506
------- ------- -------
Operating costs and expenses:
Operating 2,850 2,917 2,161
Cost of sales from electronic retailing services -- 605 603
Selling, general and administrative 1,745 2,224 1,754
Stock compensation 488 (13) 57
Impairment of intangible assets 15 -- --
Restructuring charges -- 41 17
Depreciation 1,077 1,093 899
Amortization 546 523 473
------- ------- -------
6,721 7,390 5,964
------- ------- -------
Operating income 849 632 542
Other income (expense):
Interest expense (1,160) (1,096) (1,010)
Interest and dividend income 88 64 52
Share of losses of affiliates, net (note 5) (930) (450) (213)
Loss on early extinguishment of debt (note 9) (39) (71) (6)
Minority interests in losses (earnings) of consolidated
subsidiaries, net (154) (56) 17
Gain on sale of stock by subsidiaries and equity
investees (notes 5 and 14) 172 12 288
Gain on disposition of assets 401 1,593 49
Other, net (22) (65) (30)
------- ------- -------
(1,644) (69) (853)
------- ------- -------
Earnings (loss) before income taxes (795) 563 (311)
Income tax benefit (expense) (note 15) 234 (271) 128
------- ------- -------
Net earnings (loss) (561) 292 (183)
Dividend requirements on preferred stocks (42) (35) (34)
------- ------- -------
Net earnings (loss) attributable to common
stockholders $ (603) 257 (217)
======= ======= =======
</TABLE>
* Restated - see note 13.
**Restated - see note 19. (continued)
53
<PAGE> 55
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, continued
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997** 1996* 1995*
------------ ------------ ------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Net earnings (loss) attributable to common stockholders (note 3):
TCI Class A and Class B common stock $ -- -- (78)
TCI Group Series A and Series B common stock (537) (799) (112)
Liberty Media Group Series A and Series B common stock 125 1,056 (27)
TCI Ventures Group Series A and Series B common stock (191) -- --
------------ ------------ ------------
$ (603) 257 (217)
============ ============ ============
Basic earnings (loss) attributable to
common stockholders per common share
(note 3):
TCI Class A and Class B common stock $ -- -- (.12)
============ ============ ============
TCI Group Series A and Series B common stock $ (.85) (1.20) (.17)
============ ============ ============
Liberty Media Group Series A and Series B common stock $ .34 2.82 (.07)
============ ============ ============
TCI Ventures Group Series A and Series B common stock $ (.47) -- --
============ ============ ============
Diluted earnings (loss) attributable to
common stockholders per common and
potential common share (note 3):
TCI Class A and Class B common stock $ -- -- (.12)
============ ============ ============
TCI Group Series A and Series B common stock $ (.85) (1.20) (.17)
============ ============ ============
Liberty Media Group Series A and Series B common stock $ .31 2.58 (.07)
============ ============ ============
TCI Ventures Group Series A and Series B common stock $ (.47) -- --
============ ============ ============
</TABLE>
* Restated - see note 13.
**Restated - see note 19.
See accompanying notes to consolidated financial statements.
54
<PAGE> 56
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------------------------------
Class B TCI TCI Group Liberty Media Group
Preferred -------------------- ---------------------- ----------------------
Stock Class A Class B Series A Series B Series A Series B
-------- --------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- 577 89 -- -- -- --
Net loss -- -- -- -- -- -- --
Issuance of common stock in public
offering -- 20 -- -- -- -- --
Issuance of common stock in private
offering -- 1 -- -- -- -- --
Issuance of common stock for
acquisitions and investments -- 59 -- -- -- -- --
Issuance of Class A common stock to
subsidiary of TCI in reorganization
of TCI -- -- -- -- -- -- --
Issuance of Class A common stock to
subsidiary in exchange for investment -- -- -- -- -- -- --
Retirement of Class A common stock
previously held by subsidiary -- -- -- -- -- -- --
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred
Stock, Series F ("Series F Preferred
Stock") -- (86) (4) -- -- -- --
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock -- -- -- 101 -- -- --
Distribution of Series A and Series B
Liberty Media Group common stock to
TCI common stockholders -- -- -- -- -- 337 32
Costs associated with Liberty
Distribution (see note 1) -- -- -- -- -- -- --
Redesignation of TCI common stock into
Series A and Series B TCI Group
common stock -- (571) (85) 571 85 -- --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- -- -- --
Issuance of common stock by subsidiary -- -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities -- -- -- -- -- -- --
Adjustment to reflect elimination of
reporting delay with respect to
certain foreign subsidiaries -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1995 $ -- -- -- 672 85 337 32
====== ====== ====== ====== ====== ====== ======
<CAPTION>
Unrealized
holding Treasury
gains stock and
Cumulative (losses) for common
foreign available- stock held
Additional currency for-sale by Total
paid-in translation, securities, Accumulated subsidiaries, stockholders'
capital net of taxes net of taxes deficit* at cost equity*
--------- ------------ ------------ -------- -------- ---------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 2,791 (4) 94 (359) (610) 2,578
Net loss -- -- -- (183) -- (183)
Issuance of common stock in public
offering 381 -- -- -- -- 401
Issuance of common stock in private
offering 29 -- -- -- -- 30
Issuance of common stock for
acquisitions and investments 1,329 -- -- -- -- 1,388
Issuance of Class A common stock to
subsidiary of TCI in reorganization
of TCI (6) -- -- -- 6 --
Issuance of Class A common stock to
subsidiary in exchange for investment (1) -- -- -- 1 --
Retirement of Class A common stock
previously held by subsidiary 29 -- -- -- (29) --
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred
Stock, Series F ("Series F Preferred
Stock") (542) -- -- -- 632 --
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock 213 -- -- -- (314) --
Distribution of Series A and Series B
Liberty Media Group common stock to
TCI common stockholders (369) -- -- -- -- --
Costs associated with Liberty
Distribution (see note 1) (8) -- -- -- -- (8)
Redesignation of TCI common stock into
Series A and Series B TCI Group
common stock -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock (34) -- -- -- -- (34)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements 10 -- -- -- -- 10
Payment of preferred stock dividends (10) -- -- -- -- (10)
Issuance of common stock by subsidiary 51 -- -- -- -- 51
Foreign currency translation adjustment -- (5) -- -- -- (5)
Change in unrealized holding gains for
available-for-sale securities -- -- 244 -- -- 244
Adjustment to reflect elimination of
reporting delay with respect to
certain foreign subsidiaries -- -- -- (1) -- (1)
------ ------ ------ ------ ------ ------
Balance at December 31, 1995 3,863 (9) 338 (543) (314) 4,461
====== ====== ====== ====== ====== ======
</TABLE>
*Restated - see notes 13 and 19.
(continued)
55
<PAGE> 57
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity, continued
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------------------------
Class B TCI Group Liberty Media Group
Preferred ---------------------------- ----------------------------
Stock Series A Series B Series A Series B
--------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- 672 85 337 32
Net earnings -- -- -- -- --
Issuance of common stock for
acquisition -- 11 -- 6 --
Issuance of common stock upon
conversion of notes -- 2 -- 2 --
Issuance of common stock upon
conversion of preferred stock -- 1 -- -- --
Exchange of cost investment for TCI
Group and Liberty Media Group common
stock -- (6) -- (3) --
Contribution of common stock to
subsidiary -- 16 -- -- --
Spin-off of TCI Satellite
Entertainment, Inc. -- -- -- -- --
Accreted dividends on all classes of
preferred stock -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Recognition of unrealized holding
gains on available-for-sale securities -- -- -- -- --
Recognition of unrealized holding
losses on available-for-sale securities -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 $ -- 696 85 342 32
========== ========== ========== ========== ==========
<CAPTION>
Unrealized
holding Treasury
Cumulative gains stock and
foreign (losses) for common
currency available- stock
Additional translation for-sale held by Total
paid-in adjustment, securities, Accumulated subsidiaries, stockholders'
capital net of taxes net of taxes deficit* at cost equity*
---------- ------------ ------------- ----------- ------------ -------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,863 (9) 338 (543) (314) 4,461
Net earnings -- -- -- 292 -- 292
Issuance of common stock for
acquisition 248 -- -- -- -- 265
Issuance of common stock upon
conversion of notes (2) -- -- -- -- 2
Issuance of common stock upon
conversion of preferred stock 15 -- -- -- -- 16
Exchange of cost investment for TCI
Group and Liberty Media Group common
stock (121) -- -- -- -- (130)
Contribution of common stock to
subsidiary (16) -- -- -- -- --
Spin-off of TCI Satellite
Entertainment, Inc. (405) -- -- -- -- (405)
Accreted dividends on all classes of
preferred stock (35) -- -- -- -- (35)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements 10 -- -- -- -- 10
Payment of preferred stock dividends (10) -- -- -- -- (10)
Foreign currency translation adjustment -- 35 -- -- -- 35
Recognition of unrealized holding
gains on available-for-sale securities -- -- (428) -- -- (428)
Recognition of unrealized holding
losses on available-for-sale securities -- -- 64 -- -- 64
Change in unrealized holding gains for
available-for-sale securities -- -- 41 -- -- 41
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 3,547 26 15 (251) (314) 4,178
======== ======== ======== ======== ======== ========
</TABLE>
*Restated - see notes 13 and 19.
(continued)
56
<PAGE> 58
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity, continued
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------------------------------
Class B TCI Group Liberty Media Group TCI Ventures Group
Preferred --------------------- ------------------------ ----------------------
Stock Class A Class B Series A Series B Series A Series B
-------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ -- 696 85 342 32 -- --
Net loss -- -- -- -- -- -- --
Issuance of TCI Ventures Group common
stock in exchange for TCI Group
common stock after giving effect to
stock split (note 1) -- (189) (16) -- -- 377 33
Costs associated with TCI Ventures
Exchange -- -- -- -- -- -- --
Exchange of common stock with an
officer/director (note 13) -- -- 7 -- 3 -- --
Issuance of common stock for
acquisitions and investment -- 63 2 2 -- -- --
Issuance of Series A TCI Group common
stock in exchange for Series B TCI
Group common stock (the "Exchange")
(note 13) -- 31 -- -- -- -- --
Recognition of fees related to
Exchange (note 13) -- -- -- -- -- -- --
Repurchase of common stock -- -- -- -- -- -- --
Cancellation of common stock -- -- -- -- -- -- --
Reclassification to redeemable
securities of redemption amount of
common stock subject to put
obligation -- -- -- -- -- -- --
Gain from issuance of equity by
equity investee -- -- -- -- -- -- --
Issuance of common stock upon
exercise of stock options -- -- -- -- -- -- --
Issuance of restricted stock granted
pursuant to stock incentive plan -- 1 -- -- -- -- --
Issuance of common stock upon
conversion of notes and preferred
stock -- 3 -- 1 -- -- --
Issuance of common stock to
Tele-Communications, Inc. Employee
Stock Purchase Plan -- 1 -- -- -- -- --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- --
Change in unrealized holding gains
for available-for-sale securities -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ -- 606 78 345 35 377 33
======== ======== ======== ======== ======== ======== ========
<CAPTION>
Unrealized
holding Treasury
Cumulative gains stock and
foreign (losses) for common
currency available- stock held
Additional translation for-sale by Total
paid-in adjustment, securities, Accumulated subsidiaries, stockholders'
capital net of taxes net of taxes deficit* at cost equity*
------- ------------ ------------ ----------- ------------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 3,547 26 15 (251) (314) 4,178
Net loss -- -- -- (561) -- (561)
Issuance of TCI Ventures Group common
stock in exchange for TCI Group
common stock after giving effect to
stock split (note 1) (205) -- -- -- -- --
Costs associated with TCI Ventures
Exchange (7) -- -- -- -- (7)
Exchange of common stock with an
officer/director (note 13) 160 -- -- -- (170) --
Issuance of common stock for
acquisitions and investment 1,058 -- -- -- (484) 641
Issuance of Series A TCI Group common
stock in exchange for Series B TCI
Group common stock (the "Exchange")
(note 13) 481 -- -- -- (512) --
Recognition of fees related to
Exchange (note 13) (11) -- -- -- -- (11)
Repurchase of common stock -- -- -- -- (529) (529)
Cancellation of common stock (18) -- -- -- 18 --
Reclassification to redeemable
securities of redemption amount of
common stock subject to put
obligation (4) -- -- -- -- (4)
Gain from issuance of equity by
equity investee 66 -- -- -- -- 66
Issuance of common stock upon
exercise of stock options 4 -- -- -- -- 4
Issuance of restricted stock granted
pursuant to stock incentive plan 3 -- -- -- -- 4
Issuance of common stock upon
conversion of notes and preferred
stock 3 -- -- -- -- 7
Issuance of common stock to
Tele-Communications, Inc. Employee
Stock Purchase Plan 8 -- -- -- -- 9
Accreted dividends on all classes of
preferred stock (42) -- -- -- -- (42)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements 10 -- -- -- -- 10
Payment of preferred stock dividends (10) -- -- -- -- (10)
Foreign currency translation
adjustment -- (22) -- -- -- (22)
Change in unrealized holding gains
for available-for-sale securities -- -- 759 -- -- 759
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 5,043 4 774 (812) (1,991) 4,492
======== ======== ======== ======== ======== ========
</TABLE>
* Restated - see notes 13 and 19.
See accompanying notes to consolidated financial statements.
57
<PAGE> 59
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997** 1996* 1995*
---------- ---------- ----------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (561) 292 (183)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Stock compensation 488 (13) 57
Payments of obligation relating to stock compensation (132) (3) (9)
Impairment of intangible assets 15 -- --
Restructuring charges -- 41 17
Payments of restructuring charges (24) (8) (17)
Depreciation and amortization 1,623 1,616 1,372
Share of losses of affiliates, net 930 450 213
Loss on early extinguishment of debt 39 71 6
Minority interests in earnings (losses) of consolidated
subsidiaries, net 154 56 (17)
Gain on sale of stock by subsidiaries and equity investees (172) (12) (288)
Gain on disposition of assets (401) (1,593) (49)
Deferred income tax expense (benefit) (275) 233 (161)
Other noncash charges (credits) 10 11 (28)
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (53) (115) (70)
Change in inventories -- (8) 16
Change in prepaids (77) (23) (86)
Change in accrued interest (23) 40 45
Change in other accruals and payables 169 243 139
---------- ---------- ----------
Net cash provided by operating activities 1,710 1,278 957
---------- ---------- ----------
Cash flows from investing activities:
Cash paid for acquisitions (323) (664) (488)
Capital expended for property and equipment (709) (2,055) (1,782)
Proceeds from disposition of assets 541 341 166
Additional investments in and loans to affiliates (636) (778) (1,135)
Repayments of loans to affiliates 133 647 18
Cash received in exchanges 18 66 11
Other investing activities (179) (26) (134)
---------- ---------- ----------
Net cash used in investing activities (1,155) (2,469) (3,344)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings of debt 2,513 8,163 8,152
Repayments of debt (3,036) (7,969) (6,567)
Prepayment penalties (33) (60) --
Proceeds from issuance of subsidiary common stock and preferred stock 148 223 445
Proceeds from issuance of common stock 5 -- 431
Proceeds from issuance of Trust Preferred Securities 490 971 --
Contributions by minority shareholders of subsidiaries 6 319 --
Repurchase of common stock (529) -- --
Repurchase of subsidiary common stock (42) -- --
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (179) (95) (6)
Payment of preferred stock dividends (42) (35) (24)
Other financing activities (16) -- --
---------- ---------- ----------
Net cash provided (used) by financing activities (715) 1,517 2,431
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (160) 326 44
Cash and cash equivalents at beginning of year 444 118 74
---------- ---------- ----------
Cash and cash equivalents at end of year $ 284 444 118
========== ========== ==========
</TABLE>
* Restated - see note 13.
** Restated - see note 19.
See accompanying notes to consolidated financial statements.
58
<PAGE> 60
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Basis of Presentation
Nature of Business
Tele-Communications, Inc. ("TCI" or the "Company"), through its
subsidiaries and affiliates, is principally engaged in the
construction, acquisition, ownership, and operation of cable television
systems and the provision of satellite-delivered video entertainment,
information and home shopping programming services to various video
distribution media, principally cable television systems. The Company
also has investments in cable and telecommunications operations and
television programming in certain international markets as well as
investments in companies and joint ventures involved in developing and
providing programming for new television and telecommunications
technologies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of TCI and those of all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Preferred stock of TCI which is owned by subsidiaries of
TCI eliminates in consolidation. Common stock of the Company held by
subsidiaries is treated similar to treasury stock in consolidation.
Targeted Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue two new series of stock,
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") and
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series B Stock," and together
with the Liberty Group Series A Stock, the "Liberty Group Stock"). The
Liberty Group Stock is intended to reflect the separate performance of
TCI's assets which produce and distribute programming services
("Liberty Media Group"). Additionally, the stockholders, of TCI
approved the redesignation of the previously authorized Class A and
Class B common stock into Tele-Communications, Inc. Series A TCI Group
Common Stock, par value $1.00 per share (the "TCI Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock,
par value $1.00 per share (the "TCI Group Series B Stock", and together
with the TCI Group Series A Stock, the "TCI Group Stock"),
respectively. On August 10, 1995, TCI distributed, in the form of a
dividend, 2.25 shares of Liberty Group Stock (as adjusted for stock
dividends - see below) for each four shares of TCI Group Stock owned
(the "Liberty Distribution").
(continued)
59
<PAGE> 61
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On August 28, 1997, the stockholders of TCI authorized the Board to
issue the Tele-Communications, Inc. Series A TCI Ventures Group Common
Stock, par value $1.00 per share (the "TCI Ventures Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Ventures Group
Common Stock, par value $1.00 per share (the "TCI Ventures Group Series
B Stock," and together with TCI Ventures Group Series A Stock, the "TCI
Ventures Group Stock"). The TCI Ventures Group Stock is intended to
reflect the separate performance of the "TCI Ventures Group," which is
comprised of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets.
In August 1997, TCI commenced offers (the "Exchange Offers") to
exchange shares of TCI Ventures Group Series A Stock and TCI Ventures
Group Series B Stock for up to 188,661,300 shares of TCI Group Series
A Stock and up to 16,266,400 shares of TCI Group Series B Stock,
respectively. The exchange ratio for the Exchange Offers was two
shares (as adjusted) of the applicable series of TCI Ventures Group
Stock for each share of the corresponding series of TCI Group Stock
properly tendered up to the indicated maximum numbers. Upon the
September 10, 1997 consummation of the Exchange Offers, 188,661,300
shares of TCI Group Series A Stock and 16,266,400 shares of TCI Group
Series B Stock were exchanged for 377,322,600 shares of TCI Ventures
Group Series A Stock and 32,532,800 shares of TCI Ventures Group
Series B Stock (as adjusted for a stock dividend, see below) (the "TCI
Ventures Exchange").
As of December 31, 1997, the TCI Group Stock is intended to reflect the
separate performance of TCI and its subsidiaries and assets not
attributed to Liberty Media Group or TCI Ventures Group. Such
subsidiaries and assets are referred to as "TCI Group" and are
comprised primarily of TCI's domestic cable and communications
business. Collectively, the TCI Group, the Liberty Media Group and the
TCI Ventures Group are referred to as the "Groups" and individually,
may be referred to herein as a "Group." The TCI Group Series A Stock,
TCI Ventures Group Series A Stock and the Liberty Group Series A Stock
are sometimes collectively referred to herein as the "Series A Stock,"
and the TCI Group Series B Stock, TCI Ventures Group Series B Stock and
Liberty Group Series B Stock are sometimes collectively referred to
herein as the "Series B Stock."
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, each such Group in the capital structure
of TCI, which encompasses the TCI Group Stock, Liberty Group Stock and
TCI Ventures Group Stock, does not affect the ownership or the
respective legal title to such assets or responsibility for liabilities
of TCI or any of its subsidiaries. TCI and its subsidiaries each
continue to be responsible for their respective liabilities. Holders of
TCI Group Stock, Liberty Group Stock and TCI Ventures Group Stock are
common stockholders of TCI and are subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities.
The redesignation of TCI Group Stock and the issuance of Liberty Group
Stock and TCI Ventures Group Stock does not affect the rights of
creditors of TCI.
(continued)
60
<PAGE> 62
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of the
separate Groups and the market prices of shares of TCI Group Stock,
Liberty Group Stock and TCI Ventures Group Stock. In addition, net
losses of any portion of TCI, dividends or distributions on, or
repurchases of, any series of common stock, and dividends on, or
certain repurchases of preferred stock would reduce funds of TCI
legally available for dividends on all series of common stock.
Accordingly, financial information of any one Group should be read in
conjunction with the financial information of TCI and the other Groups.
The common stockholders' equity value of TCI Ventures Group or Liberty
Media Group that, at any relevant time, is attributed to the TCI Group,
and accordingly not represented by outstanding TCI Ventures Group Stock
or Liberty Group Stock, respectively, is referred to as "Inter-Group
Interest." Prior to consummation of the Liberty Distribution and TCI
Ventures Exchange, TCI Group had a 100% Inter-Group Interest in Liberty
Media Group and TCI Ventures Group, respectively. Following
consummation of the Liberty Distribution and TCI Ventures Exchange, TCI
Group no longer has Inter-Group Interests in Liberty Media Group and
TCI Ventures Group, respectively. For periods in which an Inter-Group
Interest exists, TCI Group accounts for its Inter-Group Interest in a
manner similar to the equity method of accounting. Following
consummation of the Liberty Distribution and the TCI Ventures Exchange,
an Inter-Group Interest would be created with respect to Liberty Media
Group or TCI Ventures Group only if a subsequent transfer of cash or
other property from TCI Group to Liberty Media Group or TCI Ventures
Group is specifically designated by the Board as being made to create
an Inter-Group Interest or if outstanding shares of Liberty Group Stock
or TCI Ventures Stock, respectively, are purchased with funds
attributable to TCI Group. Management of TCI believes that generally
accepted accounting principles require that Liberty Media Group or TCI
Ventures Group be consolidated with TCI Group for all periods in which
TCI Group held an Inter-Group Interest in Liberty Media Group or TCI
Ventures Group, respectively.
Dividends on TCI Group Stock, Liberty Group Stock or TCI Ventures Group
Stock are payable at the sole discretion of the Board out of the lesser
of assets of TCI legally available for dividends or the available
dividend amount with respect to each Group, as defined. Determinations
to pay dividends on TCI Group Stock, Liberty Group Stock or TCI
Ventures Group Stock are based primarily upon the financial condition,
results of operations and business requirements of the applicable Group
and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
is (unless the Board otherwise provides) specifically attributed to and
reflected in the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred
stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., the TCI Group. The Board
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected in the combined financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
(continued)
61
<PAGE> 63
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstances, one of the
other Groups may transfer funds to such Group. Such transfers of funds
among the Groups will be reflected as borrowings or, if determined by
the Board, in the case of a transfer from TCI Group to either Liberty
Media Group or TCI Ventures Group, reflected as the creation of, or
increase in, TCI Group's Inter-Group Interest in such Group or, in the
case of a transfer from either Liberty Media Group or TCI Ventures
Group to TCI Group, reflected as a reduction in TCI Group's Inter-Group
Interest in such Group. There are no specific criteria for determining
when a transfer will be reflected as a borrowing or as an increase or
reduction in an Inter-Group Interest. The Board expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs
of TCI, the financing needs and objectives of the Groups, the
investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest
rates and general economic conditions.
Loans from one Group to another Group generally will bear interest at
such rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures established
by, the Board. The Board expects to make such determinations, either in
specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the use of proceeds by
and creditworthiness of the recipient Group, the capital expenditure
plans of and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group reflect its net loans or
advances to or loans or advances from the other Groups. Similarly, the
respective combined statements of operations of the Groups reflect
interest income or expense, as the case may be, associated with such
loans or advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical combined financial statements,
net loans or advances between Groups have been and will continue to be
included as a component of each respective Group's combined equity.
Although any increase in TCI Group's Inter-Group Interest in Liberty
Media Group or TCI Ventures Group resulting from an equity contribution
by the TCI Group to Liberty Media Group or TCI Ventures Group or any
decrease in such Inter-Group Interest resulting from a transfer of
funds from Liberty Media Group or TCI Ventures Group to the TCI Group
would be determined by reference to the market value of the Liberty
Group Series A Stock, or the TCI Ventures Group Series A Stock,
respectively, as of the date of such transfer. Such an increase could
occur at a time when such shares could be considered undervalued and
such a decrease could occur at a time when such shares could be
considered overvalued.
(continued)
62
<PAGE> 64
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All financial impacts of issuances and purchases of shares of TCI Group
Stock, TCI Ventures Group Stock or Liberty Group Stock, the proceeds of
which are attributed to TCI Group, TCI Ventures Group or Liberty Media
Group, respectively, will be to such extent reflected in the combined
financial statements of TCI Group, TCI Ventures Group or Liberty Media
Group, respectively. All financial impacts of issuances of shares of
TCI Ventures Group Stock or Liberty Group Stock, the proceeds of which
are attributed to TCI Group in respect of a reduction in TCI Group's
Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
respectively, will be to such extent reflected in the combined
financial statements of TCI Group. Financial impacts of dividends or
other distributions on TCI Group Stock, TCI Ventures Group Stock or
Liberty Group Stock, will be attributed entirely to TCI Group, TCI
Ventures Group or Liberty Media Group, respectively, except that
dividends or other distributions on TCI Ventures Group Stock or Liberty
Group Stock will (if at the time there is an Inter-Group Interest in
TCI Ventures Group or Liberty Media Group, respectively) result in TCI
Group being credited, and TCI Ventures Group or Liberty Media Group
being charged (in addition to the charge for the dividend or other
distribution paid), with an amount equal to the product of the
aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of TCI Ventures Group
Stock or Liberty Group Stock and a fraction of the numerator of which
is TCI Ventures Group or Liberty Media Group "Inter-Group Interest
Fraction" and the denominator of which is the TCI Ventures Group or the
Liberty Media Group "Outstanding Interest Fraction" (both as defined).
Financial impacts of repurchases of TCI Ventures Group Stock or Liberty
Group Stock, the consideration for which is charged to TCI Group, will
be to such extent reflected in the combined financial statements of TCI
Group and will result in an increase in TCI Group's Inter-Group
Interest in TCI Ventures Group or Liberty Media Group, respectively.
Industry Segments
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). The
Company has restated its prior year segment disclosures to conform to
the requirements of SFAS 131. The Company has significant operations
principally in two industry segments: cable and communications services
and programming services. Substantially all of the Company's domestic
cable and communications businesses and assets ("cable") are attributed
to the TCI Group, and substantially all of the Company's programming
businesses and assets ("programming") are attributed to the Liberty
Media Group. The Company's principal international businesses and
assets and the Company's remaining non-cable and non-programming
domestic businesses and assets are included in TCI Ventures Group. No
individual business or asset within TCI Ventures Group constitutes a
reportable segment of the Company as contemplated by SFAS 131. See note
17 for additional segment information.
(continued)
63
<PAGE> 65
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Dividends
Effective February 6, 1998, the Company issued stock dividends to
holders of Liberty Group Stock (the "1998 Liberty Stock Dividend") and
TCI Ventures Group Stock (the "Ventures Stock Dividend"). The 1998
Liberty Stock Dividend consisted of one share of Liberty Group Stock
for every two shares of Liberty Group Stock owned. The Ventures Stock
Dividend consisted of one share of TCI Venture Group Stock for every
one share of TCI Ventures Group Stock owned. The 1998 Liberty Stock
Dividend and the Ventures Stock Dividend have been treated as stock
splits, and accordingly, all share and per share amounts have been
restated to reflect the 1998 Liberty Stock Dividend and the Ventures
Stock Dividend.
(2) Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents consist of investments which are readily convertible
into cash and have maturities of three months or less at the time of
acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at December 31, 1997 and 1996 was not significant.
Program Rights
Prepaid program rights are amortized on a film-by-film basis over the
specific number of exhibitions. Committed program rights and program
rights payable are recorded at the estimated costs of the programs when
the film is available for airing less prepayments. Such committed
amounts are amortized on a film-by-film basis over the anticipated
number of exhibitions.
Investments
All marketable equity securities held by the Company are classified as
available-for-sale and are carried at fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are
carried net of taxes as a separate component of stockholders' equity.
Realized gains and losses are determined on a specific-identification
basis.
Other investments in which the ownership interest is less than 20% and
are not considered marketable securities are generally carried at cost.
For those investments in affiliates in which the Company's voting
interest is 20% to 50%, the equity method of accounting is generally
used. Under this method, the investment, originally recorded at cost,
is adjusted to recognize the Company's share of the net earnings or
losses of the affiliates as they occur rather than as dividends or
other distributions are received. The Company's share of losses are
generally limited to the extent of the Company's investment in,
advances to and commitments for the investee. The Company's share of
net earnings or losses of affiliates includes the amortization of the
difference between the Company's investment and its share of the net
assets of the investee. Recognition of gains on sales of properties to
affiliates accounted for under the equity method is deferred in
proportion to the Company's ownership interest in such affiliates.
(continued)
64
<PAGE> 66
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Changes in the Company's proportionate share of the underlying equity
of a subsidiary or equity method investee, which result from the
issuance of additional equity securities by such subsidiary or equity
investee, generally are recognized as gains or losses in the Company's
consolidated statements of operations.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including
interest during construction and applicable overhead, are capitalized.
During 1997, 1996 and 1995, interest capitalized was not significant.
Depreciation is computed on a straight-line basis using estimated
useful lives of 3 to 15 years for distribution systems and 3 to 40
years for support equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales
or other dispositions of property, the original cost and cost of
removal of such property are charged to accumulated depreciation, and
salvage, if any, is credited thereto. Gains or losses are only
recognized in connection with the sales of properties in their
entirety.
Franchise Costs
Franchise costs include the difference between the cost of acquiring
cable television systems and amounts allocated to their tangible
assets. Such amounts are generally amortized on a straight-line basis
over 40 years. Costs incurred by the Company in negotiating and
renewing franchise agreements are amortized on a straight-line basis
over the life of the franchise, generally 10 to 20 years.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amounts of property,
plant and equipment and its identifiable intangible assets to determine
whether current events or circumstances warrant adjustments to such
carrying amounts. If an impairment adjustment is deemed necessary, such
loss is measured by the amount that the carrying value of such assets
exceeds their fair value. Considerable management judgment is necessary
to estimate the fair value of assets, accordingly, actual results could
vary significantly from such estimates. Assets to be disposed of are
carried at the lower of their financial statement carrying amount or
fair value less costs to sell.
(continued)
65
<PAGE> 67
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivative Financial Instruments
The Company has entered into variable and fixed interest rate exchange
agreements ("Interest Rate Swaps") which it uses to manage interest
rate risk arising from the Company's financial liabilities. Such
Interest Rate Swaps are accounted for as hedges; and accordingly,
amounts receivable or payable under Interest Rate Swaps are recognized
as adjustments to interest expense. Gains and losses on early
terminations of Interest Rate Swaps are included in the carrying amount
of the related debt and amortized as yield adjustments over the
remaining term of the derivative financial instruments or the
remaining term of the related debt, whichever is shorter. The Company
does not use such instruments for trading purposes.
Derivative financial instruments that can be settled, at the Company's
option, in shares of the Company's common stock are accounted for as
equity instruments. Periodic settlements of amounts payable/receivable
pursuant to such financial instruments are included in additional
paid-in capital.
In conjunction with a stock repurchase program or similar transaction,
the Company may elect to sell put options on its own common stock.
Proceeds from any such sales are reflected as an increase to additional
paid-in capital and an amount equal to the maximum redemption amount
under unexpired put options is reflected as redeemable common stock.
From time to time, the Company uses certain derivative financial
instruments to manage its foreign currency risks. Because the Company
generally views its foreign operating subsidiaries and affiliates as
long-term investments, the Company generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries.
However, the Company may enter into forward contracts to reduce its
exposure to short-term (generally no more than one year) movements in
the exchange rates applicable to firm funding commitments that are
denominated in currencies other than the U.S. dollar. When high
correlation of changes in the market value of the forward contract and
changes in the fair value of the firm commitment is probable, the
forward contract is accounted for as a hedge. Changes in the market
value of a forward contract that qualifies as a hedge and any gains or
losses on early termination of such a forward contract are deferred and
included in the measurement of the item (generally an investment in, or
an advance to, a foreign affiliate) that results from the funding of
such commitment. Market value changes in derivative financial
instruments that do not qualify as hedges are recognized currently in
the consolidated statements of operations. To date, the Company's use
of forward contracts, as described above, has not had a material impact
on the Company's financial position or results of operations.
Minority Interests
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests'
allocable portion of the common equity of those consolidated
subsidiaries. Further, the minority interests' share of losses is not
recognized if the minority holders of common equity of consolidated
subsidiaries have the right to cause the Company to repurchase such
holders' common equity.
(continued)
66
<PAGE> 68
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Included in minority interests in equity of consolidated subsidiaries
is $927 million and $923 million in 1997 and 1996, respectively, of
preferred stocks (and accumulated dividends thereon) of certain
subsidiaries. The current dividend requirements on these preferred
stocks aggregate $49 million per annum and such dividend requirements
are reflected as minority interests in the accompanying consolidated
statements of operations.
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period. Statement
of operations items are translated at average currency exchange rates.
The resulting translation adjustment is recorded as a separate
component of stockholders' equity.
Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses which are reflected in the combined
statements of operations as unrealized (based on the applicable period
end translation) or realized upon settlement of the transactions. Such
realized and unrealized gains and losses were not material to the
accompanying consolidated financial statements.
Revenue Recognition
Cable revenue for customer fees, equipment rental, advertising,
pay-per-view programming and revenue sharing agreements is recognized
in the period that services are delivered. Installation revenue is
recognized in the period the installation services are provided to the
extent of direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are
expected to remain connected to the cable television system.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123") establishes financial accounting
and reporting standards for stock-based employee compensation plans as
well as transactions in which an entity issues its equity instruments
to acquire goods or services from non-employees. As allowed by SFAS
123, the Company continues to account for stock-based compensation
pursuant to Accounting Principles Board Opinion No. 25 ("APB Opinion
No. 25"). The Company has included the disclosures required by SFAS 123
in note 12.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(continued)
67
<PAGE> 69
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reclassifications
Certain amounts have been reclassified for comparability with the 1997
presentation.
(3) Earnings (Loss) Per Common and Potential Common Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128, Earnings Per Share, ("SFAS 128") in
February of 1997. SFAS 128 establishes new computation, presentation
and disclosure requirements for earnings per share ("EPS"). SFAS 128
requires companies with complex capital structures to present basic and
diluted EPS. Basic EPS is measured as the income or loss available to
common stockholders divided by the weighted average outstanding common
shares for the period. Diluted EPS is similar to basic EPS but presents
the dilutive effect on a per share basis of potential common shares
(e.g., convertible securities, options, etc.) as if they had been
converted at the beginning of the periods presented. Potential common
shares that have an anti-dilutive effect (i.e., those that increase
income per share or decrease loss per share) are excluded from diluted
EPS. The Company adopted SFAS 128 as of December 31, 1997 and has
restated all prior period EPS data, as required. SFAS 128 did not have
a material impact on EPS for any period presented.
(a) TCI Class A and B Common Stock
The basic and diluted loss attributable to common stockholders
per common share for the period from January 1, 1995 through
the Liberty Distribution was computed by dividing net loss
attributable to common stockholders by the weighted average
number of common shares outstanding (648 million). Potential
common shares were not included in the computation of weighted
average shares outstanding because their inclusion would be
anti-dilutive.
(b) TCI Group Stock
The basic and diluted loss attributable to TCI Group common
stockholders per common share for the years ended December 31,
1997, December 31, 1996 and the period from the Liberty
Distribution through December 31, 1995 was computed by
dividing net loss attributable to TCI Group common
stockholders ($537 million, $799 million and $112 million,
respectively) by the weighted average number of common shares
outstanding of TCI Group Stock during the period (632 million,
665 million and 656 million, respectively). Potential common
shares were not included in the computation of weighted
average shares outstanding because their inclusion would be
anti-dilutive. At December 31, 1997, 1996, and 1995, there
were 113 million, 126 million, and 74 million potential common
shares, respectively, consisting of fixed and nonvested
performance awards and convertible securities that could
potentially dilute future EPS calculations in periods of net
income. Such potential common share amounts do not take into
account the assumed number of shares that would be
repurchased by the Company upon the exercise of the fixed
and nonvested performance awards. No material changes in the
weighted average outstanding shares or potential common
shares occurred after December 31, 1997.
(continued)
68
<PAGE> 70
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Liberty Group Stock
The basic earnings attributable to Liberty Media Group common
stockholders per common share for the years ended December 31,
1997 and 1996 was computed by dividing net earnings
attributable to Liberty Media Group common stockholders by the
weighted average number of common shares outstanding of
Liberty Group Stock during the period, as adjusted for the
effect of the 1998 Liberty Stock Dividend (366 million and 374
million, respectively).
The diluted earnings attributable to Liberty Media Group
common stockholders per common and potential common share for
the years ended December 31, 1997 and 1996 was computed by
dividing earnings attributable to Liberty Media Group common
stockholders by the weighted average number of common and
potential common shares outstanding of Liberty Group Stock
during the period, as adjusted for the effect of the 1998
Liberty Stock Dividend (403 million and 409 million,
respectively). Shares issuable upon conversion of the Series
C-Liberty Group Preferred Stock, the Convertible Preferred
Stock, Series D (the "Series D Preferred Stock"), the
Redeemable Convertible Liberty Media Group Preferred Stock,
Series H, convertible notes payable and other fixed and
nonvested performance awards have been included in the
computation of weighted average shares, as illustrated below.
Numerator adjustments for dividends and interest associated
with the convertible preferred shares and convertible notes
payable, respectively, were not made to the computation of
diluted earnings per share as such dividends and interest are
paid or payable by TCI Group. See notes 9 and 10 for
descriptions of the convertible notes payable and convertible
preferred shares, respectively. See note 12 for descriptions
of the dilutive stock options.
The basic and diluted loss attributable to Liberty Media Group
common stockholders per common share for the period from the
Liberty Distribution to December 31, 1995 was computed by
dividing net loss attributable to Liberty Media Group common
stockholders by the weighted average number of common shares
outstanding of Liberty Group Stock during the period, as
adjusted for the effect of the 1998 Liberty Stock Dividend
(369 million). Potential common shares were not included in
the computation of weighted average shares outstanding because
their inclusion would be anti-dilutive. After giving
consideration to the effect of the 1998 Liberty Stock
Dividend, no material changes in the weighted average
outstanding shares or potential common shares occurred after
December 31, 1997.
(continued)
69
<PAGE> 71
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the reconciliation of basic EPS to dilutive EPS
with respect to Liberty Group Stock is presented below:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
amounts in millions, except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings (loss) available to common
shareholders $ 125 1,056 (27)
========== ========== ==========
Weighted average common shares 366 374 369
========== ========== ==========
Basic earnings (loss) per share
attributable to common shareholders $ 0.34 2.82 (0.07)
Diluted EPS:
Earnings (loss) available to common
shareholders $ 125 1,056 (27)
========== ========== ==========
Weighted average common shares 366 374 369
Add dilutive potential common shares:
Employee and director options 4 3 --
Convertible notes payable 19 21 --
Series C Preferred Stock 4 4 --
Series D Preferred Stock 6 5 --
Series H Preferred Stock 4 2 --
---------- ---------- ----------
Dilutive potential common shares 37 35 --
---------- ---------- ----------
Diluted weighted average common shares 403 409 369
========== ========== ==========
Diluted earnings (loss) per share
attributable to common shareholders $ 0.31 2.58 (0.07)
========== ========== ==========
</TABLE>
(d) TCI Ventures Group Stock
The basic and diluted loss attributable to TCI Ventures Group
common stockholders per common share for the period from the
TCI Ventures Exchange to December 31, 1997 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, as
adjusted for the effect of the Ventures Stock Dividend (410
million). Potential common shares were not included in the
computation of weighted average shares outstanding because
their inclusion would be anti-dilutive.
At December 31, 1997, there were 35 million potential common
shares consisting of fixed and nonvested performance awards
and convertible securities that could potentially dilute
future EPS calculations in periods of net income. Such
potential common share amount does not take into account the
assumed number of shares that would be repurchased by the
Company upon the exercise of the fixed and nonvested
performance awards. After giving consideration to the effect
of the Ventures Stock Dividend, no material changes in the
weighted average outstanding shares or potential common shares
occurred after December 31, 1997.
(continued)
70
<PAGE> 72
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $1,183 million, $1,056 million and $965
million for the years ended December 31, 1997, 1996 and 1995,
respectively. Cash paid for income taxes was $141 million, $41 million,
and $63 million in 1997, 1996 and 1995, respectively. In addition, the
Company received income tax refunds amounting to $36 during the year
ended December 31, 1997.
Significant noncash investing and financing activities are reflected in
the following table. See also note 8 for the impact of the spin-off of
TCI Satellite Entertainment, Inc.
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ (1,857) (5,064) (3,582)
Liabilities assumed, net of current assets 720 1,811 445
Deferred tax liability recorded in acquisitions 145 1,379 1,083
Minority interests in equity of acquired entities 93 113 (49)
Common stock and preferred stock issued in acquisitions 1,060 457 1,615
Preferred stock of subsidiaries issued in acquisitions -- 640 --
TCI common stock and preferred stock held by acquired
company (484) -- --
---------- ---------- ----------
Cash paid for acquisitions $ (323) (664) (488)
========== ========== ==========
Cash received in exchanges:
Aggregate cost basis of assets acquired $ (392) (709) (10)
Historical cost of assets exchanged 399 754 13
Gain recorded on exchange of assets 11 21 8
---------- ---------- ----------
$ 18 66 11
========== ========== ==========
Costs of distribution agreements $ 173 -- --
========== ========== ==========
Exchange of consolidated subsidiaries for note receivable
and equity investments $ -- 894 --
========== ========== ==========
</TABLE>
The Company ceased to consolidate Flextech p.l.c. ("Flextech") and
Cablevision S.A. ("Cablevision") and began to account for Flextech and
Cablevision using the equity method of accounting, effective January 1,
1997 and October 1, 1997, respectively. The effects of changing the
method of accounting for the Company's ownership interest in Flextech
and Cablevision from the consolidation method to the equity method are
summarized below (amounts in millions):
<TABLE>
<S> <C>
Assets (other than cash and cash equivalents) reclassified to
equity investments $ 596
Liabilities reclassified to equity investments (484)
Minority interests in equity of subsidiaries reclassified to
equity investments (151)
--------------
Decrease in cash and cash equivalents $ (39)
==============
</TABLE>
(continued)
71
<PAGE> 73
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments in Affiliates
The Company has various investments accounted for under the equity
method. The following table includes the Company's carrying value and
percentage ownership of the more significant investments at December
31, 1997.
<TABLE>
<CAPTION>
December 31, 1997
-----------------------
Percentage Carrying
Ownership Value
------------ ---------
amounts in millions
<S> <C> <C>
Sprint Spectrum Holding Company, L.P., MinorCo, L.P.
and PhillieCo, L.P. 30% - 35% 607
Telewest Communications plc ("Telewest") 26.6% 324
Teleport Communications Group, Inc. ("TCG") 28% 295
InterMedia Capital Partners IV, L.P. ("InterMedia IV")
and InterMedia Capital Management IV, L.P. ("ICM IV") 48.7% 262
Flextech 36.8% 261
Cablevision 26.2% 239
BDTV INC. and BDTV II, INC 99% 229
Various foreign equity investments (other than
Telewest, Flextech and Cablevision) various 213
QVC, Inc. 42.6% 134
Home Shopping Network, Inc. ("HSN") 19.9% 119
</TABLE>
Summarized unaudited combined financial information for affiliates is
as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -----------
Combined Financial Position amounts in millions
---------------------------
<S> <C> <C>
Property and equipment, net $ 6,478 4,920
Franchise costs, net 2,993 3,913
Other assets, net 17,658 13,362
----------- -----------
Total assets $ 27,129 22,195
=========== ===========
Debt $ 14,245 8,969
Other liabilities 5,496 5,787
Owners' equity 7,388 7,439
----------- -----------
Total liabilities and equity $ 27,129 22,195
=========== ===========
</TABLE>
(continued)
72
<PAGE> 74
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Combined Operations amounts in millions
-------------------
<S> <C> <C> <C>
Revenue $ 8,207 6,088 4,619
Operating expenses (8,219) (5,576) (4,001)
Depreciation and
amortization (1,485) (1,070) (588)
---------- ---------- ----------
Operating income (loss) (1,497) (558) 30
Interest expense (857) (615) (373)
Other, net (447) (354) (153)
---------- ---------- ----------
Net loss $ (2,801) (1,527) (496)
========== ========== ==========
</TABLE>
The Company is a partner in a series of partnerships formed to engage
in the business of providing wireless communications services, using
the radio spectrum for broadband personal communications services
("PCS"), to residential and business customers nationwide, using the
"Sprint" brand (the "PCS Ventures"). The PCS Ventures include Sprint
Spectrum Holding Company, L.P. ("Sprint Spectrum") and MinorCo, L.P.
(collectively, "Sprint PCS" or the "Sprint PCS Partnerships") and
PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS
Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast
Corporation, Cox Communications, Inc. ("Cox") and the Company. The
partners of PhillieCo are subsidiaries of Sprint, Cox and the Company.
The Company has a 30% partnership interest in each of the Sprint PCS
Partnerships and a 35% interest as a partner in PhillieCo. During the
years ended December 31, 1997 and 1996, the PCS Ventures accounted for
$493 million and $167 million, respectively, of the Company's share of
affiliate losses. The 1996 amount includes $34 million related to prior
periods.
(continued)
73
<PAGE> 75
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
From inception through December 1997, the four partners have
contributed approximately $4 billion to the Sprint PCS Partnerships (of
which the Company contributed an aggregate of approximately $1.3
billion). The remaining capital that the Sprint PCS Partnerships will
require to fund the construction and operation of the PCS systems and
the commitments made to its affiliates will be substantial. The
partners had agreed in forming the Sprint PCS Partnerships to
contribute up to an aggregate of approximately $4.2 billion of equity
thereto, from inception through fiscal 1999, subject to certain
requirements. The Company expects that the remaining approximately $200
million of such amount (of which the Company's share is approximately
$60 million) will be contributed by the end of the second quarter of
1998 (although there can be no assurance that any additional capital
will be contributed). The Company expects that the Sprint PCS
Partnerships will require additional equity thereafter.
Pursuant to an agreement entered into in connection with certain
financings by Sprint Spectrum, under certain circumstances the partners
in Sprint Spectrum may be required to make additional contributions to
Sprint Spectrum to fund projected cash shortfalls to the extent that
the amount of the partners' aggregate contributions to Sprint Spectrum
(exclusive of certain amounts, including amounts invested in certain
affiliates of Sprint Spectrum), following December 31, 1995 are less
than $1.0 billion.
Sprint PCS's business plan will require additional capital financing
prior to the end of 1998. Sources of funding for Sprint PCS's capital
requirements may include vendor financing, public offerings or private
placements of equity and/or debt securities, commercial bank loans
and/or capital contributions from the Sprint PCS partners. However,
there can be no assurance that any additional financing can be obtained
on a timely basis, on terms acceptable to Sprint PCS or the Sprint PCS
partners and within the limitations contained in the agreements
governing Sprint PCS's existing debt.
Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized
management to operate Sprint PCS in accordance with such budget. The
Sprint PCS partners may mutually agree to make additional capital
contributions. However, the Sprint PCS partners have no such obligation
in the absence of an approved budget, and there can be no assurance the
Sprint PCS partners will reach such an agreement or approve the 1998
proposed budget. In addition, the failure by the Sprint PCS partners to
approve a business plan may impair the ability of Sprint PCS to obtain
required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS partners could result in the
delay or abandonment of Sprint PCS's development and expansion plans
and expenditures, the failure to meet regulatory requirements or other
potential adverse consequences.
(continued)
74
<PAGE> 76
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership
board has resulted in the occurrence of a "Deadlock Event" under the
Sprint PCS partnership agreement as of January 1, 1998. Under the
Sprint PCS partnership agreement, if one of the Sprint PCS partners
refers the budget issue to the chief executive officers of the
corporate parents of the Sprint PCS partners for resolution pursuant to
specified procedures and the issue remains unresolved, buy/sell
provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other Sprint
PCS partners, or, in certain circumstances, liquidation of Sprint PCS.
Discussions among the Sprint PCS partners about restructuring their
interests in Sprint PCS in lieu of triggering such buy/sell procedures
are ongoing. However, there is no certainty the discussions will result
in a change to the partnership structure or will avert the triggering
of the resolution and buy/sell procedures referred to above or a
liquidation of Sprint PCS.
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000
shares of Class A common stock at $16.00 per share to the public for
aggregate net proceeds of approximately $410,000,000. As a result of
the TCG IPO, the Company's ownership interest in TCG was reduced from
approximately 35% to approximately 31%. Accordingly, the Company
recognized a gain amounting to $12 million (before deducting deferred
income tax expense of approximately $5 million).
During 1997, TCG issued approximately 6.6 million shares of its Class A
common stock for certain acquisitions. The total consideration paid by
TCG through the issuance of common stock for such acquisitions was
approximately $123 million. In addition, effective November 5, 1997,
TCG consummated a public offering of 17.2 million shares of its Class A
common stock. Of the 17.2 million shares, 7.3 million shares were
offered by TCG and 9.9 million shares were offered by MediaOne of
Delaware, Inc. (formerly Continental Cablevision, Inc., "MediaOne").
TCG did not receive any proceeds from the sale of shares by MediaOne,
which represented all of MediaOne's interest in TCG. TCG received net
proceeds from its sale of shares pursuant to the above offering of
$317.6 million (after deducting expenses and fees). As a result of the
above transactions, the Company's ownership interest in TCG decreased
from 31% to 28%. In connection with the dilution of the Company's
ownership interest in TCG, the Company recognized non-cash gains in
1997 aggregating $112 million (before deducting deferred income tax
expense of approximately $43 million).
In January 1998, TCG entered into certain agreements pursuant to which
it agreed to be acquired by AT&T Corporation ("AT&T"). Upon
consummation of such merger, TCI would receive in exchange for all of
its interest in TCG, approximately 46.95 million shares of AT&T common
stock, which shares would be attributed to the TCI Ventures Group. The
transaction is subject to a number of regulatory and other conditions,
accordingly, there can be no assurance that such transaction will be
consummated on the terms contemplated by the parties, or at all.
(continued)
75
<PAGE> 77
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In July 1996, the Company completed a series of transactions that
resulted in the transfer of all or part of the Company's ownership
interests in certain cable television systems to InterMedia IV in
exchange for a 49% limited partnership interest in InterMedia IV and
assumed debt of $120 million. Simultaneously, the Company received a
cable television system and cash from InterMedia IV in exchange for a
cable television system that had been recently acquired by the Company.
The Company recognized no gain or loss in connection with the
above-described transactions. The $225 million excess of the Company's
investment in InterMedia IV over the Company's share of the partners'
capital of InterMedia IV is being amortized over an estimated useful
life of 20 years. Including such amortization, the Company's share of
InterMedia IV's losses was $46 million and $16 million during the years
ended December 31, 1997 and 1996, respectively.
ICM IV owns a 1.12% limited partnership interest in InterMedia IV. The
Company acquired its limited partnership interest in ICM IV in August
1997 pursuant to the transactions described in note 13.
As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and Tele-Communications International, Inc., a
majority-owned subsidiary of the Company ("TINTA"), formed two sports
programming ventures. In the United States, Liberty Media Group and
News Corp. formed Fox/Liberty Networks LLC ("Fox Sports") into which
Liberty Media Group contributed interests in its national and regional
sports networks and into which News Corp. contributed its fx cable
network and certain other assets. Liberty Media Group received a 50%
interest in Fox Sports and a distribution of $350 million in cash. No
gain or loss was recognized as the cash distribution approximated the
carrying value of the assets contributed.
Internationally, News Corp. and a limited liability corporation owned
50% by Liberty Media Group and 50% by TINTA ("Liberty/TINTA") formed a
venture ("Fox Sports International") to operate previously existing
sports services in Latin America and Australia and a variety of new
sports services throughout the world, except in Asia and in the United
Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. Liberty/TINTA owns 50% of Fox Sports
International with News Corp. owning the other 50%. News Corp.
contributed various international sports rights and certain trademark
rights. Liberty/TINTA contributed Prime Deportiva, a Spanish language
sports service distributed in Latin American and in Hispanic markets in
the United States; an interest in Torneos y Competencias S.A.
("Torneos"), an Argentinean sports programming and production business;
various international sports and satellite transponder rights and cash.
Liberty/TINTA also contributed its 50% interest in Premier Sports and
All-Star Sports. Both are Australian 24-hour sports services available
via multichannel, multipoint distribution systems or cable television.
Fox Sports International is accounted for by the equity method.
During the third quarter of 1997, Fox Sports International distributed
(i) its 35% interest in Torneos to Liberty/TINTA and (ii) certain
Australian sports rights to News Corp.
(continued)
76
<PAGE> 78
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to an agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and
amended in August 1996 (the "BDTV Agreement"), Liberty Media Group
contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the
"Silver King Option") to purchase 2 million shares of Class B common
stock of Silver King Communications, Inc. ("Silver King") (which shares
represented voting control of Silver King at such time) and $3,500,000
in cash, representing the exercise price of the Silver King Option.
BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller
pursuant to the BDTV Agreement, in which Liberty Media Group owns over
99% of the equity and none of the voting power (except for protective
rights with respect to certain fundamental corporate actions) and Mr.
Diller owns less than 1% of the equity and all of the voting power.
BDTV-I exercised the Silver King Option shortly after its contribution,
thereby becoming the controlling stockholder of Silver King. Such
change in control of Silver King had been approved by the FCC in June
1996, subject, however, to the condition that the equity interest of
Liberty Media Group in Silver King not exceed 21.37% without the prior
approval of the FCC (the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King acquired Home Shopping Network, Inc.
("HSN") by merger of HSN with a subsidiary of Silver King in December
1996 (the "HSN Merger") where HSN is the surviving corporation and a
subsidiary of Silver King following the HSN Merger. Liberty Media Group
accounted for the HSN Merger as a sale of a portion of its investment
in HSN and accordingly, recorded a pre-tax gain of approximately $47
million. In order to effect the HSN Merger in compliance with the FCC
Order, Liberty Media Group agreed to defer receiving certain shares of
Silver King that would otherwise have become issuable to it in the HSN
Merger until such time as it was permitted to own such shares. As a
result, the HSN Merger was structured so that Liberty Media Group
received (i) 7,809,111 shares of Class B common stock of Silver King,
all of which shares Liberty Media Group contributed to BDTV II INC.
("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be
issued up to an additional 2,591,752 shares of Class B common stock of
Silver King from time to time upon the occurrence of certain events
which would allow Liberty Media Group to own additional shares in
compliance with the FCC Order (including events resulting in the
dilution of Liberty Media Group's percentage equity interest), and
(iii) 739,141 shares of Class B common stock and 17,566,702 shares of
common stock of HSN (representing approximately 19.9% of the equity of
HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry
Diller pursuant to the BDTV Agreement, in which the relative equity
ownership and voting power of Liberty Media Group and Mr. Diller are
substantially the same as their respective equity ownership and voting
power in BDTV-I.
As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty
Media Group and therefore, the financial results of HSN are no longer
included in the combined financial results of Liberty Media Group.
Although Liberty Media Group no longer possesses voting control over
HSN, it continues to have an indirect equity interest in HSN through
its ownership of the equity securities of BDTV-I and BDTV-II as well as
a direct interest in HSN which would be exchangeable into shares of
Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for
using the equity method. Subsequent to the HSN Merger, the surviving
corporation was renamed HSN, Inc. ("HSNI").
(continued)
77
<PAGE> 79
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 1998, pursuant to an Investment Agreement among Universal
Studios, Inc. ("Universal"), HSNI, HSN and Liberty Media Group, dated
as of October 1997 and amended and restated as of December 1997 (the
"Investment Agreement"), HSNI consummated a transaction (the "Universal
Transaction") through which USA Networks Partners, Inc., a subsidiary
of Universal, sold its 50% interest in USA Networks, a New York general
partnership ("USA Networks") to HSNI and Universal contributed the
remaining 50% interest in USA Networks and its domestic television
production and distribution operations to HSNI. In connection with the
Universal Transaction, Universal, HSNI, HSN and Liberty Media Group
became parties to a number of other agreements relating to, among other
things, (i) the management of HSNI, (ii) the purchase and sale or other
transfer of voting securities of HSNI, including securities convertible
or exchangeable for voting securities of HSNI, and (iii) the voting of
such securities.
At the closing of the Universal Transaction, Universal (i) was issued
3,190,000 shares of HSNI's Class B Common Stock, 3,560,000 shares of
HSNI's Common Stock and 54,327,170 common equity shares ("LLC Shares")
of USANi LLC, a limited liability company ("USANi LLC") formed to hold
all of the businesses of HSNI and its subsidiaries, except for its
broadcasting business and its equity interest in Ticketmaster and (ii)
received a cash payment of $1.3 billion. Pursuant to an Exchange
Agreement relating to the LLC Shares (the "LLC Exchange Agreement"),
36,810,000 of the LLC Shares issued to Universal are each exchangeable
for one share of HSNI's Class B Common Stock and the remainder of the
LLC Shares issued to Universal are each exchangeable for one share of
HSNI's Common Stock.
At the closing of the Universal Transaction, Liberty Media Group was
issued 589,161 shares of HSNI's Class B Common Stock, representing all
of the remaining shares of HSNI's Class B Common Stock issuable
pursuant to Liberty Media Group's Contingent Right. Of such shares,
400,000 shares of Class B Common Stock were contributed to BDTV IV Inc.
("BDTV-IV"), a newly-formed entity having substantially the same terms
as BDTV-I and BDTV-II (with the exception of certain transfer
restrictions). In addition, Liberty Media Group purchased 5 LLC Shares
at the closing of the Universal Transaction for an aggregate purchase
price of $200. Liberty Media Group has also agreed to contribute $300
million in cash to USANI LLC by June 30, 1998 in exchange for an
aggregate of 7,500,000 LLC Shares and/or shares of HSNI's Common Stock.
Liberty Media Group's cash purchase price will increase at an annual
interest rate of 7.5% beginning from the date of the closing of the
Universal Transaction through the date of Liberty Media Group's
purchase of such securities (the "Liberty Closing"). Pursuant to the
LLC Exchange Agreement, each LLC Share issued or to be issued to
Liberty Media Group is exchangeable for one share of HSNI's Common
Stock.
(continued)
78
<PAGE> 80
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Universal Transaction, each of Universal and
Liberty Media Group has been granted a preemptive right with respect to
future issuances of HSNI's capital stock, subject to certain
limitations, to maintain their respective percentage ownership
interests in HSNI that they had immediately prior to such issuances. In
addition, with respect to issuances of HSNI's capital stock in certain
specified circumstances, Universal will be obligated to maintain the
percentage ownership interest in HSNI that it had immediately prior to
such issuances. In addition, HSNI, Universal and Liberty Media Group
have agreed that if the parties agree prior to June 30, 1998 (the date
of mandatory cash contributions) on the identity of assets owned by
Liberty Media Group that are to be contributed to the LLC and the form
and terms of such contributions, Liberty Media Group will contribute
those assets in exchange for LLC Shares valued at $40 per share. If
Liberty Media Group contributes such additional assets, Liberty Media
Group has the right to elect to reduce the number of LLC Shares it is
obligated to purchase for cash by an amount equal to 45% of the value
of the assets contributed by Liberty Media Group. If Liberty Media
Group exercises the option to contribute assets and thereby reduces its
cash contribution amount, Universal will be required to purchase a
number of additional LLC shares (valued at $40 per share) equal to the
value of Liberty Media Group's asset contribution, less the amount by
which Liberty Media Group's asset contribution is applied towards
reducing Liberty Media Group's cash contribution. In addition,
Universal may purchase an additional number of LLC shares (valued at
$40 per share), equal to the value of Liberty Media Group's asset
contribution which is not applied towards reducing Liberty Media
Group's cash contribution.
Telewest is a company that is currently operating and constructing
cable television and telephone systems in the United Kingdom ("UK").
Telewest was formed on October 3, 1995 upon the merger (the "Telewest
Merger") of Telewest Communications plc ("Telewest Communications")
with SBC CableComms (UK). Prior to the Telewest Merger, the Company had
an effective ownership interest of approximately 36% in Telewest
Communications. As a result of the dilution of the Company's ownership
interest in Telewest that occurred in connection with the Telewest
Merger, the Company recognized a gain of approximately $165 million
(before deducting deferred income taxes of $58 million). Telewest
accounted for $145 million, $109 million and $70 million of the
Company's share of its affiliates' losses during the years ended
December 31, 1997, 1996 and 1995, respectively.
(continued)
79
<PAGE> 81
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In January 1997, the Company's voting interest in Flextech, a company
engaged in the distribution and production of programming for
multichannel video distribution systems in the United Kingdom ("UK"),
was reduced to 50% and the Company ceased to consolidate Flextech and
began to account for Flextech using the equity method of accounting. In
April 1997, Flextech and BBC Worldwide Limited formed two separate
joint ventures (the "BBC Joint Ventures") and entered into certain
related transactions. The consummation of the BBC Joint Ventures and
related transactions resulted in, among other things, a reduction of
the Company's economic ownership interest in Flextech from 46.2% to
36.8%. The Company continues to maintain a voting interest in Flextech
of approximately 50%. As a result of such dilution, the Company
recorded a $152 million increase to the carrying value of the Company's
investment in Flextech, a $53 million increase to deferred income tax
liability and a $66 million increase to equity and a $33 million
increase to minority interests in consolidated subsidiaries. No gain
was recognized in the statement of operations due primarily to certain
contingent obligations of the Company with respect to one of the BBC
Joint Ventures. Flextech accounted for $16 million of the Company's
share of its affiliates' losses during the year ended December 31,
1997.
On April 25, 1995, TINTA acquired a 51% ownership interest in
Cablevision, an entity engaged in the multi-channel video distribution
business in Buenos Aires, Argentina, for an adjusted purchase price of
$282.0 million, before liabilities assumed. The purchase price was paid
with cash consideration of $195.2 million (including a previously paid
$20 million deposit) and TINTA's issuance of $86.8 million principal
amount of secured negotiable promissory notes payable to the selling
shareholders.
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision to unaffiliated third parties (the "Buyers") for cash
proceeds of $120 million. In addition, on October 9, 1997, Cablevision
issued 3,541,829 shares of stock in the aggregate to the Buyers for $80
million in cash and notes receivable with an aggregate principal amount
of $240 million, plus accrued interest at LIBOR, due within the earlier
of two years or at the request of Cablevision's board of directors. The
above transactions, (collectively, the "Cablevision Sale") reduced
TINTA's interest in Cablevision to 26.24%. TINTA recognized a gain of
$49 million on the Cablevision Sale. As a result of the Cablevision
Sale, effective October 1, 1997, TINTA ceased to consolidate
Cablevision and began to account for Cablevision using the equity
method of accounting. Cablevision accounted for $3 million of the
Company's share of its affiliates' losses during the year ended
December 31, 1997.
In addition to Telewest, Flextech and Cablevision, the Company has
other less significant equity method investments in video distribution
and programming businesses located in the UK, other parts of Europe,
Asia, Latin America and certain other foreign countries. In the
aggregate, such other foreign equity method investments accounted for
$84 million, $70 million and $54 million of the Company's share of its
affiliates' losses in 1997, 1996 and 1995, respectively.
(continued)
80
<PAGE> 82
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the year ended December 31, 1997, TSX Corporation ("TSX"), an
equity affiliate of the Company, and Antec Corporation ("Antec) entered
into a business combination with Antec being the surviving entity. In
connection with such transaction, the Company recognized a $29 million
gain (before deducting deferred income tax expense of approximately $12
million) representing the difference between the fair value of the
Antec shares received ($52 million) and the carrying value of the
Company's investment in TSX at the date of the transaction ($23
million). Upon completion of this transaction, the Company's ownership
interest decreased from an approximate 45% interest in TSX to an
approximate 16% ownership interest in Antec. The Company accounts for
its investment in Antec using the cost method.
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts (other than non-recourse debts) of that partnership in the event
liabilities of that partnership were to exceed its assets.
(6) Investment in Time Warner
On October 10, 1996, Time Warner and Turner Broadcasting System, Inc.
("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS
shareholders received 0.75 of a Time Warner common share for each TBS
Class A and Class B common share held, and each holder of TBS Class C
preferred stock received 0.80 of a Time Warner common share for each of
the 6 shares of TBS Class B common stock into which each share of Class
C preferred stock could have been converted.
Time Warner, TBS, TCI and Liberty Media Group entered into an Agreement
Containing Consent Order with the Federal Trade Commission ("FTC")
dated August 14, 1996, as amended on September 4, 1996 (the "FTC
Consent Decree"). Pursuant to the FTC Consent Decree, among other
things, Liberty Media Group agreed to exchange the shares of Time
Warner common stock to be received in the TBS/Time Warner Merger for
shares of a separate series of Time Warner common stock with limited
voting rights (the "TW Exchange Stock"). Holders of the TW Exchange
Stock are entitled to one one-hundredth (l/100th) of a vote for each
share with respect to the election of directors. Holders of the TW
Exchange Stock will not have any other voting rights, except as
required by law or with respect to limited matters, including
amendments of the terms of the TW Exchange Stock adverse to such
holders. Subject to the federal communications laws, each share of the
TW Exchange Stock will be convertible at any time at the option of the
holder on a one-for-one basis for a share of Time Warner common stock.
Holders of TW Exchange Stock are entitled to receive dividends ratably
with the Time Warner common stock and to share ratably with the holders
of Time Warner common stock in assets remaining for common stockholders
upon dissolution, liquidation or winding up of Time Warner.
(continued)
81
<PAGE> 83
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the TBS/Time Warner Merger, Liberty Media Group
received approximately 50.6 million shares of the TW Exchange Stock in
exchange for its TBS holdings. As a result of the TBS/Time Warner
Merger, Liberty Media Group recognized a pre-tax gain of approximately
$1.5 billion in the fourth quarter of 1996. Additionally, Liberty Media
Group and Time Warner entered into, among other agreements, an
agreement providing for the grant to Time Warner of an option (the
"Contract Option") to enter into a contract with Southern Satellite
Systems, Inc. ("Southern"), a wholly-owned subsidiary of Liberty Media
Group which distributes the TBS SuperStation ("WTBS") signal in the
United States and Canada, pursuant to which Southern would provide Time
Warner with certain uplinking and distribution services relating to
WTBS and would assist Time Warner in converting WTBS from a
superstation into a copyright paid cable programming service. On June
24, 1997, under the new agreement, Liberty Media Group granted Time
Warner an option, expiring October 10, 2002, to acquire the business of
Southern and certain of its subsidiaries (together with Southern, the
"Southern Business") through a purchase of assets (the "Southern
Option"). Liberty Media Group received 6.4 million shares of TW
Exchange Stock valued at $306 million in consideration for the grant.
Such amount has been reflected as a deferred option premium in the
accompanying December 31, 1997 consolidated balance sheet. In September
1997, Time Warner exercised the Southern Option. Pursuant to the
Southern Option, Time Warner acquired the Southern Business, effective
January 1, 1998, for $213.3 million, which was paid in cash together
with the assumption of certain liabilities on January 2, 1998.
As security for borrowings under one of its credit facilities, Liberty
Media Group has pledged a portion of its TW Exchange Stock. At December
31, 1997 such pledged portion had an aggregate fair value of
approximately $1.4 billion.
(7) Acquisitions and Dispositions
On March 4, 1998, the Company contributed to Cablevision Systems
Corporation ("CSC") certain of its cable television systems serving
approximately 830,000 basic customers to CSC in exchange for
approximately 12.2 million newly issued CSC Class A shares. Such shares
represent an approximate 33% equity interest in CSC's total outstanding
shares and an approximate 9% voting interest in CSC in all matters
except for the election of directors, in which case the Company has an
approximate 47% voting interest in the election of one fourth of CSC's
directors. CSC also assumed approximately $669 million of TCI's debt.
The Company has also entered into letters of intent with CSC which
provide for the Company to acquire a cable system in Michigan and an
additional 3% of CSC's Class A shares and for CSC to (i) acquire cable
systems serving approximately 250,000 customers in Connecticut and (ii)
assume $110 million of the Company's debt. The ability of the Company
to sell or increase its investment in CSC is subject to certain
restrictions and limitations set forth in a stockholders agreement with
CSC. The Company will account for its approximate 33% interest in CSC
under the equity method.
(continued)
82
<PAGE> 84
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Including the above-described CSC transactions and another transaction
that closed in February 1998, the Company, as of February 28, 1998,
has, since January 1, 1997, contributed, or signed agreements or
letters of intent to contribute within the next twelve months, certain
cable television systems (the "Contributed Cable Systems") serving
approximately 3.8 million basic customers to joint ventures (the
"Contribution Transactions") in which the Company will retain
non-controlling ownership interests. Following the completion of the
Contribution Transactions, the Company will no longer consolidate the
Contributed Cable Systems. Accordingly, it is anticipated that the
completion of the Contribution Transactions, as currently contemplated,
will result in aggregate estimated reductions (based on 1997 amounts)
to debt, annual revenue and annual operating income before
depreciation, amortization and stock compensation of $4.6 billion, $1.7
billion and $783 million, respectively. No assurance can be given that
any of the pending Contribution Transactions will be consummated.
On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
Liberty Media Group, which held non-voting class C common stock of
International Family Entertainment, Inc. ("IFE") ("Class C Stock") and
$23 million of IFE 6% convertible secured notes due 2004, convertible
into Class C Stock, ("Convertible Notes"), contributed its Class C
Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in
exchange for a new series of 30 year non-convertible 9% preferred stock
of FKW with a stated value of $345 million (the "FKW Preferred Stock").
As a result of the exchange, Liberty Media Group recognized a pre-tax
gain of approximately $304 million.
Effective July 31, 1997, a wholly-owned subsidiary of TCI merged with
and into Kearns-Tribune Corporation ("Kearns-Tribune") . The merger was
valued at $808 million. TCI exchanged 47.2 million shares of TCI Group
Series A Stock for shares of Kearns-Tribune which held 17.9 million
shares of TCI Group Stock and 10.1 million shares of Liberty Group
Stock. The merger of Kearns-Tribune has been accounted for by the
purchase method. Accordingly, the results of operations of
Kearns-Tribune Corporation have been combined with those of the Company
since the date of acquisition, and the Company recorded
Kearns-Tribune's assets and liabilities at fair value. Assuming the
acquisition of Kearns-Tribune had occurred on January 1, 1996, the
Company's pro forma results of operations would not have been
materially different from the Company's historical results of
operations for the years ended December 31, 1997 and 1996.
In January 1997, the Company acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that the Company did not previously own and
certain additional assets for aggregate consideration of approximately
$970 million. The Company issued approximately 16 million shares of TCI
Group Stock, assumed $584 million of TKR Cable's debt and paid cash of
$88 million and shares of Time Warner common stock valued at $41
million upon consummation of such acquisition. Prior to the acquisition
date, the Company accounted for its 50% interest in TKR Cable under the
equity method. This acquisition has been treated as a step acquisition
for accounting purposes. Accordingly, the results of operations of TKR
Cable have been combined with those of TCI Group since the date of
acquisition and TCI Group's aggregate cost basis in TKR Cable has been
allocated to TKR Cable's assets and liabilities based on their fair
values. Assuming the acquisition of TKR Cable had occurred on January
1, 1996, the Company's pro forma results of operations would not have
been materially different from the Company's historical results of
operations for the years ended December 31, 1997 and 1996.
(continued)
83
<PAGE> 85
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 31, 1996, pursuant to certain agreements entered into among
TCIC, a subsidiary of TCI, TCI, Viacom International, Inc. and Viacom,
Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary
of Viacom ("Cable Sub") which owned Viacom's cable systems and related
assets (the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to a new subsidiary of
Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub
the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the
"Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these
transfers, Cable Sub retained cable assets with a value at closing of
approximately $2.326 billion and the obligation to repay the Loan
Proceeds. Neither Viacom nor New Viacom Sub has any obligation with
respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class B
Common Stock (collectively, "Viacom Common Stock") the opportunity to
exchange (the "Viacom Exchange Offer") a portion of their shares of
Viacom Common Stock for shares of Class A Common Stock, par value $100
per share, of Cable Sub ("Cable Sub Class A Stock"). Immediately
following the completion of the Viacom Exchange Offer, TCIC acquired
from Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's
obligations under the Loan Facility). At the time of the Share
Issuance, the Cable Sub Class A Stock received by Viacom stockholders
pursuant to the Viacom Exchange Offer automatically converted into 5%
Class A Senior Cumulative Exchangeable Preferred Stock (the
"Exchangeable Preferred Stock") of Cable Sub with a stated value of
$100 per share (the "Stated Value"). The Exchangeable Preferred Stock
is exchangeable, at the option of the holder commencing after the fifth
anniversary of the date of issuance, for shares of TCI Group Series A
Stock at an exchange rate of 5.447 shares of TCI Group Series A Stock
for each share of Exchangeable Preferred Stock exchanged. The
Exchangeable Preferred Stock is subject to redemption, at the option of
Cable Sub, after the fifth anniversary of the date of issuance,
initially at a redemption price of $102.50 per share and thereafter at
prices declining ratably annually to $100 per share on and after the
eighth anniversary of the date of issuance, plus accrued and unpaid
dividends to the date of redemption. The Exchangeable Preferred Stock
is also subject to mandatory redemption on the tenth anniversary of the
date of issuance at a price equal to the Stated Value per share plus
accrued and unpaid dividends. Amounts payable by Cable Sub in
satisfaction of its optional or mandatory redemption obligations with
respect to the Exchangeable Preferred Stock may be made in cash or, at
the election of Cable Sub, in shares of TCI Group Series A Stock, or in
any combination of the foregoing. Upon completion of the Viacom
Acquisition, Cable Sub was renamed TCI Pacific Communications, Inc.
("TCI Pacific").
The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of TCI Pacific have been
consolidated with those of the Company since the date of acquisition,
and the Company recorded TCI Pacific's assets and liabilities at fair
value. On a pro forma basis, the Company's revenue and TCI Group's net
loss and net loss per share would have been increased by $280 million,
$55 million and $.08, respectively, for the year ended December 31,
1996 if TCI Pacific had been consolidated with the Company since
January 1, 1996.
(continued)
84
<PAGE> 86
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of January 26, 1995, TCI, TCIC and TeleCable Corporation
("TeleCable") consummated a transaction, whereby TeleCable was merged
into TCIC. The aggregate $1.6 billion purchase price was satisfied by
TCIC's assumption of approximately $300 million of TeleCable's net
liabilities and the issuance to TeleCable's shareholders of
approximately 42 million shares of TCI Class A common stock and 1
million shares of Series D Preferred Stock with an aggregate initial
liquidation value of $300 million (see note 10).
(8) Spin-Off of TCI Satellite Entertainment, Inc.
Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"),
which the Company accounted for by the equity method. Primestar
provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers.
On December 4, 1996, the Company distributed (the "Satellite Spin-off")
to the holders of shares of TCI Group Stock all of the issued and
outstanding common stock of TCI Satellite Entertainment, Inc.
("Satellite"). At the time of the Satellite Spin-off, Satellite's
assets and operations included the Company's interest in Primestar, the
Company's business of distributing Primestar programming and two
communications satellites. As a result of the Satellite Spin-off,
Satellite's operations are no longer consolidated with the Company's.
In addition, the Satellite Spin-off effected a change in the conversion
rate for each of the Company's equity and debt securities that are
convertible into TCI Group Series A Stock. See notes 9, 10 and 12.
Summarized financial information of Satellite as of December 4, 1996
and from January 1, 1996 through December 4, 1996 is as follows
(amounts in millions):
<TABLE>
<CAPTION>
Financial Position
------------------
<S> <C>
Cash, receivables and other assets $ 104
Investment in Primestar 32
Property and equipment, net 1,111
----------
$ 1,247
Accounts payable and accrued liabilities $ 60
Due to Primestar 458
Due to TCI 324
Equity 405
----------
$ 1,247
Operations
----------
Revenue $ 377
Operating expenses (373)
Depreciation (166)
----------
Loss before income tax benefit (162)
Income tax benefit 53
----------
Net loss $ (109)
==========
</TABLE>
(continued)
85
<PAGE> 87
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at -----------------------------
December 31, 1997 1997 1996
----------------- ------------ ------------
amounts in millions
<S> <C> <C> <C>
Debt of subsidiaries:
Notes payable (a) 8.0% $ 9,017 9,308
Bank credit facilities (b) 6.8% 5,233 4,813
Commercial paper 6.3% 533 638
Convertible notes (c) 9.5% 40 43
Other debt, at varying rates 427 124
------------ ------------
$ 15,250 14,926
============ ============
</TABLE>
(a) During the year ended December 31, 1997, the Company purchased
in the open market certain notes payable which had an
aggregate principal balance of $409 million and fixed interest
rates ranging from 8.75% to 10.13% (the "1997 Purchases"). In
connection with the 1997 Purchases, the Company recognized a
loss on early extinguishment of debt of $39 million. Such loss
related to prepayment penalties amounting to $33 million and
the retirement of deferred loan costs.
During the year ended December 31, 1996, the Company purchased
in the open market certain notes payable which had an
aggregate principle balance of $904 million and fixed interest
rates ranging from 7.88% to 10.44% (the "1996 Purchases"). In
connection with the 1996 Purchases, the Company recognized a
loss on early extinguishment of debt of $62 million. Such loss
related to prepayment penalties amounting to $60 million and
the retirement of deferred loan costs.
(b) At December 31, 1997, subsidiaries of the Company had
approximately $2.6 billion in unused lines of credit,
excluding amounts related to lines of credit which provide
availability to support commercial paper.
During the year ended December 31, 1996, certain subsidiaries
of the Company terminated, at such subsidiaries' option,
certain revolving bank credit facilities with aggregate
commitments of approximately $2 billion and refinanced certain
other bank credit facilities. In connection with such
termination and refinancings, the Company recognized a loss on
early extinguishment of debt of $9 million related to the
retirement of deferred loan costs.
(continued)
86
<PAGE> 88
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) The convertible notes, which are stated net of unamortized
discount of $166 million and $178 million at December 31, 1997
and 1996, respectively, mature on December 18, 2021. The notes
require, so long as conversion of the notes has not occurred,
an annual interest payment through 2003 equal to 1.85% of the
face amount of the notes. During the year ended December 31,
1997, certain of these notes were converted, pursuant to their
existing terms, into 2,533,116 shares of TCI Group Series A
Stock, 1,448,341 shares of Liberty Group Series A Stock and
256,484 shares of Series A Common Stock, $1.00 par value per
share, of Satellite ("Satellite Series A Common Stock") and
63,432 shares of TCI Ventures Group Series A Stock. At
December 31, 1997, 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.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
Also, as security for borrowings under another of the Company's credit
facilities, the Company has pledged a portion of its Time Warner common
stock with an estimated market value of $1.4 billion.
The fair value of the debt of the Company's subsidiaries is estimated
based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. At December 31, 1997, the fair value of the Company's debt
was $16,037 million, as compared to a carrying value of $15,250 million
on such date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various Interest Rate Swaps
pursuant to which it (i) paid fixed interest rates (the "Fixed Rate
Agreements") and received variable interest rates through December 1997
and (ii) pays variable interest rates (the "Variable Rate Agreements")
and receives fixed interest rates ranging from 4.8% to 9.7% on notional
amounts of $2,400 million at December 31, 1997. During the years ended
December 31, 1997, 1996 and 1995, the Company's net payments pursuant
to the Fixed Rate Agreements were $7 million, $14 million and $13
million, respectively; and the Company's net receipts (payments)
pursuant to the Variable Rate Agreements were (less than $1 million),
$15 million and (less than $1 million), respectively. At December 31,
1997, all of the Company's Fixed Rate Agreements had expired.
During the year ended December 31, 1996, the Company terminated certain
Variable Rate Agreements with an aggregate notional amount of $700
million. The Company received $16 million upon such terminations. The
Company will amortize such termination settlement over the remainder of
the original terms of the terminated Variable Rate Agreements.
(continued)
87
<PAGE> 89
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the Company's Variable Rate Agreements at
December 31, 1997 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to be paid
Expiration Interest rate Notional (received) upon
date to be received amount termination (a)
---------- -------------- -------- -----------------
<S> <C> <C> <C>
September 1998 4.8%-5.4% $ 450 $ 4
April 1999 7.4% 50 (1)
September 1999 6.4% 350 (1)
February 2000 5.8%-6.6% 300 (2)
March 2000 5.8%-6.0% 675 1
September 2000 5.1% 75 2
March 2027 9.7% 300 (15)
December 2036 9.7% 200 (6)
----------- -----------
$ 2,400 $ (18)
=========== ===========
</TABLE>
--------------------
(a) The estimated amount that the Company would pay or receive to
terminate the agreements at December 31, 1997, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
In addition to the Variable Rate Agreements, the Company entered into
an Interest Rate Swap in September 1997 pursuant to which it pays a
variable rate based on the London Interbank Offered Rate ("LIBOR")
(6.1% at December 31, 1997) and receives a variable rate based on the
Constant Maturity Treasury Index (6.4% at December 31, 1997) on a
notional amount of $400 million through September 2000. During the year
ended December 31, 1997, the Company's net receipts pursuant to such
agreement were less than $1 million. At December 31, 1997, the Company
would be required to pay an estimated $3 million to terminate such
Interest Rate Swap.
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties. Further, the Company does not anticipate material
near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of December 31,
1997.
Certain of TCI's subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper. Also, certain of TCI's subsidiaries pay fees ranging
from 1/4% to 1/2% per annum on the average unborrowed portion of the
total amount available for borrowings under bank credit facilities.
(continued)
88
<PAGE> 90
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Annual maturities of debt for each of the next five years are as
follows (amounts in millions):
<TABLE>
<S> <C>
1998 $ 976*
1999 1,001
2000 1,554
2001 1,329
2002 1,292
</TABLE>
* Includes $533 million of commercial paper.
(10) Redeemable Preferred Stocks
The conversion rates identified below for the redeemable preferred
stocks that are convertible into TCI Group Series A Stock were
adjusted, as applicable, on December 4, 1996 as a result of the
Satellite Spin-off. See note 8. The conversion rates for the redeemable
preferred stocks that are convertible into Liberty Group Series A Stock
and TCI Ventures Group Series A Stock have been adjusted to give effect
to the 1998 Liberty Stock Dividend and the Ventures Stock Dividend,
respectively. See note 1.
Convertible Preferred Stock, Series C. TCI issued 70,575 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series C," par value $.01 per share, as partial consideration
for an acquisition by TCI. All of the issued and outstanding shares of
Series C Preferred Stock were retired on December 31, 1997, with the
effect that such retired shares have been restored to the status of
authorized and unissued shares of Series Preferred Stock, and may be
reissued as shares of another series of Series Preferred Stock but may
not be reissued as Series C Preferred Stock.
Series C-TCI Group Preferred Stock. On December 31, 1997, TCI issued
70,575 shares designated as convertible preferred stock, Series C-TCI
Group (the "Series C-TCI Group Preferred Stock") as partial
consideration for retired Series C Preferred Stock. See also Series
C-Liberty Media Group Preferred Stock below. There were 70,575 shares
of Series C-TCI Group Preferred Stock authorized and outstanding at
December 31, 1997.
Upon the liquidation, dissolution or winding up of TCI, holders of the
Series C-TCI Group Preferred Stock will be entitled to receive from the
assets of TCI available for distribution to stockholders an amount in
cash, per share, equal to the liquidation value of the Series C-TCI
Group Preferred Stock. The Series C-TCI Group Preferred Stock ranks
senior to the TCI common stock and the Class B Preferred Stock and on a
parity with all other currently outstanding classes and series of TCI
preferred stock as to rights to receive assets upon liquidation,
dissolution or winding up of the affairs of TCI.
The Series C-TCI Group Preferred Stock is subject to optional
redemption by TCI at any time after August 8, 2001, in whole or in
part, at a redemption price, per share, equal to the liquidation value
of the Series C-TCI Group Preferred Stock of $2,208.35 per share. The
Series C-TCI Group Preferred Stock is required to be redeemed by TCI at
any time on or after August 8, 2001 at the option of the holder, in
whole or in part (provided that the aggregate liquidation value of the
shares to be redeemed is in excess of $1 million), in each case at a
redemption price, per share, equal to the liquidation value.
(continued)
89
<PAGE> 91
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1997, subject to anti-dilution adjustments, each
share of Series C-TCI Group preferred Stock is currently convertible,
at the option of the holder, into 132.86 shares of TCI Group Series A
Stock. Subject to certain provisions, if the holders of Series C-TCI
Group Preferred Stock would be entitled to receive upon conversion
thereof any TCI capital stock that is redeemable or exchangeable at the
election of TCI ("Series C-TCI Group Redeemable Capital Stock"), and
all of the outstanding shares or other units of such Series C-TCI Group
Redeemable Capital Stock are redeemed, exchanged or otherwise acquired
in full, then, from and after such event (a "Series C-TCI Group
Redemption Event"), the holders of Series C-TCI Group Preferred Stock
then outstanding shall be entitled to receive upon conversion of such
shares, in lieu of shares of such Series C-TCI Group Redeemable Capital
Stock, the kind and amount of shares of stock and other securities and
property receivable upon such Series C-TCI Group Redemption Event by a
holder of the number of shares or units of Series C-TCI Group
Redeemable Capital Stock into which such shares of Series C-TCI Group
Preferred Stock could have been converted immediately prior to the
effectiveness of such Series C-TCI Group Redemption Event (assuming
that such holder failed to exercise any applicable right of election
with respect thereto and received per share or unit of such Series
C-TCI Group Redeemable Capital Stock the kind and amount of stock and
other securities and property received per share or unit by the holders
of a plurality of the non-electing shares or units thereof) and,
thereafter, the holders of the Series C-TCI Group Preferred Stock shall
have no other conversion rights with respect to such Series C-TCI Group
Redeemable Capital Stock.
If TCI distributes the stock of a subsidiary of TCI as a dividend to
all holders of TCI Group Series A Stock (a "TCI Group Spin Off"), TCI
shall make appropriate provision so the holders of the Series C-TCI
Preferred Stock have the right to exchange their shares of Series C-TCI
Group Preferred Stock on the effective date of the TCI Group Spin Off
for convertible preferred stock of TCI and convertible preferred stock
of such subsidiary that together have an aggregate liquidation
preference equal to the liquidation preference of a share of Series
C-TCI Group Preferred Stock on the effective date of the TCI Group Spin
Off and that otherwise each have terms, conditions, designations,
voting powers, rights on liquidation and other preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions applicable to such
convertible preferred stock that are identical, or as nearly so as is
practicable in the judgment of the Board, to those of the Series C-TCI
Group Preferred Stock for which such convertible preferred stock is to
be exchanged.
(continued)
90
<PAGE> 92
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In the event an "Exchange Offer" is made by TCI or a subsidiary of TCI
(the applicable of the foregoing being the "Series C-TCI Group
Offeror"), the Series C-TCI Group Offeror shall concurrently therewith
make an equivalent offer to the holders of Series C-TCI Group Preferred
Stock pursuant to which such holders may tender shares of Series C-TCI
Group Preferred Stock, based upon the number of shares of TCI Group
Series A Common Stock into which such tendered shares are then
convertible (and in lieu of tendering outstanding shares of TCI Group
Series A Common Stock), together with such other consideration as may
be required to be tendered pursuant to such Exchange Offer, and receive
in exchange therefor, in lieu of securities of the Series C-TCI Group
Offeror offered in such Exchange Offer ("Exchange Securities") (and
other property, if applicable), convertible preferred stock of the
issuer of the Exchange Securities with an aggregate liquidation
preference equal to the aggregate liquidation preference of the shares
of Series C-TCI Group Preferred Stock exchanged therefor and that
otherwise has terms, conditions, designations, voting powers, rights on
liquidation and other preferences and relative, participating, optional
or other special rights, and qualifications, limitations or
restrictions applicable to such convertible preferred stock that are
identical, or as nearly so as is practicable in the judgment of the
Board, to those of the Series C-TCI Group Preferred Stock for which
such convertible preferred stock is to be exchanged. For the purposes
of the foregoing, "Exchange Offer" means an issuer tender offer,
including, without limitation, one that is effected through the
distribution of rights or warrants, made to holders of TCI Group Series
A Stock (or to holders of other stock of TCI receivable by a holder of
Series C-TCI Group Preferred Stock upon conversion thereof), to issue
stock of TCI or of a subsidiary of TCI and/or other property to a
tendering stockholder in exchange for shares of TCI Group Series A
Stock (or such other stock).
The holders of Series C-TCI Group Preferred Stock are entitled to vote
on an as converted basis on all matters submitted to a vote of holders
of the capital stock of TCI entitled to vote generally on the election
of directors. Holders of Series C-TCI Group Preferred Stock are not
entitled to vote as a separate class except as otherwise may be
required by the Delaware General Corporation Law ("DGCL").
Series C-Liberty Media Group Preferred Stock. On December 31, 1997, TCI
issued 70,575 shares designated as convertible preferred stock, Series
C-Liberty Media Group (the "Series C-Liberty Media Group Preferred
Stock") as remaining consideration for retired Series C Preferred
Stock. There were 70,575 shares of Series C-Liberty Media Group
Preferred Stock authorized and outstanding at December 31, 1997.
Upon the liquidation, dissolution or winding up of TCI, holders of the
Series C-Liberty Media Group Preferred Stock will be entitled to
receive from the assets of TCI available for distribution to
stockholders an amount in cash, per share, equal to the liquidation
value of the Series C-Liberty Media Group Preferred Stock. The Series
C-Liberty Media Group Preferred Stock ranks senior to the TCI common
stock and the Class B Preferred Stock and on a parity with all other
currently outstanding classes and series of TCI preferred stock as to
rights to receive assets upon liquidation, dissolution or winding up of
the affairs of TCI.
(continued)
91
<PAGE> 93
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Series C-Liberty Media Group Preferred Stock is subject to optional
redemption by TCI at any time after August 8, 2001, in whole or in
part, at a redemption price, per share, equal to the liquidation value
of the Series C-Liberty Media Group Preferred Stock of $579.31 per
share. The Series C-Liberty Media Group Preferred Stock is required to
be redeemed by TCI at any time on or after August 8, 2001 at the option
of the holder, in whole or in part (provided that the aggregate
liquidation value of the shares to be redeemed is in excess of $1
million), in each case at a redemption price, per share, equal to the
liquidation value.
As of December 31, 1997, subject to anti-dilution adjustments, each
share of Series C-Liberty Media Group Preferred Stock was convertible,
at the option of the holder, into 37.5 shares of Liberty Group Series A
Stock plus one additional share for every two such shares received upon
conversion. Subject to certain provisions, if (i) TCI redeems all the
outstanding shares of Liberty Group Series A Stock in accordance with
the terms thereof, or (ii) the holders of Series C-Liberty Media Group
Preferred Stock would be entitled to receive upon conversion thereof
any TCI capital stock that is redeemable or exchangeable at the
election of TCI ("Series C-Liberty Media Group Redeemable Capital
Stock"), and all of the outstanding shares or other units of such
Series C-Liberty Media Group Redeemable Capital Stock are redeemed,
exchanged or otherwise acquired in full, then, from and after either
such event (each event referred to in clause (i) and (ii) being a
"Series C-Liberty Media Group Redemption Event"), the holders of Series
C-Liberty Media Group Preferred Stock then outstanding shall be
entitled to receive upon conversion of such shares of Series C-Liberty
Media Group Preferred Stock, in lieu of shares of Liberty Group Series
A Stock or such Series C-Liberty Media Group Redeemable Capital Stock,
as the case may be, the kind and amount of shares of stock and other
securities and property receivable upon such Series C-Liberty Media
Group Redemption Event by a holder of the number of shares of Liberty
Group Series A Stock or shares or units of such Series C-Liberty Media
Group Redeemable Capital Stock, as the case may be, into which such
shares of Series C-Liberty Media Group Preferred Stock could have been
converted immediately prior to the effectiveness of such Series
C-Liberty Media Group Redemption Event (assuming that such holder
failed to exercise any applicable right of election with respect
thereto and received per share of Liberty Group Series A Common Stock
or per share or unit of such Series C-Liberty Media Group Redeemable
Capital Stock, as the case may be, the kind and amount of stock and
other securities and property received per share or unit by the holders
of a plurality of the non-electing shares or units thereof) and,
thereafter, the holders of the Series C-Liberty Media Group Preferred
Stock shall have no other conversion rights with respect to the Liberty
Group Series A Stock or such Series C-Liberty Media Group Redeemable
Capital Stock, as the case may be.
(continued)
92
<PAGE> 94
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
If TCI distributes the stock of a subsidiary of TCI as a dividend to
all holders of Liberty Group Series A Stock (a "Liberty Media Group
Spin Off"), TCI shall make appropriate provision so the holders of the
Series C-Liberty Media Group Preferred Stock have the right to exchange
their shares of Series C-Liberty Media Group Preferred Stock on the
effective date of the Liberty Media Group Spin Off for convertible
preferred stock of TCI and convertible preferred stock of such
subsidiary that together have an aggregate liquidation preference equal
to the liquidation preference of a share of Series C-Liberty Media
Group Preferred Stock on the effective date of the Liberty Media Group
Spin Off and that otherwise each have terms, conditions, designations,
voting powers, rights on liquidation and other preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions applicable to such
convertible preferred stock that are identical, or as nearly so as is
practicable in the judgment of the Board, to those of the Series
C-Liberty Media Group Preferred Stock for which such convertible
preferred stock is to be exchanged.
In the event an "Exchange Offer" is made by TCI or a subsidiary of TCI
(the applicable of the foregoing being the "Series C-Liberty Media
Group Offeror"), the Series C-Liberty Media Group Offeror shall
concurrently therewith make an equivalent offer to the holders of
Series C-Liberty Media Group Preferred Stock pursuant to which such
holders may tender shares of Series C-Liberty Media Group Preferred
Stock, based upon the number of shares of Liberty Group Series A Stock
into which such tendered shares are then convertible (and in lieu of
tendering outstanding shares of Liberty Group Series A Stock), together
with such other consideration as may be required to be tendered
pursuant to such Exchange Offer, and receive in exchange therefor, in
lieu of securities of the Series C-Liberty Media Group Offeror offered
in such Exchange Offer ("Liberty Media Group Exchange Securities") (and
other property, if applicable), convertible preferred stock of the
issuer of such Liberty Media Group Exchange Securities with an
aggregate liquidation preference equal to the aggregate liquidation
preference of the shares of Series C-Liberty Media Group Preferred
Stock exchanged therefor and that otherwise has terms, conditions,
designations, voting powers, rights on liquidation and other
preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions applicable to
such convertible preferred stock that are identical, or as nearly so as
is practicable in the judgment of the Board, to those of the Series
C-Liberty Media Group Preferred Stock for which such convertible
preferred stock is to be exchanged. For purposes of the foregoing,
"Exchange Offer" means an issuer tender offer, including, without
limitation, one that is effected through the distribution of rights or
warrants, made to holders of Liberty Group Series A Stock (or to
holders of other stock of TCI receivable by a holder of Series
C-Liberty Media Group Preferred Stock upon conversion thereof), to
issue stock of TCI or of a subsidiary of TCI and/or other property to a
tendering stockholder in exchange for shares of Liberty Group Series A
Stock (or such other stock).
The holders of Series C-Liberty Media Group Preferred Stock are
entitled to vote on an as converted basis on all matters submitted to a
vote of holders of the capital stock of TCI entitled to vote generally
on the election of directors. Holders of Series C-Liberty Media Group
Preferred Stock are not entitled to vote as a separate class except as
otherwise may be required by the DGCL.
(continued)
93
<PAGE> 95
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Convertible Preferred Stock, Series D. The Company designated and
issued 1,000,000 shares of a series of TCI Series Preferred Stock
designated "Convertible Preferred Stock, Series D", par value $.01 per
share, as partial consideration for the merger between TCIC and
TeleCable (see note 7). At December 31, 1997, there were 994,797 shares
of Series D Preferred Stock outstanding.
The holders of the Series D Preferred Stock shall be entitled to
receive, when and as declared by the Board out of unrestricted funds
legally available therefor, cumulative dividends, in preference to
dividends on any stock that ranks junior to the Series D Preferred
Stock (currently the TCI Group Stock, the Liberty Group Stock, the TCI
Ventures Group Stock and the Class B Preferred Stock), that shall
accrue on each share of Series D Preferred stock at the rate of 5-1/2%
per annum of the liquidation value ($300 per share). Dividends are
cumulative, and in the event that dividends are not paid in full on two
consecutive dividend payment dates or in the event that TCI fails to
effect any required redemption of Series D Preferred Stock, accrue at
the rate of 10% per annum of the liquidation value. The Series D
Preferred Stock ranks on parity with the Series C-TCI Group Preferred
Stock, the Series C-Liberty Media Group Stock, the Series F Preferred
Stock, the Series G Preferred Stock and the Series H Preferred Stock.
Each share of Series D Preferred Stock is convertible, at the option of
the holder, into 10 shares of TCI Group Series A Stock and 2.5 shares
of Liberty Group Series A Stock, subject to adjustment upon certain
events specified in the certificate of designation establishing Series
D Preferred Stock. In addition to the aforementioned shares of TCI
common stock, holders of Series D Preferred Stock are entitled to
receive (i) one share of Liberty Group Series A Stock for every two
such shares received upon conversion, (ii) one additional share of
Liberty Group Series A Stock for every two such shares issued,
including those issued pursuant to (i) above, and (iii) one share of
Satellite Series A Common Stock for each share of Series D Preferred
Stock converted. Such shares of Satellite Series A Common Stock
represent the number of shares of Satellite common stock that they
would have received had they converted their Series D Preferred Stock
into TCI Group Series A Stock prior to the Satellite Spin-off. To the
extent any cash dividends are not paid on any dividend payment date,
the amount of such dividends will be deemed converted into shares of
TCI Group Series A Stock at a conversion rate equal to 95% of the then
current market price of TCI Group Series A Common Stock, and upon
issuance of TCI Group Series A Common Stock to holders of Series D
Preferred Stock in respect of such deemed conversion, such dividend
will be deemed paid for all purposes.
Shares of Series D Preferred Stock are redeemable for cash at the
option of the holder at any time after the tenth anniversary of the
issue date at a price equal to the liquidation value in effect as of
the date of the redemption. Shares of Series D Preferred Stock may also
be redeemed for cash at the option of TCI after the fifth anniversary
of the issue date at such redemption price or after the third
anniversary of the issue date if the market value per share exceeds
certain defined levels for periods specified in the certificate of
designation.
(continued)
94
<PAGE> 96
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
If TCI fails to effect any required redemption of Series D Preferred
Stock, the holders thereof will have the option to convert their shares
of Series D Preferred Stock into TCI Group Series A Common Stock at a
conversion rate of 95% of the then current market value of common
stock, provided that such option may not be exercised unless the
failure to redeem continues for more than a year.
Except as required by the DGCL, holders of Series D Preferred Stock are
not entitled to vote on any matters submitted to a vote of the
stockholders of TCI.
On February 20, 1998, the Company issued a Notice of Redemption which
called for the redemption of all of its outstanding Convertible
Preferred Stock, Series D, on April 1, 1998, for a redemption price of
$304.0233 per share. The shares of Convertible Preferred Stock, Series
D, that are redeemed are to be retired and restored to the status of
authorized and unissued shares of Series Preferred Stock.
Convertible Redeemable Participating Preferred Stock, Series F. The
Company is authorized to issue 500,000 shares of Series F Preferred
Stock, par value $.01 per share. Subsidiaries of TCI hold all the
issued and outstanding shares (278,307 shares). Immediately prior to
the record date for the Liberty Distribution, the Company caused each
of its subsidiaries holding shares of equity securities of TCI
("Subsidiary Shares") to exchange such shares for shares of Series F
Preferred Stock having an aggregate value of not less than that of the
Subsidiary Shares so exchanged. Subsidiaries of TCI exchanged all of
the Subsidiary Shares for 355,141 shares of Series F Preferred Stock.
Subsequent to such exchange, a holder of 78,077 shares of Series F
Preferred Stock converted its holdings into 100,524,364 shares of TCI
Group Series A Stock.
Each holder of Series F Preferred Stock has the right to receive upon
conversion 1,496.65 shares of TCI Group Series A Stock. The
anti-dilution provisions of the Series F Preferred Stock provide that
the conversion rate of the Series F Preferred Stock will be adjusted by
increasing the number of shares of TCI Group Series A Stock issuable
upon conversion in the event of any non-cash dividend or distribution
of the TCI Group Series A Stock to give effect to the value of the
securities, assets or other property so distributed; however, no such
adjustment shall entitle the holder to receive the actual security,
asset or other property so distributed upon the conversion of shares of
Series F Preferred Stock.
The holders of the Series F Preferred Stock are entitled to
participate, on an as-converted basis, with the holders of the TCI
Group Series A Stock, with respect to any cash dividends or
distribution declared and paid on the TCI Group Series A Stock.
Dividends or distribution on the TCI Group Series A Stock which are not
paid in cash would result in the adjustment of the applicable
conversion rate as described above.
Upon the dissolution, liquidation or winding up of the Company, holders
of the Series F Preferred Stock will be entitled to receive from the
assets of the Company available for distribution to stockholders an
amount, in cash or property or a combination thereof, per share of
Series F Preferred Stock, equal to the sum of (x) $.01 and (y) the
amount to be distributed per share of TCI Group Series A Stock in such
liquidation, dissolution or winding up multiplied by the applicable
conversion rate of a share of Series F Preferred Stock.
(continued)
95
<PAGE> 97
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Series F Preferred Stock is subject to optional redemption by the
Company at any time after its issuance, in whole or in part, at a
redemption price, per share, equal to the issue price of a share of
Series F Preferred Stock (as adjusted in respect of stock splits,
reverse splits and other events affecting the shares of Series F
Preferred Stock), plus any dividends which have been declared but are
unpaid as of the date fixed for such redemption. The Company may elect
to pay the redemption price (or designated portion thereof) of the
shares of Series F Preferred Stock called for redemption by issuing to
the holder thereof, in respect of its shares to be redeemed, a number
of shares of TCI Group Series A Stock equal to the aggregate redemption
price (or designated portion thereof) of the shares to be redeemed
divided by the average of the last sales prices of the TCI Group Series
A Stock for a period specified, and subject to the adjustments
described, in the certificate of designations establishing the Series F
Preferred Stock.
Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G
Preferred Stock") and Redeemable Convertible Liberty Media Group
Preferred Stock, Series H ("Series H Preferred Stock"). In January,
1996, TCI designated and issued 7,259,380 shares of a series of TCI
Series Preferred Stock designated "Redeemable Convertible TCI Group
Preferred Stock, Series G" and 7,259,380 shares of a series of TCI
Series Preferred Stock designated "Redeemable Convertible Liberty Media
Group Preferred Stock, Series H" as consideration for an acquisition.
At December 31, 1997, there were 6,567,344 shares of Series G Preferred
Stock and 6,567,894 shares of Series H Preferred Stock outstanding.
The initial liquidation value for the Series G Preferred Stock and
Series H Preferred Stock is $21.60 per share and $5.40 per share,
respectively, subject in both cases, to increase in an amount equal to
aggregate accrued but unpaid dividends, if any. Dividends will begin to
accrue on the Series G and Series H Preferred Stock on the first
anniversary of issuance of the Series G and Series H Preferred Stock,
and will thereafter be payable semi-annually commencing January 25,
1997, at the rate of 4% per annum on the liquidation value. Any
dividends paid on the Series G and Series H Preferred Stock may be
paid, at TCI's election, in cash or shares of TCI Group Series A Stock.
Additional dividends will accrue on unpaid dividends initially at a
rate of 4% per annum. The dividend rate on dividends that remain unpaid
on the next succeeding dividend payment date will increase to 8.625%
per annum.
Each share of Series G Preferred Stock is convertible at the option of
the holder at any time prior to the close of business on the last
business day prior to redemption into 1.19 shares of TCI Group Series A
Stock and each share of Series H Preferred Stock is convertible at any
time prior to the close of business on the last business day prior to
redemption into (i) .2625 shares of Liberty Group Series A Stock, plus
(ii) one additional share of Liberty Group Series A Stock for every two
such shares received upon such conversion, plus (iii) one additional
share of Liberty Group Series A Stock for every two shares of such
stock held after calculating the shares pursuant to (i) and (ii) above.
The conversion rights of Series G and Series H Preferred Stock are
subject to adjustment in certain circumstances.
(continued)
96
<PAGE> 98
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Among other such adjustments, if the Liberty Group Series A Stock, or
any other redeemable capital stock of TCI into which either series of
Preferred Stock may be convertible ("Redeemable Capital Stock"), is
redeemed in full by TCI (the "Redemption Event"), then, except as
otherwise described below, the shares of such Series G and Series H
Preferred Stock will thereafter be convertible into the kind and amount
of consideration that would have been received in such Redemption Event
by a holder of the number of shares of Redeemable Capital Stock that
would have been issuable upon conversion of such shares of Series G and
Series H Preferred Stock, if they had been converted in full
immediately prior to such Redemption Event.
However, if any series of Redeemable Capital Stock into which a series
of Series G or Series H Preferred Stock is then convertible is redeemed
in full by TCI in exchange for securities of another issuer
("Redemption Securities"), TCI may elect to provide the holders of such
Series G or Series H Preferred Stock with the right to exchange such
Series G or Series H Preferred Stock, concurrently with the Redemption
Event, for preferred stock of such other issuer ("Mirror Preferred
Stock"). Such Mirror Preferred Stock shall be convertible into
Redemption Securities and shall otherwise have terms and conditions
comparable to the Series G or Series H Preferred Stock exchanged. If
TCI provides such an exchange right, any holder that does not then
choose to participate in such exchange will continue to hold such
Series G or Series H Preferred Stock but such holder will lose the
conversion right with respect to the Redeemable Capital Stock redeemed
in the Redemption Event and will not have any right to receive
Redemption Securities in lieu thereof. A holder that participates in
such exchange will receive Mirror Preferred Stock convertible into
Redemption Securities, but will no longer hold the Series G or Series H
Preferred Stock so exchanged.
An alternative provision will apply if, at the time of exercise of any
such exchange right provided by TCI, the holder of the applicable
series of Series G or Series H Preferred Stock would be entitled to
receive on conversion any property in addition to the Redeemable
Capital Stock being redeemed. In that case, holders that choose to
participate in the exchange will receive both Mirror Preferred Stock
issued by the issuer of the Redemption Securities of the other issuer
and a new preferred stock of TCI convertible into such additional
property. In such event, the Mirror Preferred Stock and such new TCI
preferred stock will have a combined liquidation value equal to the
liquidation value of the Series G or Series H Preferred Stock exchanged
and will otherwise have terms and conditions comparable to such Series
G or Series H Preferred Stock.
The Series G and Series H Preferred Stock are redeemable at TCI's
option, in whole or in part, any time on or after February 1, 2001. The
Series G and Series H Preferred Stock will be redeemable in full on
February 1, 2016, to the extent then outstanding. In all cases, the
redemption price per share will be the liquidation value thereof,
including the amount of any accrued but unpaid dividends thereon, to
and including the redemption date.
The Series G and Series H Preferred Stock will rank prior to TCI common
stock and the TCI Class B Preferred Stock and on a parity with all
other currently outstanding classes and series of TCI preferred stock
as to rights to receive assets upon liquidation, dissolution or winding
up of the affairs of the Company.
(continued)
97
<PAGE> 99
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Series G and Series H Preferred Stock will vote in any general
election of directors of TCI and will have one vote per share for such
purposes and will vote as a single class with the TCI common stock, the
TCI Class B Preferred Stock and any other class or series of TCI
Preferred Stock entitled to vote in any general election of directors.
The Series G and Series H Preferred Stock will have no other voting
rights except as required by the DGCL.
(11) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
The Company, through certain subsidiary trusts, (the "Trusts"), had
preferred securities outstanding at December 31, 1997 as follows:
<TABLE>
<CAPTION>
Subsidiary Trust Interest Rate Face Amount
---------------- ------------- -----------
in millions
<S> <C> <C>
TCI Communications Financing I 8.72% $ 500
TCI Communications Financing II 10.00% 500
TCI Communications Financing III 9.65% 300
TCI Communications Financing IV 9.72% 200
---------------
$ 1,500
===============
</TABLE>
The Trusts exist for the exclusive purpose of issuing the Trust
Preferred Securities and investing the proceeds thereof into
Subordinated Deferrable Interest Notes (the "Subordinated Debt
Securities") of TCIC. The Subordinated Debt Securities have interest
rates equal to the interest rate of the corresponding Trust Preferred
Securities and have maturity dates ranging from 30 to 49 years from the
date of issuance. The Subordinated Debt Securities are unsecured
obligations of TCIC and are subordinate and junior in right of payment
to certain other indebtedness of the Company. Upon redemption of the
Subordinated Debt Securities, the Trust Preferred Securities will be
mandatorily redeemable. TCIC effectively provides a full and
unconditional guarantee of the Trusts' obligations under the Trust
Preferred Securities.
The Trust Preferred Securities are presented together in a separate
line item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities of TCI
Communications, Inc." Dividends accrued on the Trust Preferred
Securities aggregated $132 million and $71 million for the years ended
December 31, 1997 and 1996, respectively, and are included in minority
interests in earnings of consolidated subsidiaries in the accompanying
consolidated financial statements.
(continued)
98
<PAGE> 100
\
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Stockholders' Equity
Common Stock
The Series A Stock each have one vote per share, and the Series B Stock
each have ten votes per share. Each share of Series B Stock is
convertible, at the option of the holder, into one share of Series A
Stock of the applicable Group. See note 1.
The rights of holders of the TCI Group Stock, Liberty Media Group Stock
and TCI Ventures Group Stock upon liquidation of TCI are based upon the
ratio of the aggregate market capitalization, as defined, of each of
the TCI Group Stock, Liberty Group Stock and TCI Ventures Group Stock
to the aggregate market capitalization, as defined, of the TCI Group
Stock, Liberty Group Stock, and TCI Ventures Group Stock.
Stock Repurchases
During the year ended December 31, 1997, pursuant to a stock repurchase
program approved by the Board, Liberty Media Group repurchased 916,500
shares of Liberty Group Series A Stock in open market transactions and
219,937 shares of Liberty Group Series A Stock from the spouse of an
officer and director of TCI at an aggregate cost of approximately $18
million. Such shares were canceled and returned to an authorized but
unissued status.
In addition, pursuant to the stock repurchase program, 4,000,000 shares
of TCI Group Series A Stock, 330,902 shares of TCI Group Series B Stock
and 338,196 shares of TCI Ventures Group Series B Stock were
repurchased at an aggregate cost of $77 million. Such shares are
reflected as treasury stock in the accompanying consolidated financial
statements.
Effective July 31, 1997, TCI merged Kearns-Tribune into a wholly-owned
TCI subsidiary attributed to TCI Group. TCI exchanged 47.2 million
shares of TCI Group Series A Stock for shares of Kearns-Tribune which
held 17.9 million shares of TCI Group Stock and 10.1 million shares of
Liberty Group Stock. Such shares are reflected as common stock held by
subsidiaries in the accompanying consolidated financial statements.
During the third quarter of 1997, Liberty Media Group commenced a
tender offer (the "Liberty Tender Offer") to purchase up to an
aggregate of 22.5 million shares of Liberty Group Stock at a price of
$20 per share through October 3, 1997. During the fourth quarter of
1997, Liberty Media Group repurchased 21.7 million shares of Liberty
Group Series A Stock and 82,074 shares of Liberty Group Series B Stock
at an aggregate cost of approximately $435 million pursuant to the
Liberty Tender Offer. Such purchases are reflected as treasury stock in
the accompanying consolidated financial statements.
(continued)
99
<PAGE> 101
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Employee Benefit Plans
The Company has several employee stock purchase plans to provide
employees an opportunity to create a retirement fund including
ownership interests in TCI. The primary employee stock purchase plan
provides for employees to contribute up to 10% of their compensation to
a trust for investment in several diversified investment choices,
including investment in Company common stock. The Company, by annual
resolution of the Board, generally contributes up to 100% of the amount
contributed by employees. Such TCI contribution is invested in TCI
Group Stock, Liberty Group Stock and TCI Ventures Group Stock. Certain
of the Company's subsidiaries have their own employee benefit plans.
Contributions to all plans aggregated $38 million, $35 million and $28
million for 1997, 1996 and 1995, respectively.
Preferred Stock
Class A Preferred Stock. The Company is authorized to issue 700,000
shares of Class A Preferred Stock, par value $.01 per share.
Subsidiaries of TCI previously held all of the issued shares of such
stock, amounting to 592,797 shares. The holders of the Class A
Preferred Stock exchanged such Subsidiary Shares for shares of Series F
Preferred Stock immediately prior to the record date of the Liberty
Distribution. See note 1.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock.
The Company is authorized to issue 1,675,096 shares of Class B
Preferred Stock and 1,552,490 of such shares are issued and
outstanding, net of shares held by a TCI subsidiary.
Dividends accrue cumulatively (but without compounding) at an annual
rate of 6% of the stated liquidation value of $100 per share (the
"Stated Liquidation Value"), whether or not such dividends are declared
or funds are legally available for payment of dividends. Accrued
dividends will be payable annually on March 1 of each year (or the next
succeeding business day if March 1 does not fall on a business day),
and, in the sole discretion of the Board, may be declared and paid in
cash, in shares of TCI Group Series A Stock or in any combination of
the foregoing. Accrued dividends not paid as provided above on any
dividend payment date will accumulate and such accumulated unpaid
dividends may be declared and paid in cash, shares of TCI Group Series
A Stock or any combination thereof at any time (subject to the rights
of any senior stock and, if applicable, to the concurrent satisfaction
of any dividend arrearages on any class or series of TCI preferred
stock ranking on a parity with the Class B Preferred Stock with respect
to dividend rights) with reference to any regular dividend payment
date, to holders of record of Class B Preferred Stock as of a special
record date fixed by the Board (which date may not be more than 45 days
nor less than 10 days prior to the date fixed for the payment of such
accumulated unpaid dividends). The Class B Preferred Stock ranks junior
to the Series F Preferred Stock with respect to the declaration and
payment of dividends.
(continued)
100
<PAGE> 102
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
If all or any portion of a dividend payment is to be paid through the
issuance and delivery of shares of TCI Group Series A Stock, the number
of such shares to be issued and delivered will be determined by
dividing the amount of the dividend to be paid in shares of TCI Group
Series A Stock by the Average Market Price of the TCI Group Series A
Stock. For this purpose, "Average Market Price" means the average of
the daily last reported sale prices (or, if no sale price is reported
on any day, the average of the high and low bid prices on such day) of
a share of TCI Group Series A Stock for the period of 20 consecutive
trading days ending on the tenth trading day prior to the regular
record date or special record date, as the case may be, for the
applicable dividend payment.
In the event of any liquidation, dissolution or winding up of TCI, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of stock ranking prior to
the Class B Preferred Stock with respect to liquidating distributions,
to receive from the assets of TCI available for distribution to
stockholders an amount in cash or property or a combination thereof,
per share, equal to the Stated Liquidation Value thereof, plus all
accumulated and accrued but unpaid dividends thereon to and including
the redemption date. TCI does not have any mandatory obligation to
redeem the Class B Preferred Stock as of any fixed date, at the option
of the holders or otherwise.
Subject to the prior preferences and other rights of any class or
series of TCI preferred stock, the Class B Preferred Stock will be
exchangeable at the option of TCI in whole but not in part at any time
for junior subordinated debt securities of TCI ("Junior Exchange
Notes"). The Junior Exchange Notes will be issued pursuant to an
indenture (the "Indenture"), to be executed by TCI and a qualified
trustee to be chosen by TCI.
If TCI exercises its optional exchange right, each holder of
outstanding shares of Class B Preferred Stock will be entitled to
receive in exchange therefor newly issued Junior Exchange Notes of a
series authorized and established for the purpose of such exchange, the
aggregate principal amount of which will be equal to the aggregate
Stated Liquidation Value of the shares of Class B Preferred Stock so
exchanged by such holder, plus all accumulated and accrued but unpaid
dividends thereon to and including the exchange date. The Junior
Exchange Notes will be issuable only in principal amounts of $100 or
any integral multiple thereof and a cash adjustment will be paid to the
holder for any excess principal that would otherwise be issuable. The
Junior Exchange Notes will mature on the fifteenth anniversary of the
date of issuance and will be subject to earlier redemption at the
option of TCI, in whole or in part, for a redemption price equal to the
principal amount thereof plus accrued but unpaid interest. Interest
will accrue, and be payable annually, on the principal amount of the
Junior Exchange Notes at a rate per annum to be determined prior to
issuance by adding a spread of 215 basis points to the "Fifteen Year
Treasury Rate" (as defined in the Indenture). Interest will accrue on
overdue principal at the same rate, but will not accrue on overdue
interest.
The Junior Exchange Notes will represent unsecured general obligations
of TCI and will be subordinated in right of payment to all Senior Debt
(as defined in the Indenture). Accordingly, holders of Class B
Preferred Stock who receive Junior Exchange Notes in exchange therefor
may have difficulty selling such Notes.
(continued)
101
<PAGE> 103
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For so long as any dividends are in arrears on the Class B Preferred
Stock or any class or series of TCI preferred stock ranking pari passu
with the Class B Preferred Stock which is entitled to payment of
cumulative dividends prior to the redemption, exchange, purchase or
other acquisition of the Class B Preferred Stock, and until all
dividends accrued up to the immediately preceding dividend payment date
on the Class B Preferred Stock and such parity stock shall have been
paid or declared and set apart so as to be available for payment in
full thereof and for no other purpose, neither TCI nor any subsidiary
thereof may redeem, exchange, purchase or otherwise acquire any shares
of Class B Preferred Stock, any such parity stock or any class or
series of its capital stock ranking junior to the Class B Preferred
Stock (including the TCI common stock), or set aside any money or
assets for such purpose, unless all of the outstanding shares of Class
B Preferred Stock and such parity stock are redeemed. If TCI fails to
redeem or exchange shares of Class B Preferred Stock on a date fixed
for redemption or exchange, and until such shares are redeemed or
exchanged in full, TCI may not redeem or exchange any parity stock or
junior stock, declare or pay any dividend on or make any distribution
with respect to any junior stock or set aside money or assets for such
purpose and neither TCI nor any subsidiary thereof may purchase or
otherwise acquire any Class B Preferred Stock, parity stock or junior
stock or set aside money or assets for any such purpose. The failure of
TCI to pay any dividends on any class or series of parity stock or to
redeem or exchange on any date fixed for redemption or exchange any
shares of Class B Preferred Stock shall not prevent TCI from (i) paying
any dividends on junior stock solely in shares of junior stock or the
redemption purchase or other acquisition of junior stock solely in
exchange for (together with cash adjustment for fractional shares, if
any) or (but only in the case of a failure to pay dividends on any
parity stock) through the application of the proceeds from the sale of,
shares of junior stock; or (ii) the payment of dividends on any parity
stock solely in shares of parity stock and/or junior stock or the
redemption, exchange, purchase or other acquisition of Class B
Preferred Stock or parity stock solely in exchange for (together with a
cash adjustment for fractional shares, if any), or (but only in the
case of failure to pay dividends on any parity stock) through the
application of the proceeds from the sale of, parity stock and/or
junior stock.
The Class B Preferred Stock will vote in any general election of
directors, will have one vote per share for such purpose and will vote
as a single class with the TCI common stock and any class or series of
TCI preferred stock entitled to vote in any general election of
directors. The Class B Preferred Stock will have no other voting rights
except as required by the DGCL.
Series Preferred Stock. The TCI Series Preferred Stock is issuable,
from time to time, in one or more series, with such designations,
preferences and relative participating, option or other special rights,
qualifications, limitations or restrictions thereof, as shall be stated
and expressed in a resolution or resolutions providing for the issue of
such series adopted by the Board. The Company is authorized to issue
50,000,000 shares of Series Preferred Stock.
All shares of any one series of the TCI Series Preferred Stock are
required to be alike for every particular and all shares are required
to rank equally and be identical in all respects, except insofar as
they may vary with respect to matters which the Board is expressly
authorized by the TCI Charter to determine in the resolution or
resolutions proving for the issue of any series of the TCI Series
Preferred Stock.
(continued)
102
<PAGE> 104
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Redeemable Convertible Preferred Stock, Series E. The Company is
authorized to issue 400,000 shares of Redeemable Convertible Preferred
Stock, Series E, par value $.01 per share. Subsidiaries of TCI
previously held all of the issued and outstanding shares of such stock,
amounting to 246,402 shares. The holders of the Series E Preferred
Stock exchanged such Subsidiary Shares for shares of Series F Preferred
Stock immediately prior to the record date of the Liberty Distribution.
See note 1.
Stock-Based Compensation
As of December 31, 1997, the Company and its subsidiaries had several
stock-based compensation plans for certain employees, officers,
directors and other persons. Such plans are described below.
Tele-Communications, Inc. Stock Incentive Plans. In 1994, the Company
adopted the Tele-Communications, Inc. 1994 Stock Incentive Plan (the
"1994 Plan"). The Plan provided for awards to be made in respect of a
maximum of 16 million shares of TCI Class A common stock. Awards may be
made as grants of stock options, stock appreciation rights, restricted
shares, stock units or any combination thereof.
In 1995, the Company adopted the Tele-Communications, Inc. 1995
Employee Stock Incentive Plan (the "1995 Plan"). In addition, the
Company has established the Tele-Communications, Inc. 1996 Stock
Incentive Plan (the "1996 Plan" and together with the 1994 Plan and the
1995 Plan, the "Incentive Plans") which was approved by stockholders at
the TCI 1996 annual meeting. The 1996 Plan provides (i) for stock-based
awards to be made in respect of a maximum of 16 million shares of
Series A TCI Group Stock and a maximum of 6 million shares of Series A
Liberty Group Stock (subject to certain adjustments described below)
and (ii) for cash awards in amounts determined by the TCI compensation
committee.
Awards may be made as grants of stock options ("Options"), stock
appreciation rights ("SARs"), restricted shares ("Restricted Shares"),
stock units ("Stock Units"), performance awards ("Performance Awards"),
or any combination thereof (collectively, "Awards"). Shares in respect
of which Awards are made may be either authorized but unissued shares
of Series A Stock or issued shares reacquired by the Company, including
shares purchased in the open market. Shares of Series A Stock that are
subject to Awards that expire, terminate or are annulled for any reason
without having been exercised (or, with respect to tandem SARs deemed
exercised, by virtue of the exercise of a related Option), or are
Restricted Shares or Stock Units that are forfeited prior to becoming
vested, or are subject to Awards of SAR's that are exercised for cash,
will return to the pool of such shares available for grant under the
1996 Plan.
(continued)
103
<PAGE> 105
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Liberty Distribution, each holder of an
outstanding option or SAR received an additional option or stock
appreciation right, as applicable, covering a number of shares of
Liberty Group Series A Stock equal to 56% (as adjusted) of the number
of shares of Class A common stock theretofore subject to the
outstanding option or stock appreciation right, and the outstanding
option or stock appreciation right would continue in effect as an
option or stock appreciation right covering the same number of shares
of TCI Group Series A Stock (as redesignated) that were theretofore
subject to the option or stock appreciation right. The aggregate
pre-adjustment strike price of the outstanding options or stock
appreciation rights was allocated between the outstanding options or
stock appreciation rights and the newly issued options or stock
appreciation rights in a ratio determined by the Compensation Committee
of TCI. The following descriptions of stock options and/or stock
appreciation rights have been adjusted to reflect such change.
As a result of the TCI Ventures Exchange, the Compensation Committee of
TCI elected to adjust the options in tandem with SARs to purchase TCI
Group Series A Stock to reflect the expected shift of attributable
value from TCI Group to the newly created TCI Ventures Group. The
options in tandem with SARs to purchase TCI Group Series A Stock
outstanding immediately prior to the TCI Ventures Exchange were
canceled and reissued as two separately exercisable options in tandem
with SARS: (i) with 70% of the options in tandem with SARs allocated to
an option in tandem with SARs to purchase TCI Group Series A Stock, and
(ii) with 30% of the options in tandem with SARs allocated to an option
in tandem with SARs to purchase TCI Ventures Group Series A Stock. The
terms of these adjusted options in tandem with SARs, including the
exercise price and the date of grant, are in all material respects the
same as the terms of the original options in tandem with SARs. The
following descriptions of stock options and/or stock appreciation
rights have been adjusted to reflect such change.
Awards granted subsequent to the Liberty Distribution may include
Awards relating to TCI Group Series A Stock or Liberty Group Series A
Stock and Awards granted subsequent to the TCI Ventures Exchange may
include Awards relating to TCI Group Series A Stock, Liberty Group
Series A Stock or TCI Ventures Group Series A Stock in such amounts and
types as the Compensation Committee of TCI determines in accordance
with the terms of the Incentive Plans.
Awards of TCI Group Series A Stock made under the Incentive Plans prior
to the Satellite Spin-off were adjusted in connection with the
Satellite Spin-off such that immediately prior to the Satellite
Spin-off, each option was divided into two separately exercisable
options: (i) an option to purchase Satellite Series A Stock (an "Add-on
Satellite Option"), exercisable for the number of shares of Satellite
Series A common stock that would have been issued in the Satellite
Spin-off in respect of the shares of TCI Group Series A Stock subject
to the applicable TCI option, if such TCI option had been exercised in
full immediately prior to the record date of the Satellite Spin-off,
and containing substantially equivalent terms as the existing TCI
option, and (ii) an option to purchase TCI Group Series A Stock (an
"Adjusted TCI Option"), exercisable for the same number of shares of
TCI Group Series A Stock as the corresponding TCI option had been. The
aggregate exercise price of each TCI option was allocated between the
Add-on Satellite Option and the Adjusted TCI Option into which it is
divided, and all other terms of the Add-on Satellite Option and
Adjusted TCI Option will in all material respects be the same as such
TCI option. Similar adjustments were made to the outstanding TCI SARs,
resulting in the holders thereof holding Adjusted TCI SARs and Add-on
Satellite SARs instead of TCI SARs, effective immediately prior to the
Satellite Spin-off.
(continued)
104
<PAGE> 106
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a result of the foregoing, certain persons who remain TCI employees
or non-employee directors after the Satellite Spin-off and certain
persons who were TCI employees prior to the Satellite Spin-off but
became Satellite employees after the Satellite Spin-off hold both
Adjusted TCI Options and separate Add-on Satellite Options and/or hold
both Adjusted TCI SARs and separate Add-on Satellite SARs. The
obligations with respect to the Adjusted TCI Options, Add-on Satellite
Options, Adjusted TCI SARs and Add-on Satellite SARs held by TCI
employees and non-employee directors following the Satellite Spin-off
are obligations solely of TCI. The obligations with respect to the
Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and
Add-on Satellite SARs held by persons who are Satellite employees at
the time of the Satellite Spin-off and following the Satellite Spin-off
are no longer TCI employees are obligations solely of Satellite. Prior
to the Satellite Spin-off, TCI and Satellite entered into an agreement
to sell to each other from time to time at the then current market
price shares of TCI Group Series A Stock and Satellite Series A common
stock, respectively, as necessary to satisfy their respective
obligations under such securities.
The following table presents the number and weighted average exercise
price ("WAEP") of certain options in tandem with SARs to purchase Class
A common stock, TCI Group Series A Stock, Liberty Group Series A Stock
and TCI Ventures Group Series A Stock pursuant to the Incentive Plans.
The number of options to purchase Liberty Group Series A Stock and TCI
Ventures Group Series A Stock, and the WAEP thereof, has been adjusted
to give effect to the 1998 Liberty Stock Dividend and the TCI Ventures
Dividend, respectively.
(continued)
105
<PAGE> 107
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
TCI
Liberty Ventures
Class A TCI Group Group Group
common Series A Series A Series A
stock WAEP Stock WAEP Stock WAEP Stock WAEP
--------- -------- ----------- ------- --------- ------- ------- ------
amounts in thousands, except for WAEP
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1995 11,321 $ 18.13 -- -- --
Converted from
Class A options (11,219) 18.15 11,219 $ 13.58 -- --
Adjustment for
Liberty
Distribution -- -- 6,311 $ 8.07 --
Granted -- 7,508 16.99 5,819 10.63 --
Exercised (92) 16.07 (934) 12.45 (511) 7.41 --
Canceled (10) 17.25 (91) 13.07 (51) 7.77 --
------- ------- ------- -------
Outstanding at
December 31, 1995 -- 17,702 15.08 11,568 9.39 --
Exercised -- (196) 12.70 (132) 7.93 --
Canceled -- (132) 15.35 (42) 8.45 --
------- ------- ------- -------
Outstanding at
December 31, 1996 -- 17,374 12.97 11,394 9.41 --
Adjustment for TCI
Ventures Exchange -- (7,874) 14.21 -- 15,748 $ 7.11
Granted -- 12,314 15.26 3,514 15.91 --
Exercised -- (5,621) 11.95 (2,502) 8.41 (1,035) 6.77
Canceled -- (72) 14.31 (47) 10.21 (2) 7.10
------- ------- ------- -------
Outstanding at
December 31, 1997 -- 16,121 14.47 12,359 11.45 14,711 7.13
======= ======= ======= =======
Exercisable at
December 31, 1997 -- 4,363 12.82 5,156 9.09 4,723 6.31
======= ======= ======= =======
Vesting Period -- 5 yrs 5 yrs 5 yrs
======= ======= ======= =======
</TABLE>
(Continued)
106
<PAGE> 108
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 13, 1995, pursuant to the 1994 Plan, the Company awarded
330,000 restricted shares of TCI Group Series A Stock and 67,500
restricted shares of Liberty Group Series A Stock to certain officers
and other key employees of the Company. Based on the terms at the date
of grant, such restricted shares vest as to 50% in December 1999 and as
to the remaining 50% in December 2000. Such restricted shares had a
fair value of $20.625 and $11.67, respectively, on the date of grant.
On July 23, 1997, pursuant to the 1996 Plan, the Company awarded
400,000 restricted shares of TCI Group Series A Stock to an officer and
a director of the Company. Such restricted shares vest as to 50% in
July 2001 and as to the remaining 50% in July 2002. Such restricted
shares had a fair value of $15.81 on the date of grant.
On December 16, 1997, the Company granted, subject to shareholder
approval, options in tandem with stock appreciation rights to acquire
2,800,000 shares of TCI Ventures Group Series B Stock to an officer and
director of the Company. The options in tandem with stock appreciation
rights have an exercise price of $10.37 and vest ratably over five
years with such vesting period beginning December 16, 1997, first
become exercisable on December 16, 1998 and expire on December 16,
2007.
SARs with respect to 508,350 shares of TCI Group Series A Stock,
569,553 shares of Liberty Group Series A Stock and 814,726 shares of
TCI Ventures Group Series A Stock were outstanding at December 31,
1997. These rights have an adjusted strike price of $.52, $.36 and $.26
per share, respectively. All such SARs are 100% vested at December 31,
1997 and expire on March 28, 2001. The Company has the option of paying
the holder in stock or cash. During the year ended December 31, 1997,
SARs with respect to 442,162 shares of TCI Group Series A Stock,
231,163 shares of Liberty Group Series A Stock and 237,200 shares of
TCI Ventures Group Series A Stock were exercised.
Tele-Communications, Inc. Director Stock Option Plan. On August 3,
1995, stockholders of the Company approved the Director Stock Option
Plan (the "DSOP") including the grant, effective as of November 16,
1994, to each person that as of that date was a member of the Board and
was not an employee of the Company or any of its subsidiaries, of
options to purchase 50,000 shares of TCI Class A common stock. Pursuant
to the DSOP, options to purchase 300,000 shares of TCI Class A common
stock were granted at an exercise price of $22.00 per share. Such
options had a weighted average fair value of $16.49 on the date of
grant. Options issued pursuant to the DSOP vest and become exercisable
over a five-year period from the date of grant and expire 10 years from
the date of grant. During the year ended December 31, 1995, options to
purchase 50,000 shares of TCI Group Series A Stock and options to
purchase 28,125 shares of Liberty Group Series A Stock were canceled.
During the year ended December 31, 1996, options to purchase 150,000
shares of TCI Group Series A Stock and options to purchase 84,375
shares of Liberty Group Series A Stock with a WAEP of $14.75 and
$11.52, respectively, were issued pursuant to the DSOP. Such options
had a weighted average fair value of $9.83 and $7.67, respectively, on
the date of grant.
(continued)
107
<PAGE> 109
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1997, 370,000 options with respect to TCI Group Stock
granted pursuant to the DSOP were outstanding, 162,000 of which were
exercisable. Such options had a range of exercise prices of $12.25 to
$16.99, with a WAEP of $14.04, and a weighted average remaining
contractual life of 7.68 years.
At December 31, 1997, 225,000 options with respect to Liberty Group
Stock granted pursuant to the DSOP were outstanding, 101,250 of which
were exercisable. Such options had a range of exercise prices of $9.78
to $11.67, with a WAEP of $10.43, and a weighted average remaining
contractual life of 7.63 years.
Tele-Communications International, Inc. Stock Incentive Plan. In 1995,
TINTA adopted the Tele-Communications International, Inc. 1995 Stock
Incentive Plan (the "TINTA 1995 Plan"). The TINTA 1995 Plan provides
for Awards to be made in respect of a maximum of 3,000,000 shares of
TINTA Series A common stock ("TINTA Series A Stock") (subject to
certain anti-dilution adjustments). Shares of TINTA Series A Stock that
are subject to Awards that expire, terminate or are annulled for any
reason without having been exercised (or deemed exercised, by virtue of
the exercise of a related stock appreciation right), or are forfeited
prior to becoming vested will return to the pool of such shares
available for grant under the TINTA 1995 Plan.
On December 13, 1995, stock options in tandem with SARs to purchase
1,302,000 shares of TINTA Series A Stock were granted pursuant to the
TINTA 1995 Plan. Of such grant, 1,252,000 options in tandem with SARs
were granted to employees of TINTA. Additionally, on December 13, 1995
TCI granted to one of its officers 50,000 options in tandem with SARs
to acquire TINTA Series A Stock owned by it. Such options vest evenly
over five years, first became exercisable August 4, 1996 and expire on
August 4, 2005. During 1997, TINTA granted stock options in tandem with
SARs to purchase 1,130,000 shares of TINTA Series A Stock. Such options
vest evenly over five years, first become exercisable one year after
date of grant, and expire ten years after date of grant.
The following table presents the number and WAEP of certain options in
tandem with SARs to purchase TINTA Series A Stock pursuant to the TINTA
1995 Plan (amounts in thousands, except for WAEP).
<TABLE>
<CAPTION>
TINTA
Series A Stock WAEP
-------------- --------------
<S> <C> <C>
Outstanding at January 1, 1995 --
Granted 1,302 $ 16.00
------------
Outstanding at December 31, 1995 and 1996 1,302 16.00
Granted 1,130 14.69
------------
Outstanding at December 31, 1997 2,432 15.39
============
Exercisable at December 31, 1997 521 16.00
============
Vesting Period 5 yrs
============
</TABLE>
(continued)
108
<PAGE> 110
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 13, 1995, pursuant to the TINTA 1995 Plan, 40,000
restricted shares of TINTA Series A Stock were awarded to certain
officers and directors of TINTA. Such restricted shares vest as to 50%
in December 1999 and as to the remaining 50% in December 2000. Such
restricted shares had a fair value of $25.375 on the date of grant.
On July 23, 1997, pursuant to the TINTA 1995 Plan, 150,000 restricted
shares of TINTA Series A Stock were awarded to a director of TINTA.
Such restricted shares vest as to 50% in July 2001 and as to the
remaining 50% in July 2002. Such restricted shares had a fair value of
$14.625 on the date of grant.
Tele-Communications International, Inc. Nonemployee Director Stock
Option Plan. On April 11, 1996, TINTA adopted the Tele-Communications
International, Inc. 1996 Nonemployee Director Stock Option Plan (the
"TINTA Director Plan"). The TINTA Director Plan provides for grants to
be made to nonemployee directors of TINTA of options to purchase a
maximum of 1,000,000 shares of TINTA Series A Stock (subject to certain
anti-dilution adjustments). Shares that are subject to such options
that expire or terminate for any reason without having been exercised
will return to the pool of shares underlying options available to grant
under the TINTA Director Plan. Pursuant to the TINTA Director Plan,
options to purchase 200,000 shares of TINTA Series A Stock were granted
in April 1996 at an exercise price of $16.00 per share. Such options
had a weighted average fair value of $14.01 on the date of grant.
Options issued pursuant to the TINTA Director Plan vest and become
exercisable over a five-year period from the date of grant and expire
10 years from the date of grant.
At December 31, 1997, 200,000 options with respect to TINTA Series A
Stock granted pursuant to the TINTA Director Plan were outstanding,
40,000 of which were exercisable. Such options had a weighted average
remaining contractual life of 9 years.
(continued)
109
<PAGE> 111
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Founders Options. Effective December 1, 1996, certain officers and key
employees of the Company were each granted options (the "Telephony
Option") representing 1.0% of the Company's common equity in TCI
Telephony Services, Inc., a consolidated subsidiary of the Company,
("Telephony Services"). The aggregate exercise price for each such
option was equal to 1.0% of (i) the Company's cumulative investment in
Telephony Services as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the date
of such exercise, less (ii) the sum of (x) $500 million and (y) the
amount of the tax benefits generated by Telephony Services (up to $500
million) as and when used by TCI. Such options had a fair value of
$1,347,700 per option on the date of grant. Each such option was
replaced during 1997 with a separate SAR with respect to each of
Telephony Services' two direct wholly-owned subsidiaries, TCI Teleport
Holdings, Inc. ("TCI Teleport") and TCI Wireless Holdings, Inc. ("TCI
Wireless"). Each of the SAR with respect to TCI Teleport (the "CLEC
SAR") and the SAR with respect to TCI Wireless (the "Wireless SAR")
entitles the holder to the excess of the value of the shares subject to
the SAR (based on the percentage that such shares represent of the
total value of the common equity of TCI Teleport or TCI Wireless, as
applicable, as of the exercise date) over the "strike price" (i.e., 1%
of TCI's cumulative investment in TCI Teleport or TCI Wireless, as
applicable, and their respective subsidiaries at December 1, 1996, plus
a 6% per annum interest factor from the date when each such investment
was made to the date of exercise). The material terms of the CLEC SAR
and the Wireless SAR are the same as those of the Telephony Option,
except that the strike price for each such SAR is an allocated portion
of the exercise price under the Telephony Option based on TCI's
cumulative investment in TCI Teleport and TCI Wireless. All such SARs
will vest and become exercisable in five equal annual installments,
with the first annual installment vesting on February 1, 1997, and will
expire on February 1, 2006. Any exercise by one of such executive
officers of all or part of the CLEC SAR would need to be accompanied by
the exercise by such executive officer of a pro rata portion of
Wireline Option described below.
Each such officer and key employee was also granted a similar option
(the "Wireline Option") representing 1.0% of the Company's common
equity in TCI Wireline, Inc., another consolidated subsidiary of the
Company, ("Wireline"). The aggregate exercise price for each such
Wireline Option is equal to 1.0% of the Company's cumulative investment
in Wireline as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the date
of such exercise. All of such options vest 20% per annum beginning
February 1, 1997 and expire on February 1, 2006. Such options had a
fair value of $4,400 per option on the date of grant. Such options must
be exercised on a pro rata basis with the CLEC SARs discussed above.
(continued)
110
<PAGE> 112
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective December 1, 1996, certain officers and key employees of the
Company were each granted options (the "Internet Option") representing
1% of the Company's common equity in TCI Internet Services, Inc. ("TCI
Internet"), a consolidated subsidiary of the Company. The aggregate
exercise price for each Internet Option was equal to 1.0% of the
Company's cumulative investment in TCI Internet as of December 1, 1996,
adjusted for a 6% per annum interest factor from the date each such
investment was made to the date of such exercise price. Such options
vest 20% per annum beginning February 1, 1997 and expire on February 1,
2006. Such options had a fair value of $346,800 on the date of grant.
In anticipation of the transfer to TCI.NET, Inc. ("TCI.NET") of the
Internet services distribution business conducted through subsidiaries
of TCI Internet, each such option was replaced during 1997 with an
option to acquire a number of shares equal to 1.0% of TCI's common
equity in TCI.NET at December 1, 1996 and a SAR with respect to a
number of shares equal to 1.0% of TCI's common equity in TCI Internet
at December 1, 1996. The material terms of the option to acquire shares
of TCI.NET are the same as those of the Internet Option, except that
the exercise price, which will be payable to TCI. NET, is an allocated
portion of the exercise price under the Internet Option based on TCI's
cumulative investment in the Internet services distribution business
relative to the balance of its cumulative investment in TCI Internet at
December 1, 1996. The SAR entitles the holder to the excess of the
value of the shares subject to the SAR (based on the percentage that
such shares represent of the total value of the common equity of TCI
Internet as of the exercise date) over 1% of TCI's cumulative
investment in TCI Internet at December 1, 1996, plus a 6% per annum
interest factor from the date when each such investment was made to the
date of exercise. Any exercise by the holder of all or part of the
TCI.NET option must be accompanied by the exercise by such holder of a
pro rata portion of the TCI Internet SAR, and vice versa.
At December 31, 1997, 14 CLEC SARs and 20 Wireless SARs were
outstanding, none and 4, respectively, of which were exercisable. Such
SARs had exercise prices of $452,243 and $985,446, respectively, and an
average remaining contractual life of 9 years.
At December 31, 1997, 14 Wireline Options were outstanding, none of
which were exercisable. Such options had an exercise price of $13,314
and an average remaining contractual life of 9 years.
At December 31, 1997, 22 TCI Internet SARs and 22 TCI.NET options were
outstanding, none of which were exercisable. Such SARs and options had
exercise prices of $35,048 and $22,025, respectively, and an average
remaining contractual life of 9 years.
United Video Satellite Group, Inc. Equity Incentive Plan and United
Video Satellite Group, Inc. Stock Option Plan for Non-Employee
Directors. United Video Satellite Group, Inc., a subsidiary of the
Company, ("UVSG") sponsors the United Video Satellite Group, Inc.
Equity Incentive Plan under which 4.0 million shares of UVSG's Class A
Common Stock are authorized to be issued in connection with the
exercise of awards of stock options, stock appreciation rights and
restricted stock granted under the plan. UVSG's Equity Incentive Plan
provides that the price at which each share of stock covered by an
option may be acquired shall in no event be less than 100% of the fair
market value of the stock on the date the option is granted, except in
certain limited circumstances. Additionally, UVSG sponsors the United
Video Satellite Group, Inc. Stock Option Plan for Non-Employee
Directors under which 165,000 shares of UVSG's Class A Common Stock are
authorized to be issued in connection with the exercise of stock
options granted thereunder.
(continued)
111
<PAGE> 113
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1997, 3.2 million shares of UVSG's Class A Common Stock
were reserved for issuance under the stock option plans. The options
granted under the stock option plans expire ten years from the date of
grant. Options outstanding are as follows (amounts in thousands, except
for WAEP):
<TABLE>
<CAPTION>
UVSG
Class A Common
Stock WAEP
--------------- ----------
<S> <C> <C>
At January 1, 1995 2,739 $ 6.78
Exercised (674) 1.46
Canceled (5) 12.62
----------
At December 31, 1995 2,060 8.51
Granted 638 22.22
Exercised (407) 8.08
Canceled (402) 18.42
----------
At December 31, 1996 1,889 11.12
Granted 458 17.09
Exercised (1,045) 8.09
Canceled (126) 11.76
----------
At December 31, 1997 1,176 16.07
==========
Exercisable at December 31, 1997 354
==========
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged
from $8 to $27. The weighted-average remaining contractual life of such
options is 8.1 years.
At Home Corporation Stock Option Plans. At Home Corporation, a
subsidiary of the Company, ("@ Home") adopted certain stock option
plans (the "@ Home Plans") during 1996 and 1997. The @ Home Plans
provide for the grant of incentive stock options, nonqualified stock
options, restricted stock awards and stock bonuses to employees,
directors and consultants of @ Home. Options under the @ Home Plans
generally vest at the rate of 25% after one year and ratably on a
monthly basis for three years thereafter.
Options outstanding are as follows ( amounts in thousands, except for
WAEP):
<TABLE>
<CAPTION>
@ Home
Series A Common
Stock WAEP
--------------- ----------
<S> <C> <C>
At January 1, 1996 -- $ --
Granted 5,296 .06
Exercised (4,875) .06
Canceled (198) .05
----------
At December 31, 1996 223 .06
Granted 5,158 6.30
Exercised (2,170) .25
Canceled (153) 3.78
----------
At December 31, 1997 3,058 10.26
==========
Exercisable at December 31, 1997 1,642
==========
</TABLE>
(continued)
112
<PAGE> 114
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Exercise prices for options outstanding as of December 31, 1997 ranged
from $.05 to $24.50. The weighted-average remaining contractual life of
such options is 9.29 to 9.90 years. The weighted-average fair value of
options granted during 1997 and 1996 was $3.29 and $.01, respectively
The estimated fair values of the Options noted above are based on the
Black-Scholes model and are stated in current annualized dollars on a
present value basis. The key assumptions used in the model for purposes
of these calculations generally include the following: (a) a discount
rate equal to the 10-year Treasury rate on the date of grant; (b) a 35%
volatility factor, (c) the 10-year option term; (d) the closing price
of the respective common stock on the date of grant; and (e) an
expected dividend rate of zero.
Estimated compensation relating to restricted stock awards, options
with tandem SARs and SARs has been recorded through December 31, 1997
pursuant to APB Opinion No. 25. Such estimate is subject to future
adjustment based upon market value, and ultimately, on the final
determination of market value when the rights are exercised or the
restricted stock awards are vested. Had the Company accounted for its
stock based compensation pursuant to the fair value based accounting
method in SFAS 123, the Company's net earnings (loss) and net earnings
(loss) per share would have changed to the pro forma amounts indicated
below (amounts in millions, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Pro forma net earnings (loss) attributable to common
stockholders $ (608) 256
Pro forma basic net earnings (loss) attributable to
common stockholders per common share
TCI Group Series A and Series B $ (.86) (1.20)
Liberty Media Group Series A and Series B $ .34 2.82
TCI Ventures Group Series A and Series B $ (.47) --
Pro forma diluted net earnings (loss) attributable to common
stockholders per common and potential common share
TCI Group Series A and Series B $ (.86) (1.20)
Liberty Media Group Series A and Series B $ .31 2.58
TCI Ventures Group Series A and Series B $ (.47) --
</TABLE>
(continued)
113
<PAGE> 115
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Treasury Stock and Common Stock Held by Subsidiaries, at Cost
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------- ------------------------------
Number of Number of
shares Cost basis shares Cost basis
-------------- --------------- ------------ ---------------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
Treasury stock is summarized as follows:
Series A TCI Group Stock 11,296,324 $ 180 -- $ --
Series B TCI Group Stock 30,876,766 518 -- --
Series A Liberty Group Stock 25,082,172 489 -- --
Series B Liberty Group Stock 82,074 2 -- --
Series B TCI Ventures Group
Stock 338,196 4 -- --
Common stock held by subsidiaries is
summarized as follows:
Series A TCI Group Stock 125,645,656 464 116,853,196 314
Series B TCI Group Stock 9,112,500 160 -- --
Series A Liberty Group Stock 6,654,367 113 -- --
Series B Liberty Group Stock 3,417,187 61 -- --
--------------- ---------------
$ 1,991 $ 314
=============== ===============
</TABLE>
General
During the fourth quarter of 1997, the Company entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to
the Equity Swap Facility, the Company has the right to direct the
counterparty (the "Counterparty") to use the Equity Swap Facility to
purchase shares ("Equity Swap Shares") of TCI Group Series A Common
Stock and TCI Ventures Group Series A Stock with an aggregate purchase
price of up to $300 million. The Company has the right, but not the
obligation, to purchase Equity Swap Shares through the September 30,
2000 termination date of the Equity Swap Facility. During such period,
the Company is to settle periodically any increase or decrease in the
market value of the Equity Swap Shares. If the market value of the
Equity Swap Shares exceeds the Counterparty's cost, Equity Swap Shares
with a fair value equal to the difference between the market value and
cost will be segregated from the other Equity Swap Shares. If the
market value of Equity Swap Shares is less than the Counterparty's
cost, the Company, at its option, will settle such difference with
shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock
or, subject to certain conditions, with cash or letters of credit. In
addition, the Company is required to periodically pay the Counterparty
a fee equal to a LIBOR-based rate on the Counterparty's cost to acquire
the Equity Swap Shares. Due to the Company's ability to issue shares to
settle periodic price fluctuations and fees under the Equity Swap
Facility, the Company records all amounts received (paid) under this
arrangement as increases (decreases) to equity. As of December 31,
1997, the Equity Swap Facility had acquired 345,000 shares of TCI Group
Series A Stock and 380,000 shares of TCI Ventures Group Series A Stock
at an aggregate cost that was approximately $3 million less than the
fair value of such Equity Swap Shares at December 31, 1997.
The excess of consideration received on debentures converted or options
exercised over the par value of the stock issued is credited to
additional paid-in capital.
(continued)
114
<PAGE> 116
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1997, there were 113,221,305 shares of TCI Group Series
A Stock, 46,015,274 shares of Liberty Group Series A Stock, 36,237,250
shares of TCI Ventures Group Series A Stock, and 2,800,000 shares of
TCI Ventures Group Series B Stock reserved for issuance under exercise
privileges related to options, convertible debt securities and
convertible preferred stock, and upon vesting of restricted stock
awards described in this note 12 and in notes 9 and 10. In addition,
one share of Series A Stock of each Group is reserved for each
outstanding share of Series B Stock of each Group.
Effective January 13, 1997, the Company issued a stock dividend to
holders of Liberty Group Stock consisting of one share of Liberty Group
Series A Stock for every two shares of Liberty Group Series A Stock and
one share of Liberty Group Series A Stock for every two shares of
Liberty Group Series B Stock. Such stock dividend was treated as a
stock split.
(continued)
115
<PAGE> 117
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Transactions with Officers and Directors
On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the
Estate of Bob Magness (the "Magness Estate"), the late founder and
former Chairman of the Board of TCI in exchange (the "Exchange") for an
equal number of shares of TCI Group Series B Stock (which shares are
entitled to ten votes per share) owned by the Magness Estate, (b) the
Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock
received in the Exchange, together with approximately 1.5 million
shares of TCI Group Series A Stock that the Magness Estate previously
owned (collectively, the "Option Shares"), to two investment banking
firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment
Bankers whereby TCI has the option, but not the obligation, to purchase
the Option Shares at any time on or before June 16, 1999 (the "Option
Period"). The preceding transactions are referred to collectively as
the "June 16 Stock Transaction". During the Option Period, the Company
and the Investment Bankers are to settle quarterly any increase or
decrease in the market value of the Option Shares. If the market value
of the Option Shares exceeds the Investment Bankers' cost, Option
Shares with a fair value equal to the difference between the market
value and cost will be segregated from the other Option Shares in an
account at the Investment Bankers. If the market value of the Option
Shares is less than the Investment Bankers' cost, the Company, at its
option, will settle such difference with shares of TCI Group Series A
Stock or TCI Ventures Group Series A Stock or, subject to certain
conditions, with cash or letters of credit. In addition, the Company is
required to pay the Investment Bankers a quarterly fee equal to the
LIBOR rate plus 1% on the Sale Price, as adjusted for payments made by
the Company pursuant to any quarterly settlement with the Investment
Bankers. Due to the Company's ability to settle quarterly price
fluctuations and fees with shares of TCI Group Series A Stock or TCI
Ventures Group Series A Stock, the Company records all amounts received
or paid under this arrangement as increases or decreases, respectively,
to equity. During the fourth quarter of 1997, the Company repurchased
4,000,000 shares of TCI Group Series A Stock from one of the Investment
Bankers for an aggregate cash purchase price of $66 million.
Additionally, as a result of the Exchange Offers and certain open
market transactions that were completed to obtain the desired weighting
of TCI Group Series A Stock and TCI Ventures Group Series A Stock, the
Investment Bankers disposed of 4,210,308 shares of TCI Group Series A
Stock and acquired 23,407,118 shares (as adjusted for the Ventures
Stock Dividend) of TCI Ventures Group Series A Stock during the last
half of 1997 such that the Option Shares were comprised of 16,402,082
shares of TCI Group Series A Stock and 23,407,118 shares (as adjusted
for the Ventures Stock Dividend) of TCI Ventures Series A Stock at
December 31, 1997. At December 31, 1997, the market value of the Option
Shares exceeded the Investment Bankers' cost by $325 million. Pursuant
to a certain Letter Agreement dated June 16, 1997, between Dr. Malone,
TCI's Chairman and Chief Executive Officer, and the Magness Estate, Dr.
Malone agreed to waive certain rights of first refusal with respect to
shares of Series B TCI Group Stock beneficially owned by the Magness
Estate. Such rights of first refusal arise from a letter agreement
dated June 17, 1988, among Bob Magness, Kearns-Tribune Corporation and
Dr. Malone, pursuant to which Dr. Malone was granted a right of first
refusal to acquire any shares of TCI Group Series B Stock which the
other parties proposed to sell. As a result of Dr. Malone's rights
under such June 17, 1988 letter agreement, such waiver was necessary in
order for the Magness Estate to consummate the Exchange and the Sale.
In consideration for such waiver, TCI granted Dr. Malone the right
(the "Malone Right") to acquire from time to time until June 30, 1999,
from TCI up to 30,545,864 shares of the Series B TCI Group Stock
acquired by TCI from the Magness Estate pursuant to the Exchange. Such
acquisition may be made in exchange for either, or any combination of,
shares of Series A TCI Group Stock owned by Dr. Malone (exchanged on a
one for one basis), or cash in an amount equal to the average closing
sale price of the Series B TCI Group Stock for the five trading days
preceding the acquisition.
In connection with certain legal proceedings relative to the probate
of the Magness Estate, one or more of Gary Magness and Kim Magness,
Bob Magness' sons, Sharon Magness, Bob Magness' surviving second wife
and the original personal representatives of the Magness Estate
advanced various claims, causes of action, demands, complaints and
requests against one or more of the others. In addition, Kim Magness
and Gary Magness, in a Complaint And Request To Void Sale Of TCI
Stock, And For Damages And Surcharge, filed on October 29, 1997 (the
"Voiding Action"), advanced various claims relating to the June 16
Stock Transaction against TCI, Dr. Malone and the original personal
representatives of the Magness Estate. Among other matters, the
Voiding Action challenged the June 16 Stock Transaction on various
fiduciary bases and requested recision of such transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon
Magness, the Magness Estate, the Estate of Betsy Magness (the first
wife of Bob Magness) and Dr. Malone agreed to settle their respective
claims against each other relating to the Magness Estate and the June
16 Stock Transaction, in each case without any of those parties
admitting any of the claims or allegations against that party (the
"Magness Settlement").
(continued)
116
<PAGE> 118
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that 10,201,041 shares of TCI Group Series A
Stock and 11,666,506 shares (as adjusted for the Ventures Stock
Dividend) of TCI Ventures Group Series A Stock were returned to TCI as
authorized but unissued shares, and the Magness Estate returned to the
Investment Bankers the portion of the Sales Price attributable to such
returned shares. TCI then issued to the Magness Estate 10,017,145
shares of TCI Group Series B Stock and 12,034,298 shares (as adjusted
for the Ventures Stock Dividend) of TCI Ventures Group Series B Stock.
In addition, as part of the Magness Settlement, TCI issued 1,339,415
shares of TCI Group Series B Stock to the Estate of Betsy Magness in
exchange for an equal number of shares of TCI Group Series A Stock and
issued 1,531,834 shares of TCI Ventures Group Series B Stock for an
equal number of shares of TCI Ventures Group Series A Stock.
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr.
Malone and Dr. Malone's wife (together with Dr. Malone, the
"Malones"), under which the Malones granted to TCI the right to
acquire any shares of TCI stock which are entitled to cast more than
one vote per share (the "High-Voting Shares") owned by the Malones,
which currently consist of an aggregate of approximately 60 million
High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third
persons. In either such event, TCI has the right to acquire the shares
at a maximum price equal to the then relevant market price of shares
of "low-voting" Series A Stock plus a ten percent premium. The Malones
also agreed that if TCI were ever to be sold to another entity, then
the maximum premium that the Malones would receive on their
High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid
$150 million to the Malones in consideration of them entering into the
Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually, and in certain
cases, on behalf of the Estate of Betsy Magness and the Magness Estate
(collectively, the "Magness Family") also entered into a call
agreement with TCI (with substantially the same terms as the one
entered into by the Malones, including a call on the shares owned by
the Magness Family upon Dr. Malone's death) (the "Magness Call
Agreement") on the Magness Family's aggregate of approximately 49
million High-Voting Shares. The Magness Family was paid $124 million
by TCI in consideration of them entering into the Magness Call
Agreement. Additionally, on February 9, 1998, the Magness Family
entered into a shareholders' agreement (the "Shareholders' Agreement")
with the Malones and TCI under which (i) the Magness Family and the
Malones agree to consult with each other in connection with matters to
be brought to the vote of TCI's shareholders, subject to the proviso
that if they cannot mutually agree on how to vote the shares, Dr.
Malone has an irrevocable proxy to vote the High-Voting Shares owned
by the Magness Family, (ii) the Magness Family may designate a nominee
for the Board and Dr. Malone has agreed to vote his High Voting Shares
for such nominee and (iii) certain "tag along rights" have been
created in favor of the Magness Family and certain "drag along rights"
have been created in favor of the Malones. In addition, the Malone
Right granted by TCI to Dr. Malone to acquire 30,545,864 shares of TCI
Group Series B Stock has been reduced to an option to acquire
14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms
of the Shareholders' Agreement, the Magness Family has the right to
participate in the reduced Malone Right on a proportionate basis with
respect to 12,406,238 shares of the 14,511,570 shares subject to the
Malone Right.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement will be reflected as a $274 million
reduction of additional paid-in capital during the first quarter of
1998.
(continued)
117
<PAGE> 119
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On September 25, 1997, certain subsidiaries of the Company entered into
an Asset Contribution Agreement with, among others, Fisher
Communications Associates, L.L.C., which is controlled by a director of
the Company. On January 15, 1998, pursuant to the agreement, the cable
television assets of the applicable cable systems of the Company were
contributed to Peak Cablevision in exchange for a 66.7% partnership
interest in Peak Cablevision. Additionally, cable television assets of
Fisher Communications, L.L.C. were contributed in 1998 in exchange of a
33.3% interest in Peak Cablevision. In connection with the formation of
Peak Cablevision, the Company contributed approximately 87,000
customers passing 136,500 homes and Fisher Communications, L.L.C.
contributed approximately 27,000 customers, passing 42,100 homes. The
Company contributed debt amounting to $93 million and Fisher
Communications, L.L.C. contributed debt amounting to $19 million.
On July 23, 1997, an executive officer who is also a director of the
Company acquired from the Company an aggregate of 7,296,324 shares of
TCI Group Series B Stock and 3,417,187 shares of Liberty Group Series B
Stock, in exchange for a like number of shares of TCI Group Series A
Stock and Liberty Group Series A Stock, respectively, held by such
executive officer and director.
On July 24, 1997, the Company repurchased 219,937 shares of Liberty
Group Series A Stock from the spouse of an executive officer who is
also a director of the Company at an aggregate cost of approximately $4
million.
On June 10, 1997 (the "IP Phase I Closing Date"), the Company issued
139,513 shares of TCI Group Series B Stock (the "IP I Shares") to the
IP Series B Trust I ("Trust"). An executive officer who is also a
director of the Company is the trustee of the Trust. The IP I Shares
were issued in connection with a partial closing under two Partnership
Interest Purchase Agreements both dated as of June 10, 1997 (the "IP-I
and IP-III Purchase Agreements"), pursuant to which the Company
acquired on the IP Phase I Closing Date (a) a 99.998% limited
partnership interest in InterMedia Capital Management III, L.P., (b) a
75% limited partnership interest in InterMedia CM - LP, and (c) a
99.998% limited partnership interest in InterMedia Capital Management,
L.P. in exchange for total consideration of the IP I Shares and cash
and assumption of current liabilities in an aggregate amount of $6
million. As a result of such transactions the Company increased its
direct and indirect ownership of the limited partnership interests of
InterMedia Partners, a California limited partnership, from
approximately 53.6% to 54.7% and obtained the right to receive an
administrative fee from InterMedia Partners and the right to receive a
20% overriding interest on any distributions in excess of the partners'
capital contributions. In light of such increased ownership interests
and rights and the January 1, 1998 consummation of a transaction in
which InterMedia Partners acquired substantially all of the equity
interests held by partners other than TCI, the Company retroactively
adopted the equity method of accounting for its investment in
InterMedia Partners for all periods ended prior to January 1, 1998. On
January 1, 1998, the Company began consolidating its investment in
InterMedia Partners. The restatement of the Company's financial
statements to adopt the equity method of accounting for InterMedia
Partners resulted in a $125 million decrease to its investment in
Intermedia Partners, a $50 million decrease to its deferred tax
liability, and a $75 million increase to its accumulated deficit at
December 31, 1996. In addition, such restatement resulted in a $14
million increase to its net earnings in 1996 and a $12 million increase
to its net loss in 1995. InterMedia Partners, InterMedia IV and ICM IV
are all managed by the same management group. See note 5.
On August 5, 1997 (the "IP Phase II Closing Date"), the Company issued
2,405,942 shares of TCI Group Series B Stock (the "IP II Shares") to
the IP Series B Trust II ("Trust II"). An executive officer who is also
a director of the Company is the trustee of the Trust II. The IP II
Shares were issued in connection with the closing under the Partnership
Interest Purchase Agreement dated as of August 5, 1997, and a partial
and final closing under the IP-I and IP-III Purchase Agreements,
pursuant to which the Company acquired on the IP Phase II Closing Date
a 99.997% limited partnership interest in ICM IV and an additional
.001% limited partnership interest in InterMedia Capital Management,
L.P. in exchange for total consideration of the IP II Shares and cash
and assumption of liabilities in an aggregate amount of $18 million.
See note 5.
(continued)
118
<PAGE> 120
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the three Partnership Interest Purchase Agreements,
a director of the Company received a consulting fee in the amount of
$400,000 in cash and 31,030 shares of TCI Group Series B Stock and the
son of a director of the Company received an advisory fee in the amount
of 36,364 shares of TCI Group Series B Stock.
In connection with the Kearns-Tribune merger (see note 7), the former
Chairman of the Board of Kearns-Tribune who is also a director of TCI
(the "Former Kearns-Tribune Chairman") received (i) a cash payment of
$1.6 million and (ii) an assignment of all of Kearns-Tribune right,
title and interest in and to all patented mining claims owned by
Kearns-Tribune, including but not limited to royalties, buildings,
fixtures, surface rights, licenses and contracts related thereto, which
patented mining claims are valued at $438,000. With respect to the
assignment of the mining claims, the Former Kearns-Tribune Chairman
agreed to assume all liabilities with respect thereto and agreed to
indemnify Kearns-Tribune for any and all liabilities of Kearns-Tribune,
if any, relating to the mining claims, including those arising from
past operations. As of December 31, 1997, Kearns-Tribune had made the
cash payment to the Former Kearns-Tribune Chairman and was in process
of completing the transfers of the mining claims to a corporation
designated by the Former Kearns-Tribune Chairman. The parties
anticipate the remaining mining claim transfers will be completed in
fiscal 1998.
On March 4, 1997, an executive officer who is also a director of the
Company received an advance from a wholly-owned subsidiary of the
Company in the amount of $6 million. On March 5, 1997, such individual
received a second advance from a wholly-owned subsidiary of the Company
in the amount of $6 million. The terms of the advances were
memorialized by a promissory note. The interest rate on such loans is
1% over the one-month LIBOR rate compounded annually. Principal
outstanding on the note is due March 31, 1999 and interest is payable
annually on March 1 of each year. The loan is unsecured.
On the date of the Satellite Spin-off, the Company granted options to
two of its executive officers and a key employee of TCIC to acquire an
aggregate of 1,660,190 shares of Satellite Series A Common Stock. The
exercise price for each such option is equal to $8.86 per share. Such
options vest 20% per annum beginning February 1, 1997 and expire on
February 1, 2006.
Effective January 31, 1996, a director of the Company purchased
one-third of the Company's interest in two limited partnerships and
obtained two ten-year options to purchase the Company's remaining
partnership interests. The purchase price for the one-third partnership
interests was 37.209 shares of WestMarc Communications, Inc.
("WestMarc", a wholly-owned subsidiary of the Company) Series C
Cumulative Compounding Preferred Stock owned by such director, and the
purchase price for the ten-year options was $100 for each option. All
options were exercised during the first quarter of 1998. The aggregate
exercise price of $3,000,000 was satisfied with five non-interest
bearing promissory notes that are due and payable to the Company in
2008.
On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an
executive officer of TCI was transferred all of TCI's right title and
interest in and to 62 shares of the 12% Series C Cumulative Compounding
Preferred Stock of WestMarc owned by TCI. Such preferred stock has a
liquidation value of $1,999,500 and is subject to forfeiture by such
officer in the event of certain circumstances from the date of grant
through December 13, 2005.
(continued)
119
<PAGE> 121
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Sale of Subsidiary Stock
In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs.
On July 11, 1997, @Home completed its initial public offering (the
"@Home IPO"), in which 10,350,000 shares of @Home common stock were
sold for cash proceeds of approximately $100 million. As a result of
the @Home IPO, the Company's economic interest in @Home decreased from
43% to 39% which economic interest represents an approximate 72% voting
interest. In connection with the associated dilution of the Company's
ownership interest of @Home, the Company recognized a gain of $60
million.
Effective October 2, 1997, @Home entered into a Letter Agreement and
Term Sheet with CSC, and it's parent, CSC Parent Corporation ("CSC
Parent"), Comcast Corporation ("Comcast"), Cox Enterprises, Inc.
("Cox"), Kleiner, Perkins, Caufield & Byers and TCI (the "CSC
Agreement"). In accordance with the provisions of the CSC Agreement,
CSC has entered into a Master Distribution Agreement for the
distribution of @Home's high speed residential consumer Internet access
services on substantially the same terms and conditions as agreements
previously entered into with TCI, Comcast and Cox. In connection with
the CSC Agreement, @Home issued to CSC warrants to purchase an
aggregate of 10,946,936 shares of @Home's Series A Common Stock at an
exercise price of $.50 per share. Of these warrants, warrants to
purchase 10,231,298 of such shares were exercisable as of March 4,
1998, subject to the receipt of all necessary governmental consents or
approvals, and the balance will become exercisable as and to the extent
certain Connecticut cable television systems are transferred from TCI
and its controlled affiliates to CSC, CSC's parent or their controlled
affiliates. Following the exercise of all of CSC's warrants, the
Company's equity interest and voting power in @Home will decrease to
approximately 36% and 69%, respectively. See note 19.
On July 18, 1995, TINTA completed an initial public offering (the
"TINTA IPO") in which it sold 20 million shares of TINTA Series A
common stock to the public for consideration of $16.00 per share
aggregating $320 million, before deducting related expenses
(approximately $19 million). The shares sold to the public represented
17% of TINTA's total issued and outstanding common stock. Also in July
1995, TINTA issued 687,500 shares of TINTA Series A common stock as
partial consideration for a 35% ownership interest in Torneos (the "TYC
Acquisition"). As a result of the TINTA IPO and the TYC Acquisition,
the Company recognized a gain amounting to $123 million.
In June 1995, Flextech issued share capital for cash and preferred
shares of Thomson Directories Limited. In connection with such
issuance, the Company recorded a $51 million increase to stockholders'
equity and a $93 million increase to minority interests in equity of
consolidated subsidiaries. No gain was recognized in the Company's
consolidated statement of operations due primarily to the existence of
the Company's contingent obligations to repurchase certain of the
Flextech share capital.
(continued)
120
<PAGE> 122
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Income Taxes
TCI files a consolidated federal income tax return with all of its
80%-or-more owned subsidiaries. Consolidated subsidiaries in which the
Company owns less than 80% each file a separate income tax return. TCI
and such subsidiaries calculate their respective tax liabilities on a
separate return basis which are combined in the accompanying
consolidated financial statements.
Income tax benefit (expense) for the years ended December 31, 1997,
1996 and 1995 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1997:
Federal $ (10) 264 254
State and local (31) 11 (20)
---------- ---------- ----------
$ (41) 275 234
========== ========== ==========
Year ended December 31, 1996:
Federal $ (25) (184) (209)
State and local (13) (49) (62)
---------- ---------- ----------
$ (38) (233) (271)
========== ========== ==========
Year ended December 31, 1995:
Federal $ (23) 138 115
State and local (10) 23 13
---------- ---------- ----------
$ (33) 161 128
========== ========== ==========
</TABLE>
Income tax benefit (expense) differs from the amounts computed by
applying the federal income tax rate of 35% as a result of the
following:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1997 1996 1995
------------ ---------- ----------
amounts in millions
<S> <C> <C> <C>
Computed "expected" tax benefit (expense) $ 278 (197) 109
Amortization not deductible for tax purposes (27) (22) (25)
Minority interest in losses (earnings) of
consolidated subsidiaries 27 (3) 9
Gain on sale of subsidiary stock 21 -- 43
State and local income taxes, net of federal
income tax benefit (5) (50) (3)
Increase in valuation allowance (26) (24) --
Other (34) 25 (5)
---------- ---------- ----------
$ 234 (271) 128
========== ========== ==========
</TABLE>
(continued)
121
<PAGE> 123
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
--------------- ---------------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 920 721
Less - valuation allowance (183) (150)
Investment tax credit carryforwards 117 118
Less - valuation allowance (41) (41)
Alternative minimum tax credit carryforwards 95 95
Investments in affiliates, due principally to losses of
affiliates recognized for financial statement purposes in
excess of losses recognized for income tax purposes 175 282
Future deductible amount attributable to accrued
stock appreciation rights and deferred compensation 132 24
Future deductible amounts principally due to
non-deductible accruals 150 55
Other 5 --
--------------- ---------------
Net deferred tax assets 1,370 1,104
--------------- ---------------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 1,295 1,193
Franchise costs, principally due to differences in
amortization 4,354 4,676
Investment in affiliates, due principally to
undistributed earnings of affiliates 1,552 917
Intangible assets, principally due to differences in
amortization 9 36
Leases capitalized for tax purposes 4 90
Other 264 154
--------------- ---------------
Total gross deferred tax liabilities 7,478 7,066
--------------- ---------------
Net deferred tax liability $ 6,108 5,962
=============== ===============
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997
and 1996 was $224 million and $191 million, respectively.
At December 31, 1997, the Company had net operating loss carryforwards
for income tax purposes aggregating approximately $2,021 million of
which, if not utilized to reduce taxable income in future periods, $136
million expires in 2003, $117 million in 2004, $355 million in 2005,
$288 million in 2006, $138 million in 2009, $167 million in 2010, $285
million in 2011 and $544 million in 2012. Certain subsidiaries of the
Company had additional net operating loss carryforwards for income tax
purposes aggregating approximately $233 million and these net operating
losses are subject to certain rules limiting their usage.
At December 31, 1997, the Company had remaining available investment
tax credits of approximately $62 million which, if not utilized to
offset future federal income taxes payable, expire at various dates
through 2005. Certain subsidiaries of the Company had additional
investment tax credit carryforwards aggregating approximately $55
million and these investment tax credit carryforwards are subject to
certain rules limiting their usage.
(continued)
122
<PAGE> 124
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain of the federal income tax returns of TCI and its subsidiaries
which filed separate income tax returns are presently under examination
by the Internal Revenue Service (the "IRS") for the years 1993 through
1995 (the "IRS Examinations"). In the opinion of management, any
additional tax liability, not previously provided for, resulting from
the IRS Examinations ultimately determined to be payable, should not
have a material adverse effect on the consolidated financial position
of the Company.
(16) Commitments and Contingencies
On October 5, 1992, the United States Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). In 1993 and 1994, the Federal Communications Commission
(the "FCC") adopted certain rate regulations required by the 1992 Cable
Act and imposed a moratorium on certain rate increases. As a result of
such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the
FCC. Basic and tier service rates are evaluated against competitive
benchmark rates as published by the FCC, and equipment and installation
charges are based on actual costs. Any rates for Regulated Services
that exceeded the benchmarks were reduced as required by the 1993 and
1994 rate regulations. The rate regulations do not apply to the
relatively few systems which are subject to "effective competition" or
to services offered on an individual service basis, such as premium
movie and pay-per-view services.
The Company believes that it has complied in all material respects with
the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed by a
customer, or the appropriate franchise authority, if such authority has
been certified by the FCC to regulate rates. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate benchmark
and refund the excess portion of rates received. Any refunds of the
excess portion of tier service rates would be retroactive to the date
of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2017 (the "Film
Licensing Obligations"). Based on customer levels at December 31, 1997,
these agreements require minimum payments aggregating approximately
$695 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, the Company's aggregate payments under the Film
Licensing Obligations could prove to be significant.
(continued)
123
<PAGE> 125
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is a party to affiliation agreements with several of its
programming suppliers. Pursuant to these agreements, the Company is
committed to carry such suppliers programming on its cable systems.
Several of these agreements provide for penalties and charges in the
event the programming is not carried or not delivered to a
contractually specified number of customers.
During the third quarter of 1997, the Company committed to purchase
billing services from an unaffiliated third party pursuant to three
successive five year agreements. Pursuant to such arrangement, the
Company is obligated to make minimum payments aggregating approximately
$1.6 billion through 2012. Such minimum payments are subject to
inflation and other adjustments pursuant to the terms of the underlying
agreements.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $469 million at December 31, 1997. With respect to the
Company's guarantees of $166 million of such obligations, the Company
has been indemnified for any loss, claim or liability that the Company
may incur, by reason of such guarantees. Although there can be no
assurance, management of the Company believes that it will not be
required to meet its obligations under such guarantees, or if it is
required to meet any of such obligations, that they will not be
material to the Company.
On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
Following such merger (the "DMX Merger"), the Company owned 89.6% of
the common equity and 98.7% of the voting power of TCI Music. In
December 1997, TCI Music issued convertible preferred stock and common
stock in connection with two acquisitions. After giving effect to such
issuances and assuming the conversion of the TCI Music convertible
preferred stock, TCI, at December 31, 1997, owned TCI Music securities
representing 81.1% of TCI Music's common stock and 97.5% of the voting
power attributable to such TCI Music common stock. In connection with
the DMX Merger, the Company assumed a contingent obligation to purchase
14,896,648 shares (6,812,393 of which are owned by subsidiaries of the
Company) of TCI Music common stock at a price of $8.00 per share. Such
obligation may be settled, at the Company's option, with shares of TCI
Group Series A Stock or with cash. The Company has recorded its
contingent obligation to purchase such shares as a component of
minority interest in equity of consolidated subsidiaries the
accompanying consolidated financial statements.
The Company leases business offices, has entered into converter lease
agreements, pole rental agreements, transponder lease agreements and
uses certain equipment under lease arrangements. Rental expense under
such arrangements amounted to $212 million, $187 million and $142
million in 1997, 1996 and 1995, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
millions):
<TABLE>
<CAPTION>
Years ending
December 31,
------------
<S> <C>
1998 $ 215
1999 181
2000 151
2001 118
2002 100
Thereafter 439
</TABLE>
(continued)
124
<PAGE> 126
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than
the amount shown for 1998.
Effective as of December 16, 1997, National Digital Television Center,
Inc. ("NDTC"), a subsidiary of TCI and a member of the TCI Ventures
Group, on behalf of TCIC and other cable operators that may be
designated from time to time by NDTC ("Approved Purchasers"), entered
into an agreement (the "Digital Terminal Purchase Agreement") with
General Instrument Corporation (formerly NextLevel Systems, Inc.,
"GI") to purchase advanced digital set-top devices. The hardware and
software incorporated into these devices will be designed and
manufactured to be compatible and interoperable with the OpenCable(TM)
architecture specifications adopted by CableLabs, the cable television
industry's research and development consortium, in November 1997. NDTC
has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices over the next three years at an
average price of $318 per set-top device. GI agreed to provide NDTC
and its Approved Purchasers the most favorable prices, terms and
conditions made available by GI to any customer purchasing advanced
digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization,
which as of the effective date of the Digital Terminal Purchase
Agreement, would have represented at least a 10% equity interest in GI
(on a fully diluted basis). It is anticipated that the value
associated with such equity interest would be attributed to TCI Group
upon purchase and deployment of the digital set-top devices.
Also in December 1997, NDTC entered into a memorandum of understanding
(the "GI MOU") with GI which contemplates the sale to GI of certain of
the assets of NDTC's set-top authorization business, the license of
certain related technology to GI, and an additional cash payment in
exchange for approximately 21.4 million shares of stock of GI. In
connection therewith, NDTC would also enter into a services agreement
pursuant to which it will provide certain services to GI's set-top
authorization business. The transaction is subject to the signing of
definitive agreements; accordingly, there can be no assurance that it
will be consummated.
Certain key employees of the Company and members of the Board hold
restricted stock awards, options and options with tandem SARs to
acquire shares of certain subsidiaries' common stock. Estimates of the
compensation related to SARs have been recorded in the accompanying
consolidated financial statements pursuant to APB Opinion No. 25. Such
estimates are subject to future adjustment based upon the market value
of the respective common stock and, ultimately, on the final market
value when the rights are exercised.
(continued)
125
<PAGE> 127
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Estimates of compensation relating to phantom stock appreciation rights
("PSARs") granted to employees of a subsidiary of TCI have been
recorded in the accompanying combined financial statements, but are
subject to future adjustment based upon a valuation model derived from
such subsidiary's cash flow, working capital and debt.
During 1997, the Company began an enterprise-wide comprehensive review
of its computer systems and related software to ensure systems properly
recognize the year 2000 and continue to process business information.
The systems being evaluated include all internal use software and
devices and those systems and devices that manage the distribution of
the Company's, as well as third parties' products. Additionally, the
Company has initiated a program of communications with its significant
suppliers, customers and affiliated companies to determine the
readiness of these third parties and the impact on the Company if those
third parties fail to remediate their own year 2000 issues.
Over the past three years, the Company began an effort to convert a
substantial portion of its financial applications to commercial
products, which are anticipated to be year 2000 ready or to outsource
portions of its financial applications to third party vendors who are
expected to be year 2000 ready. Notwithstanding such effort, the
Company is in the process of finalizing its assessment of the impact of
year 2000. The Company is utilizing both internal and external
resources to identify, correct or reprogram, and test systems for year
2000 readiness. To date, the Company has inventoried substantially all
of its cable systems and is currently evaluating the results of such
inventory. The Company expects that it will have to modify or replace
certain portions of its cable distribution plant, although the Company
has not yet completed its assessment. Confirmations have been received
from certain primary suppliers indicating that they are either year
2000 ready or have plans in place to ensure readiness. As part of the
Company's assessment of its year 2000 issue, it is evaluating the level
of validation it will require of third parties to ensure their year
2000 readiness. The Company's manual assessment of the impact of the
year 2000 date change should be complete by mid-1998.
Management of the Company has not yet determined the cost associated
with its year 2000 readiness efforts and the related potential impact
on the Company's results of operations. Amounts expended to date have
not been material, although there can be no assurance that costs
ultimately required to be paid to ensure the Company's year 2000
readiness will not have an adverse effect on the Company's financial
position. Additionally, there can be no assurance that the systems of
other companies on which the Company relies will be converted in time
or that any such failure to convert by another company will not have
an adverse effect on the Company's financial condition or position.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it
is reasonably possible the Company may incur losses upon conclusion of
such matters, an estimate of any loss or range of loss cannot be made.
In the opinion of management, it is expected that amounts, if any,
which may be required to satisfy such contingencies will not be
material in relation to the accompanying consolidated financial
statements.
(continued)
126
<PAGE> 128
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Information about the Company's Segments
The Company has two reportable segments: domestic cable and
communications services and domestic programming services. Domestic
cable and communications services receive video, audio and data signals
from various sources, and amplify and distribute the signals by coaxial
cable and optical fiber to the premises of customers who pay a fee for
the service. Domestic programming services produces, acquires, and
distributes, through all available formats and media, branded
entertainment and informational programming and software, including
multimedia products, delivered in both analog and digital form. The
Company's domestic cable and communications services business and
assets are included in TCI Group, and the Company's domestic
programming business and assets are included in Liberty Media Group.
The Company's principal international businesses and assets and the
Company's remaining non-cable and non-programming domestic businesses
and assets are included in TCI Ventures Group.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance based on a measure of operating cash flow
(defined as operating income before depreciation, amortization, stock
compensation and other non-cash charges). Operating cash flow is a
measure of value and borrowing capacity within the cable television
industry and is not intended to be a substitute for cash flow provided
by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should
not be relied upon as such. The Company generally accounts for
intersegment sales and transfers as if the sales or transfers were to
third parties, that is, at current market prices.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each segment requires different technology and marketing
strategies.
(continued)
127
<PAGE> 129
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company utilizes the following information for purposes of making
decisions about allocating resources to a segment and assessing a
segment's performance:
<TABLE>
<CAPTION>
Domestic cable Domestic
& communications programming All
services services other Total
---------------- ----------- ------- --------
amounts in millions
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
-----------------------------
Revenues from external customers
including intersegment revenue $ 6,429 374 969 7,772
Intersegment revenue -- 173 29 202
Segment operating cash flow 2,766 55 154 2,975
Year ended December 31, 1996:
-----------------------------
Revenues from external customers
including intersegment revenue $ 5,881 1,339 926 8,146
Intersegment revenue -- 107 17 124
Segment operating cash flow 2,016 164 96 2,276
Year ended December 31, 1995:
-----------------------------
Revenues from external customers
including intersegment revenue $ 4,827 1,441 326 6,594
Intersegment revenue -- 80 8 88
Segment operating cash flow 1,925 16 47 1,988
As of December 31, 1997
-----------------------
Segment assets $ 23,578 5,039 3,944 32,561
Investment in equity method investees 414 524 2,098 3,036
Expenditures for segment assets 538 4 167 709
As of December 31, 1996
-----------------------
Segment assets $ 22,819 3,059 4,260 30,138
Investment in equity method investees 361 545 2,069 2,975
Expenditures for segment assets 1,834 12 209 2,055
</TABLE>
(continued)
128
<PAGE> 130
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of reportable segment amounts to the Company's
consolidated balances is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
amounts in millions
<S> <C> <C> <C>
Revenue
-------
Total revenue for reportable segments $ 6,803 7,220 6,268
Other revenue 969 926 326
Elimination of intersegment revenue (202) (124) (88)
---------- ---------- ----------
Total consolidated revenue $ 7,570 8,022 6,506
========== ========== ==========
Operating Cash Flow to Earnings (Loss) Before
---------------------------------------------
Income Tax
----------
Total operating cash flow for reportable segments $ 2,821 2,180 1,941
Other operating cash flow 154 96 47
Other items excluded from operating cash flow:
Depreciation (1,077) (1,093) (899)
Amortization (546) (523) (473)
Stock compensation (488) 13 (57)
Impairment of intangible assets (15) -- --
Restructuring charges -- (41) (17)
Interest expense (1,160) (1,096) (1,010)
Interest and dividend income 88 64 52
Share of losses of affiliates, net (930) (450) (213)
Loss on early extinguishment of debt (39) (71) (6)
Minority interest in losses (earnings) (154) (56) 17
Gain on sale of stock by subsidiary and
equity investee 172 12 288
Gain on disposition of assets 401 1,593 49
Other, net (22) (65) (30)
---------- ---------- ----------
Earnings (loss) before income taxes $ (795) 563 (311)
========== ========== ==========
</TABLE>
(continued)
129
<PAGE> 131
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1997 1996
---------- ----------
amounts in millions
<S> <C> <C>
Assets
------
Total assets for reportable segments $ 28,617 25,878
Other segment assets 3,944 4,260
Consolidating and eliminating adjustments (74) 31
---------- ----------
Consolidated total $ 32,487 30,169
========== ==========
Other Significant Items
-----------------------
Equity method investments for reportable segments $ 938 906
Other equity method investments 2,098 2,069
Consolidating and eliminating adjustments 12 10
---------- ----------
Consolidated equity method investments $ 3,048 2,985
========== ==========
Expenditures for reportable segment assets $ 542 1,846
Other asset expenditures 167 209
---------- ----------
Consolidated total asset expenditures $ 709 2,055
========== ==========
</TABLE>
Substantially all revenue and assets of TCI's reportable segments are
attributed to or located in the United States.
The Company does not have a single external customer which represents
10 percent or more of its consolidated revenues.
(continued)
130
<PAGE> 132
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
amounts in millions,
except per share data
<S> <C> <C> <C> <C>
1997:
-----
Revenue $ 1,827 1,887 1,934 1,922
======== ======== ======== ========
Operating income $ 349 253 222 25
======== ======== ======== ========
Net loss $ (58) (154) (22) (327)
======== ======== ======== ========
Basic earnings (loss) attributable to common
stockholders per common share:
TCI Group Stock $ (.12) (.25) (.34) (.11)
======== ======== ======== ========
Liberty Group Stock (a) $ .04 .02 .44 (.17)
======== ======== ======== ========
TCI Ventures Group Stock (b) $ -- -- .07 (.54)
======== ======== ======== ========
Diluted earnings (loss) attributable to common
stockholders per common and potential common share:
TCI Group Stock $ (.12) (.25) (.34) (.11)
======== ======== ======== ========
Liberty Group Stock (a) $ .04 .01 .40 (.17)
======== ======== ======== ========
TCI Ventures Group Stock(b) $ -- -- .07 (.54)
======== ======== ======== ========
1996:
-----
Revenue $ 1,861 1,948 2,058 2,155
======== ======== ======== ========
Operating income $ 172 169 220 71
======== ======== ======== ========
Net earnings (loss):
As previously reported $ (121) (187) (138) 724
Adjustment to adopt equity method of
accounting for investee (2) (2) 20 (2)
-------- -------- -------- --------
As adjusted $ (123) (189) (118) 722
======== ======== ======== ========
Basic earnings (loss) attributable to common
stockholders per common share:
TCI Group Stock:
As previously reported $ (.22) (.30) (.25) (.46)
Adjustment to adopt equity method of accounting
for investee -- -- .03 --
-------- -------- -------- --------
As adjusted $ (.22) (.30) (.22) (.46)
======== ======== ======== ========
Liberty Group Stock (a) $ .04 .01 .05 2.73
======== ======== ======== ========
Diluted earnings (loss) attributable to common
stockholders per common and potential common share:
TCI Group Stock:
As previously reported $ (.22) (.30) (.25) (.46)
Adjustment to adopt equity method of accounting
for investee -- -- .03 --
-------- -------- -------- --------
As adjusted $ (.22) (.30) (.22) (.46)
======== ======== ======== ========
Liberty Group Stock (a) $ .04 .01 .04 2.49
======== ======== ======== ========
</TABLE>
------------------
(a) Adjusted to give effect to the 1998 Liberty Stock Dividend.
(b) Adjusted to give effect to the Ventures Stock Dividend.
(19) Restatement Associated With Costs of Distribution Agreements
The Company has restated its consolidated financial statements to
record non-cash costs of certain distribution agreements as assets to be
amortized over the exclusivity periods set forth in the respective distribution
agreements. Such non-cash costs had originally been expensed in the period that
the underlying warrants had become exercisable. This restatement resulted in a
$164 million increase to other assets and a $99 million increase to minority
interests in consolidated subsidiaries at December 31, 1997. In addition, the
restatement resulted in a $65 million decrease to net loss and a $.15 decrease
to basic and diluted net loss attributable to common stockholders per share of
TCI Ventures Group Stock for the year ended December 31, 1997. See note 14.
131
<PAGE> 133
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited and reported separately herein on the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997.
We have also audited the accompanying combined balance sheets of
Liberty/Ventures Group (a combination of certain assets of Tele-Communications,
Inc., as defined in note 1) as of December 31, 1997 and 1996, and the related
combined statements of operations, equity, and cash flows for each of the years
in the three-year period ended December 31, 1997. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The combined financial statements of Liberty/Ventures Group are presented for
purposes of additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of Liberty/Ventures Group are intended to
reflect the performance of the businesses of Tele-Communications, Inc., which
produce and distribute programming services, Tele-Communications, Inc.'s
principal international assets and substantially all of Tele-Communications,
Inc.'s domestic non-cable and non-programming assets. The combined financial
statements of Liberty/Ventures Group should be read in conjunction with the
consolidated financial statements of Tele-Communications, Inc. and subsidiaries.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of
Liberty/Ventures Group as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying combined financial statements as of December 31, 1997 and for
the year then ended have been restated, as described in Note 14.
KPMG Peat Marwick LLP
Denver, Colorado
March 20, 1998,
except for Notes 2 and 14
which are as of September 14, 1998 and January 6, 1999, respectively
132
<PAGE> 134
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997* 1996
------ ------
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ 224 444
Trade and other receivables, net 127 140
Prepaid program rights 104 88
Committed program rights 117 21
Investments in affiliates, accounted for under the equity method,
and related receivables (note 5) 2,654 2,630
Investment in Time Warner, Inc. ("Time Warner") (note 6)
3,538 2,017
Other investments and related receivables (note 7) 695 245
Property and equipment, at cost:
Land 8 8
Distribution systems 856 766
Support equipment and buildings 153 221
------ ------
1,017 995
Less accumulated depreciation 280 248
------ ------
737 747
------ ------
Intangible assets:
Excess cost over acquired net assets 429 796
Franchise costs 108 243
------ ------
537 1,039
Less accumulated amortization 86 106
------ ------
451 933
------ ------
Other assets, at cost, net of amortization (note 10) 280 91
------ ------
$8,927 7,356
====== ======
</TABLE>
*Restated - see note 14.
(continued)
133
<PAGE> 135
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997* 1996
---------- ----------
Liabilities and Combined Equity amounts in millions
- -------------------------------
<S> <C> <C>
Accounts payable $ 40 72
Accrued liabilities 168 156
Program rights payable 156 34
Customer prepayments 137 119
Deferred option premium (note 6) 306 --
Capital lease obligations (note 13) 387 200
Debt (note 8) 757 528
Deferred income taxes (note 9) 957 802
Other liabilities 90 87
---------- ----------
Total liabilities 2,998 1,998
---------- ----------
Minority interests in equity of attributed subsidiaries (notes 5 and 11) 620 413
Combined equity (note 11):
Combined equity 4,011 5,038
Accumulated other comprehensive earnings, net of taxes 768 41
---------- ----------
4,779 5,079
Due to (from) related parties 530 (134)
---------- ----------
Total combined equity 5,309 4,945
---------- ----------
Commitments and contingencies (notes 2, 5 and 13) $ 8,927 7,356
========== ==========
</TABLE>
*Restated - see note 14.
See accompanying notes to combined financial statements.
134
<PAGE> 136
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997* 1996 1995
------------ ------------ ------------
amounts in millions
<S> <C> <C> <C>
Revenue:
Unaffiliated parties $ 1,104 1,136 746
Related parties (note 11) 195 117 86
Net sales from electronic retailing services -- 984 920
------------ ------------ ------------
1,299 2,237 1,752
------------ ------------ ------------
Cost of sales, operating costs and expenses:
Cost of sales -- 605 603
Operating 682 750 547
Selling, general and administrative 348 563 510
Charges from related parties (note 11) 60 54 30
Impairment of assets 15 9 --
Stock compensation (note 11) 296 10 16
Restructuring charges -- -- 17
Depreciation and amortization 196 210 173
------------ ------------ ------------
1,597 2,201 1,896
------------ ------------ ------------
Operating income (loss) (298) 36 (144)
Other income (expense):
Interest expense (57) (68) (55)
Interest expense to related parties (note 11) (18) -- (6)
Dividend and interest income 57 39 27
Interest income from related parties (note 11) 6 14 --
Share of losses of affiliates, net (note 5) (850) (372) (210)
Minority interests in losses of attributed subsidiaries 25 26 20
Gain on dispositions, net (notes 5, 6 and 7) 420 1,558 47
Gain on sale of stock by attributed subsidiaries (notes 10 and 12) 60 -- 123
Gain on issuance of stock by affiliates (note 5) 112 13 165
Other, net 2 9 (19)
------------ ------------ ------------
(243) 1,219 92
------------ ------------ ------------
Earnings (loss) before income taxes (541) 1,255 (52)
Income tax benefit (expense) (note 9) 130 (457) 56
------------ ------------ ------------
Net earnings (loss) $ (411) 798 4
============ ============ ============
Comprehensive earnings $ 316 517 231
============ ============ ============
</TABLE>
* Restated - see note 14.
See accompanying notes to combined financial statements.
135
<PAGE> 137
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Accumulated
other Due to
comprehensive (from) Total
Combined earnings, related combined
equity* net of tax parties equity*
---------- ---------- ---------- ----------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 2,563 95 29 2,687
Net earnings 4 -- -- 4
Foreign currency translation adjustment -- (5) -- (5)
Change in unrealized holding gains on
available-for-sale securities -- 232 -- 232
Gain in connection with issuance of stock of
affiliate (note 5) 51 -- -- 51
Deferred tax assets transferred to related party (16) -- -- (16)
Contribution to combined equity for acquisitions 19 -- -- 19
Stock compensation 11 -- 3 14
Intergroup tax allocation (56) -- (1) (57)
Other transfers from (to) related parties, net 1,083 -- (24) 1,059
---------- ---------- ---------- ----------
Balance at December 31, 1995 3,659 322 7 3,988
Net earnings 798 -- -- 798
Foreign currency translation adjustment -- 35 -- 35
Recognition of previously unrealized gains on
available-for-sale securities -- (364) -- (364)
Change in unrealized holding gains on
available-for-sale securities -- 48 -- 48
Repurchase of common stock (38) -- -- (38)
Issuance of stock by attributed subsidiary 10 -- -- 10
Stock compensation (7) -- (2) (9)
Intergroup tax allocation (53) -- 32 (21)
Other transfers from (to) related parties, net 669 -- (171) 498
---------- ---------- ---------- ----------
Balance at December 31, 1996 5,038 41 (134) 4,945
Net loss (411) -- -- (411)
Foreign currency translation adjustment -- (22) -- (22)
Change in unrealized holding gains on
available-for-sale securities -- 749 -- 749
Contribution to combined equity for issuance
of common stock to TCI Employee Stock
Purchase Plan 2 -- -- 2
Repurchase of common stock (625) -- -- (625)
Excess of consideration paid over carryover
basis of net assets acquired from related
party (219) -- -- (219)
Gain in connection with issuance of stock of
affiliate (note 5) 66 -- -- 66
Issuance of stock by attributed subsidiary 19 -- -- 19
Issuance of common stock 30 -- -- 30
Excess of cash received over carryover basis
of SUMMITrak Assets 30 -- -- 30
Stock compensation 68 -- 167 235
Intergroup tax allocation (193) -- 33 (160)
Other transfers from related parties, net 206 -- 464 670
---------- ---------- ---------- ----------
Balance at December 31, 1997 $ 4,011 768 530 5,309
========== ========== ========== ==========
</TABLE>
* Restated - see note 14.
See accompanying notes to combined financial statements.
136
<PAGE> 138
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997* 1996 1995
------------ ------------ ----------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (411) 798 4
Adjustments to reconcile net earnings (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 196 210 173
Impairment of assets 15 9 --
Stock compensation 296 10 16
Payments of stock compensation (75) (1) (3)
Share of losses of affiliates, net 850 372 210
Deferred income tax expense (benefit) 16 471 (9)
Intergroup tax allocation (159) (21) (56)
Minority interests in earnings of attributed subsidiaries (25) (26) (20)
Gain on issuance of stock by affiliates (112) (13) (165)
Gain on sale of stock by attributed subsidiaries (60) -- (123)
Gain on disposition of assets, net (420) (1,558) (47)
Other noncash charges 17 9 7
Changes in operating assets and liabilities, net of the effect of
acquisitions and dispositions:
Change in receivables 9 (53) (16)
Change in prepaid expenses and committed program rights (3) (12) (54)
Change in payables, accruals and customer prepayments 38 50 76
------------ ------------ ----------
Net cash provided (used) by operating activities 172 245 (7)
------------ ------------ ----------
Cash flows from investing activities:
Cash paid for acquisitions (41) (168) (251)
Capital expended for property and equipment (168) (221) (190)
Cash balances of deconsolidated subsidiaries (39) -- --
Investments in and loans to affiliates and others (683) (536) (1,110)
Return of capital from affiliates 5 6 20
Collections on loans to affiliates and others 133 24 15
Cash paid for cable distribution fees -- (32) (44)
Cash proceeds from dispositions 302 170 100
Other, net (11) (13) (19)
------------ ------------ ----------
Net cash used by investing activities (502) (770) (1,479)
------------ ------------ ----------
</TABLE>
(continued)
137
<PAGE> 139
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows, continued
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997* 1996 1995
---------- ---------- ----------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings of debt 667 470 537
Repayments of debt and capital lease obligations (348) (628) (366)
Issuance of debentures -- 345 --
Contribution for issuance of common stock 2 -- --
Cash transfers from related parties 310 293 1,047
Repurchase of common stock (625) (38) --
Repurchase of common stock by attributed subsidiary (42) -- --
Net proceeds from issuance of stock by attributed subsidiaries 148 10 376
Contributions by minority shareholders of attributed subsidiaries 4 319 2
Other, net (6) (9) 5
---------- ---------- ----------
Net cash provided by financing activities 110 762 1,601
---------- ---------- ----------
Effect of exchange rate changes on cash -- 4 (3)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (220) 241 112
Cash and cash equivalents at beginning of year 444 203 91
---------- ---------- ----------
Cash and cash equivalents at end of year $ 224 444 203
========== ========== ==========
</TABLE>
* Restated - see note 14.
See accompanying notes to combined financial statements.
138
<PAGE> 140
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
December 31, 1997,1996 and 1995
(1) Basis of Presentation
The accompanying combined financial statements include the accounts of
the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that
are attributed to Liberty/Ventures Group, as defined below. All
significant intercompany accounts and transactions have been
eliminated. The combined financial statements of Liberty/Ventures Group
are presented for purposes of additional analysis of the consolidated
financial statements of TCI and subsidiaries and should be read in
conjunction with such consolidated financial statements.
On June 24, 1998, the Board of Directors of TCI (the "Board") announced
its intention, subject to shareholder approval, to combine "Liberty
Media Group", a group of TCI's assets which produce and distribute
programming services, and "TCI Ventures Group", a group of assets
comprised of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets
(collectively, "Liberty/Ventures Group"). Under the terms of the
proposed combination (the "Liberty/Ventures Combination"), each
outstanding share of Tele-Communications, Inc. Series A TCI Ventures
Group Common Stock, par value $1.00 per share (the "TCI Ventures Group
Series A Stock") will be reclassified as .52 of a share of
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share (the "Liberty Group Series A Stock" and
following the Liberty/Ventures Combination, the "Liberty/Ventures Group
Series A Stock") and each outstanding share of Tele-Communications,
Inc. Series B TCI Ventures Group Common Stock, par value $1.00 per
share (the "TCI Ventures Group Series B Stock, " and together with the
TCI Ventures Group Series A Stock, the "TCI Ventures Group Stock") will
be reclassified as .52 of a share of Tele-Communications, Inc. Series B
Liberty Media Group Common Stock, par value $1.00 per share (the
"Liberty Group Series B Stock, and following the Liberty/Ventures
Combination, the "Liberty/Ventures Group Series B Stock" and together
with the Liberty Group Series A Stock, the "Liberty Group Stock").
Following the Liberty/Ventures Combination, the Liberty/Ventures Group
Series A Stock and the Liberty/Ventures Group Series B Stock
(collectively, the "Liberty/Ventures Group Stock") will represent one
hundred percent of the equity value attributable to Liberty/Ventures
Group. The Liberty/Ventures Combination will not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect
the rights of creditors of TCI or of holders of TCI's or any of its
subsidiaries' debt.
(continued)
139
<PAGE> 141
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At December 31, 1997, Liberty/Ventures Group consisted principally of
the following assets and their related liabilities: (i) TCI's
businesses which provide programming services including production,
acquisition and distribution through all available formats and media of
branded entertainment, educational and informational programming and
software, including multimedia products, (ii) TCI's businesses engaged
in electronic retailing, direct marketing, advertising sales relating
to programming services, infomercials and transaction processing, (iii)
TCI's businesses engaged in international cable, telephony and
programming businesses (Tele-Communications International, Inc.
"TINTA") (iv) TCI's principal interests in the telephony business
consisting primarily of TCI's investment in a series of partnerships
formed to engage in the business of providing wireless communications
services, using the radio spectrum for broadband personal
communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), TCI's 28% equity
interest (representing a 41% voting interest) in Teleport
Communications Group Inc. ("TCG"), a competitive local exchange
carrier, and Western Tele-Communications, Inc. ("WTCI"), a wholly-owned
subsidiary of TCI that provides long distance transport of video, voice
and data traffic and other telecommunications services to interexchange
carriers on a wholesale basis using primarily a digital broadband
microwave network located throughout a 12 state region, (v) TCI's
businesses engaged in high speed multimedia Internet services,
including TCI's interest in At Home Corporation ("@Home") and (vi)
other assets, including National Digital Television Center, Inc.
("NDTC"), which provides digital compression and authorization services
to programming suppliers and to video distribution outlets.
Targeted Stock
On August 3, 1995, the stockholders of TCI authorized the Board to
issue the Liberty Group Stock which was intended to reflect the
separate performance of Liberty Media Group, and on August 10, 1995,
TCI distributed, in the form of a dividend, the Liberty Group Stock.
Additionally, the stockholders, of TCI approved the redesignation of
the previously authorized Class A and Class B common stock into
Tele-Communications, Inc. Series A TCI Group Common Stock, par value
$1.00 per share (the "TCI Group Series A Stock") and
Tele-Communications, Inc. Series B TCI Group Common Stock, par value
$1.00 per share (the "TCI Group Series B Stock", and together with the
TCI Group Series A Stock, the "TCI Group Stock"), respectively. On
August 28, 1997, the stockholders of TCI authorized the Board to issue
the TCI Ventures Group Stock which was intended to reflect the separate
performance of TCI Ventures Group, and on September 10, 1997, upon the
consummation of offers commenced by TCI to exchange shares of TCI Group
Stock for TCI Ventures Group Stock (the "Exchange Offers"), TCI
exchanged TCI Group Stock for TCI Ventures Group Stock in the maximum
amount set forth in the Exchange Offers.
(continued)
140
<PAGE> 142
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group Stock is intended to reflect the separate performance of TCI
and its subsidiaries and assets not attributed to Liberty/Ventures
Group. Such subsidiaries and assets, which are comprised primarily of
TCI's domestic cable and communications businesses, are collectively
referred to as "TCI Group". Collectively, Liberty/Ventures Group and
TCI Group are referred to as the "Groups" and individually are referred
to as a "Group". The TCI Group Series A Stock, Liberty Group Series A
Stock and TCI Ventures Group Series A Stock are sometimes collectively
referred to herein as the "Series A Stock," and the TCI Group Series B
Stock, Liberty Group Series B Stock and TCI Ventures Group Series B
Stock are sometimes collectively referred to herein as the "Series B
Stock."
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group and Liberty/Ventures Group
for the purpose of preparing their respective combined financial
statements, the change in the capital structure of TCI resulting from
the redesignation of TCI Group Stock and issuance of Liberty Group
Stock and TCI Ventures Group Stock, as well as the Liberty/Ventures
Group Stock resulting from the Liberty/Ventures Combination, does not
affect the ownership or the respective legal title to assets or
responsibility for liabilities of TCI or any of its subsidiaries. TCI
and its subsidiaries each continue to be responsible for their
respective liabilities. Holders of Liberty/Ventures Group Stock will be
common stockholders of TCI and are subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of
Liberty/Ventures Group and the market price of shares of
Liberty/Ventures Group Stock. In addition, net losses of any portion of
TCI, dividends and distributions on, or repurchases of, any series of
common stock, and dividends on, or certain repurchases of preferred
stock would reduce funds of TCI legally available for dividends on all
series of common stock. Accordingly, financial information of
Liberty/Ventures Group should be read in conjunction with the financial
information of TCI and TCI Group.
After the Liberty/Ventures Combination, existing debt securities of TCI
that are convertible into or exchangeable for shares of TCI Ventures
Group Stock will, as a result of the operation of antidilution
provisions, be adjusted so that there will be delivered upon their
conversion or exchange the number of shares of Liberty/Ventures Group
Stock that would have been issuable in the Liberty/Ventures Combination
with respect to the TCI Ventures Group Stock issuable upon conversion
or exchange had such conversion or exchange occurred prior to the
record date for the Liberty/Ventures Combination. Options to purchase
TCI Ventures Group Stock outstanding at the time of the
Liberty/Ventures Combination will be adjusted such that the holders of
such options will have options to purchase that number of shares of
Liberty/Ventures Group Stock which the holder would have been entitled
to receive had the holder exercised such option to purchase TCI
Ventures Group Stock prior to the record date for the Liberty/Ventures
Combination. The aggregate exercise price of the previously outstanding
options to purchase TCI Ventures Group Stock is not effected by the
Liberty/Ventures Combination.
(continued)
141
<PAGE> 143
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
After the Liberty/Ventures Combination, existing preferred stock and
debt securities of TCI that are convertible into or exchangeable for
shares of Liberty Group Stock will not result in any changes. Such
securities will continue to be convertible or exchangeable into the
same number of shares of Liberty/Ventures Group Stock. Similarly,
options to purchase Liberty Group Stock outstanding at the time of the
Liberty/Ventures Combination will not result in any changes. Such
options will remain options to purchase that number of shares of
Liberty/Ventures Group Stock having the same exercise price of the
previously outstanding options to purchase Liberty Group Stock.
The issuance of shares of Liberty/Ventures Group Stock upon such
conversion, exchange or exercise of such convertible securities will
not result in any transfer of funds or other assets from TCI Group to
Liberty/Ventures Group in consideration of such issuance. In the case
of the exercise of such options to purchase Liberty/Ventures Group
Stock, the proceeds received upon the exercise of such options will be
attributed to Liberty/Ventures Group.
The common stockholders' equity value of Liberty/Ventures Group that,
at any relevant time, is attributed to TCI Group, and accordingly not
represented by outstanding Liberty/Ventures Group Stock is referred to
as "Inter-Group Interest." Following consummation of the
Liberty/Ventures Combination an Inter-Group Interest would be created
with respect to Liberty/Ventures Group only if a subsequent transfer of
cash or other property from TCI Group to Liberty/Ventures Group is
specifically designated by the Board as being made to create an
Inter-Group Interest or if outstanding shares of Liberty/Ventures Group
Stock are purchased with funds attributable to TCI Group.
Dividends on Liberty/Ventures Group Stock are payable at the sole
discretion of the Board out of the lesser of assets of TCI legally
available for dividends or the available dividend amount with respect
to Liberty/Ventures Group, as defined. Determinations to pay dividends
on Liberty/Ventures Group Stock are based primarily upon the financial
condition, results of operations and business requirements of
Liberty/Ventures Group and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
is (unless the Board otherwise provides) specifically attributed to and
reflected in the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred
stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., TCI Group. The Board
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected in the combined financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
(continued)
142
<PAGE> 144
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstance, the other Group
may transfer funds to such Group. Such transfers of funds among the
Groups will be reflected as borrowings or, if determined by the Board,
in the case of a transfer from TCI Group to Liberty/Ventures Group,
reflected as the creation of, or increase in, TCI Group's Inter-Group
Interest in Liberty/Ventures Group or, in the case of a transfer from
Liberty/Ventures Group to TCI Group, reflected as a reduction in TCI
Group's Inter-Group Interest in Liberty/Ventures Group. There are no
specific criteria for determining when a transfer will be reflected as
a borrowing or as an increase or reduction in an Inter-Group Interest.
The Board expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the financing needs
and objectives of the Groups, the investment objectives of the Groups,
the availability, cost and time associated with alternative financing
sources, prevailing interest rates and general economic conditions.
Loans from one Group to another Group generally will bear interest at
such rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures established
by, the Board. The Board expects to make such determinations, either in
specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the use of proceeds by
and creditworthiness of the recipient Group, the capital expenditure
plans of and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group reflect its net loans or
advances to or borrowings from the other Group. Similarly, the
respective combined statements of operations of the Groups reflect
interest income or expense, as the case may be, associated with such
loans or advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical combined financial statements,
net loans or advances between Groups have been and will continue to be
included as a component of each respective Group's combined equity.
Although any increase in TCI Group's Inter-Group Interest in
Liberty/Ventures Group resulting from an equity contribution by TCI
Group to Liberty/Ventures Group or any decrease in such Inter-Group
Interest resulting from a transfer of funds from Liberty/Ventures Group
to TCI Group would be determined by reference to the market value of
the Liberty/Ventures Group Stock, as of the date of such transfer, such
an increase could occur at a time when such shares could be considered
undervalued and such a decrease could occur at a time when such shares
could be considered overvalued.
(continued)
143
<PAGE> 145
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
All financial impacts of issuances and purchases of shares of TCI Group
Stock or Liberty/Ventures Group Stock, the proceeds of which are
attributed to TCI Group or Liberty/Ventures Group, respectively, will
be to such extent reflected in the combined financial statements of TCI
Group or Liberty/Ventures Group, respectively. All financial impacts of
issuances of shares of Liberty/Ventures Group Stock, the proceeds of
which are attributed to TCI Group in respect of a reduction in TCI
Group's Inter-Group Interest in Liberty/Ventures Group, will be to such
extent reflected in the combined financial statements of TCI Group.
Financial impacts of dividends or other distributions on TCI Group
Stock or Liberty/Ventures Group Stock, will be attributed entirely to
TCI Group or Liberty/Ventures Group, respectively, except that
dividends or other distributions on Liberty/Ventures Group Stock will
(if at the time there is an Inter-Group Interest in Liberty/Ventures
Group) result in TCI Group being credited, and Liberty/Ventures Group
being charged (in addition to the charge for the dividend or other
distribution paid), with an amount equal to the product of the
aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Liberty/Ventures Group
Stock and a fraction of the numerator of which is the Liberty/Ventures
Group "Inter-Group Interest Fraction" and the denominator of which is
the Liberty/Ventures Group "Outstanding Interest Fraction" (both as
defined). Financial impacts of repurchases of Liberty/Ventures Group
Stock, the consideration for which is charged to TCI Group, will be to
such extent reflected in the combined financial statements of TCI Group
and will result in an increase in TCI Group's Inter-Group Interest in
Liberty/Ventures Group.
(2) Proposed Merger
TCI and AT&T Corp. ("AT&T") have agreed to a merger (the "AT&T/TCI
Merger") pursuant to, and subject to the terms and conditions set forth
in the Agreement and Plan of Restructuring and Merger, dated as of June
23, 1998 (the "Merger Agreement"), among TCI, AT&T and an indirect
wholly-owned subsidiary of AT&T. In the Merger, TCI will become a
wholly-owned subsidiary of AT&T and each share of TCI Group Series A
Stock will be converted into .7757 of a share of common stock, par
value $1.00 per share, of AT&T ("AT&T Common Stock") and each share of
TCI Group Series B Stock will be converted into .8533 of a share of
AT&T Common Stock. The Liberty/Ventures Combination is not conditioned
upon the AT&T/TCI Merger, however, upon closing of the AT&T/TCI Merger,
the shareholders of Liberty/Ventures Group will be issued separate
shares of a new targeted stock of AT&T in exchange for the shares of
Liberty/Ventures Group Stock held. If the Liberty/Ventures Combination
does not occur prior to the AT&T/TCI Merger, then in the AT&T/TCI
Merger, each share of TCI Ventures Group Series A Stock and TCI
Ventures Group Series B Stock will be converted into .52 of a share of
the new targeted stock of AT&T into which the Liberty Group Series A
Stock will be exchanged ("New Liberty Media Group Class A Tracking
Stock") and the Liberty Group Series B Stock will be exchanged ("New
Liberty Media Group Class B Tracking Stock" and together with the New
Liberty Media Group Class A Tracking Stock "New Liberty Media Group
Tracking Stock"), respectively.
(continued)
144
<PAGE> 146
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective with the AT&T/TCI Merger, TCI's Convertible Preferred Stock
Series C-Liberty Media Group will be converted into a number of shares
of New Liberty Media Group Class A Tracking Stock equal to the current
conversion rate of such preferred stock (56.25 shares per preferred
share) and TCI's Redeemable Convertible Liberty Media Group Preferred
Stock, Series H will be converted into a number of shares of New
Liberty Media Group Class A Tracking Stock equal to the current
conversion rate of such preferred stock (0.590625 share per preferred
share).
The shares of New Liberty Media Group Tracking Stock to be issued in
the AT&T/TCI Merger will be a newly authorized class of common stock of
AT&T which will be intended to reflect the separate performance of the
businesses and assets attributed to Liberty/Ventures Group. Pursuant to
the Merger Agreement, immediately prior to the AT&T/TCI Merger, certain
assets attributed to Liberty/Ventures Group (including, among others,
the shares of AT&T Common Stock to be received in the merger of AT&T
and TCG (see note 5), the stock of @Home held by Liberty/Ventures
Group, the assets and business of the NDTC and Liberty/Ventures Group's
equity interest in WTCI) will be transferred to TCI Group in exchange
for approximately $5.5 billion in cash. Also, upon consummation of the
AT&T/TCI Merger, through a new tax sharing agreement between
Liberty/Ventures Group and AT&T, Liberty/Ventures Group will become
entitled to the benefit of all of the net operating loss carryforwards
available to the entities included in TCI's consolidated income tax
return as of the date of the AT&T/TCI Merger. Additionally, certain
warrants currently attributed to TCI Group will be transferred to
Liberty/Ventures Group in exchange for up to $176 million in cash.
Certain agreements to be entered into at the time of the AT&T/TCI
Merger as contemplated by the Merger Agreement will, among other
things, provide preferred vendor status to Liberty/Ventures Group for
digital basic distribution on AT&T's systems of new programming
services created by Liberty/Ventures Group and its affiliates, provide
for a renewal of existing affiliation agreements and provide for the
business of Liberty/Ventures Group to continue to be managed following
the AT&T/TCI Merger by certain members of TCI's management who manage
the businesses of Liberty/Ventures Group.
If TCI terminates the Merger Agreement due to (i) the failure of AT&T's
stockholders to approve the AT&T/TCI Merger prior to March 31, 1999,
(ii) the withdrawal or modification by the AT&T Board of Directors of
its approval of the transaction, or (iii) the failure to obtain
necessary governmental and regulatory approvals by September 30, 1999,
which failure occurs as a result of the announcement by AT&T of a
significant transaction which delays receipt of such governmental
approvals, AT&T will pay to TCI the sum of $1.75 billion in cash. If
AT&T terminates the Merger Agreement, under certain circumstances,
including the failure of TCI stockholders to approve the transaction
prior to March 31, 1999 or the withdrawal or modification by the Board
of its approval of the Merger, TCI will pay to AT&T the sum of $1.75
billion in cash.
(continued)
145
<PAGE> 147
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Consummation of the AT&T/TCI Merger is subject to the satisfaction or
waiver of customary conditions to closing, including but not limited
to, the separate approvals of the stockholders of AT&T and TCI, receipt
of all necessary governmental consents and approvals, and effectiveness
of the registration statement registering the AT&T Common Stock and New
Liberty Media Group Tracking Stock to be issued to TCI stockholders in
the AT&T/TCI Merger. As a result, there can be no assurance that the
AT&T/TCI Merger will be consummated or, if the AT&T/TCI Merger is
consummated, as to the date of such consummation.
(3) Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents consist of investments which are readily convertible
into cash and have maturities of three months or less at the time of
acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at December 31, 1997 and 1996 was not material.
Program Rights
Prepaid program rights are amortized on a film-by-film basis over the
specific number of exhibitions. Committed program rights include
exhibition and other exploitation rights acquired under license
agreements or through production and output agreements. Committed
program rights and program rights payable are recorded at the estimated
cost of the programs when the film is available for airing less
prepayments.
Investments
All marketable equity securities held by Liberty/Ventures Group are
classified as available-for-sale and are carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried net of taxes as a separate component of
combined equity. Realized gains and losses are determined on a
specific-identification basis.
Other investments in which the ownership interest is less than 20% and
are not considered marketable securities are carried at the lower of
cost or net realizable value. For those investments in affiliates in
which TCI's voting interest is 20% to 50%, the equity method of
accounting is generally used. Under this method, the investment,
originally recorded at cost, is adjusted to recognize Liberty/Ventures
Group's share of net earnings or losses of the affiliates as they occur
rather then as dividends or other distributions are received, limited
to the extent of Liberty/Ventures Group's investment in, advances to
and commitments for the investee. Liberty/Ventures Group's share of net
earnings or losses of affiliates includes the amortization of the
difference between Liberty/Ventures Group's investment and its share of
the net assets of the investee. However, recognition of gains on sales
of properties to affiliates accounted for under the equity method is
deferred in proportion to Liberty/Ventures Group's ownership interest
in such affiliates.
(continued)
146
<PAGE> 148
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Changes in Liberty/Ventures Group's proportionate share of the
underlying equity of an attributed subsidiary or equity method
investee, which result from the issuance of additional equity
securities by such attributed subsidiary or equity investee, generally
are recognized as gains or losses in Liberty/Ventures Group's combined
statements of operations.
Property and Equipment
Property and equipment, including significant improvements, is stated
at cost which includes acquisition costs allocated to tangible assets
acquired. Equipment acquired under capital leases are stated at the
present value of minimum lease payments, not to exceed the fair value
of the leased asset. Construction and initial customer installation
costs, including interest during construction, material, labor and
applicable overhead, are capitalized. Interest capitalized during 1997,
1996 and 1995 was not material.
Depreciation is computed on a straight-line basis using estimated
useful lives of 3 to 20 years for distribution systems (3 to 5 years
for converters and in-home wiring and 10 to 20 years for the remaining
components of the distribution system) and 3 to 40 years for support
equipment and buildings (3 to 5 years for support equipment and 10 to
40 years for buildings and improvements). Equipment held under capital
leases are depreciated on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.
Repairs and maintenance are charged to operations, and additions are
capitalized. At the time of ordinary retirements, sales or other
dispositions of cable property, the original cost and cost of removal
of such property are charged to accumulated depreciation, and salvage,
if any, is credited thereto. Gains and losses relating to cable
property are only recognized in connection with sales of properties in
their entirety. Gains and losses relating to all other assets are
recognized at the time of disposal.
Excess Cost Over Acquired Net Assets
Excess cost over acquired net assets consists of the difference between
the cost of acquiring non-cable entities and amounts assigned to their
tangible assets. Such amounts are amortized on a straight-line basis
over 10 to 30 years.
Franchise Costs
Franchise costs generally include the difference between the cost of
acquiring cable companies and amounts allocated to their tangible
assets. Such amounts are amortized on a straight-line basis over 40
years.
(continued)
147
<PAGE> 149
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Impairment of Long-lived Assets
Liberty/Ventures Group periodically reviews the carrying amounts of
property, plant and equipment and its intangible assets to determine
whether current events or circumstances warrant adjustments to such
carrying amounts. If an impairment adjustment is deemed necessary, such
loss is measured by the amount that the carrying value of such assets
exceeds their fair value. Considerable management judgment is necessary
to estimate the fair value of assets, accordingly, actual results could
vary significantly from such estimates. Assets to be disposed of are
carried at the lower of their financial statement carrying amount or
fair value less costs to sell.
Minority Interests
Recognition of minority interests' share of losses of attributed
subsidiaries is generally limited to the amount of such minority
interests' allocable portion of the common equity of those attributed
subsidiaries. Further, the minority interests' share of losses is not
recognized if the minority holders of common equity of attributed
subsidiaries have the right to cause Liberty/Ventures Group to
repurchase such holders' common equity.
Foreign Currency Translation
The functional currency of Liberty/Ventures Group is the United States
("U.S.") dollar. The functional currency of TINTA's foreign operations
generally is the applicable local currency for each foreign subsidiary
and foreign equity method investee. In this regard, the functional
currency of certain of TINTA's foreign subsidiaries and foreign equity
investees is the Argentine peso, the United Kingdom ("UK") pound
sterling ("(pound)" or "pounds"), the French franc ("FF") and the
Japanese yen ("(Y)"). All amounts presented herein with respect to
operations in Argentina are stated in U.S. dollars because the
Argentine government has maintained an exchange rate of one U.S. dollar
to one Argentine peso since April of 1991. However, no assurance can be
given that the Argentine government will maintain such an exchange rate
in future periods. Assets and liabilities of foreign subsidiaries and
foreign equity investees are translated at the spot rate in effect at
the applicable reporting date, and the combined statements of
operations and Liberty/Ventures Group's share of the results of
operations of its foreign equity affiliates are translated at the
average exchange rates in effect during the applicable period. The
resulting unrealized cumulative translation adjustment, net of
applicable income taxes, is recorded as a separate component of
combined equity.
Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses which are reflected in the combined
statements of operations as unrealized (based on the applicable period
end translation) or realized upon settlement of the transactions.
Cash flows from attributed foreign subsidiaries are calculated in their
functional currencies. The effect of exchange rate changes on cash
balances held in foreign currencies is reported as a separate line item
in the accompanying statements of cash flows.
(continued)
148
<PAGE> 150
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Unless otherwise indicated, convenience translations of foreign
currencies into U.S. dollars are calculated using the applicable spot
rate at December 31, 1997, as published in The Wall Street Journal.
Foreign Currency Derivatives
From time to time, Liberty/Ventures Group uses certain derivative
financial instruments to manage its foreign currency risks. Amounts
receivable or payable pursuant to derivative financial instruments that
qualify as hedges of existing assets, liabilities and firm commitments
are deferred and reflected as an adjustment of the carrying amount of
the hedged item. Market value changes in all other derivative financial
instruments are recognized currently in the combined statements of
operations. At December 31, 1997 and 1996, Liberty/Ventures Group had
no significant deferred hedging gains or losses.
Revenue Recognition
Programming revenue is recognized in the period during which
programming is provided, pursuant to affiliation agreements.
Advertising revenue is recognized, net of agency commissions, in the
period during which underlying advertisements are broadcast. Cable
revenue is recognized in the period that services are rendered. Cable
installation revenue is recognized in the period the related services
are provided to the extent of direct selling costs. Any remaining
amount is deferred and recognized over the estimated average period
that customers are expected to remain connected to the cable television
system.
Comprehensive Earnings
Effective December 31, 1997, Liberty/Ventures Group adopted the
provisions of Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("Statement 130"). Liberty/Ventures
Group has reclassified its prior period combined balance sheets and
combined statements of operations to conform to the requirements of
Statement 130. Statement 130 requires that all items which are
components of comprehensive earnings be reported in a financial
statement in the period in which they are recognized. Liberty/Ventures
Group has included cumulative foreign currency translation adjustments
and unrealized holding gains and losses on available-for-sale
securities in other comprehensive earnings that are recorded directly
in combined equity. Pursuant to Statement 130, these items are
reflected, net of related tax effects, as components of other
comprehensive earnings in Liberty/Ventures Group's combined statements
of operations, and are included in accumulated other comprehensive
earnings in Liberty/Ventures Group's combined balance sheets and
combined statements of equity.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(continued)
149
<PAGE> 151
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $60 million, $52 million and $53 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Cash
paid for income taxes during the years ended December 31, 1997 and 1996
was $35 million and $14 million, respectively. Cash paid for taxes for
the year ended December 31, 1995 was not material. In addition,
Liberty/Ventures Group received income tax refunds amounting to $15
million during the year ended December 31, 1996.
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 481 688 625
Net liabilities assumed (209) (115) (133)
Debt issued to related party and others (404) (52) (87)
Contribution to combined equity from TCI for
acquisition -- (196) (19)
Deferred tax asset (liability) recorded in acquisition 112 (37) (177)
Excess of consideration paid over carryover basis of
net assets acquired from related party 219 -- --
Increase in minority interests in equity of
attributed subsidiaries due to issuance of shares
by attributed subsidiary -- (43) --
Minority interests in equity of acquired attributed
subsidiaries (128) (77) 42
Liberty Group Stock issued (30) -- --
---------- ---------- ----------
Cash paid for acquisitions $ 41 168 251
========== ========== ==========
</TABLE>
Significant noncash investing and financing activities are as follows for the
years ended December 31,:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
amounts in millions
<S> <C> <C> <C>
Property and equipment purchased under capital leases $ 176 64 77
========== ========== ==========
Common stock received in exchange for option (note 6) $ 306 -- --
========== ========== ==========
Preferred stock received in exchange for common stock
and note receivable (note 7) $ 371 -- --
========== ========== ==========
Costs of distribution agreements $ 173 -- --
========== ========== ==========
Exchange of attributed subsidiaries for note receivable
and equity investments $ -- 574 --
========== ========== ==========
</TABLE>
(continued)
150
<PAGE> 152
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Liberty/Ventures Group ceased to include Flextech p.l.c. ("Flextech")
and Cablevision S.A. ("Cablevision") in its combined financial results
and began to account for Flextech and Cablevision using the equity
method of accounting, effective January 1, 1997 and October 1, 1997,
respectively. The effects of changing the method of accounting as of
December 31, 1997 for Liberty/Ventures Group's ownership interests in
Flextech and Cablevision from the consolidation method to the equity
method are summarized below (amounts in millions):
<TABLE>
<S> <C>
Assets (other than cash and cash equivalents) reclassified
to investments in affiliates $ (596)
Liabilities reclassified to investments in affiliates 484
Minority interests in equity of attributed subsidiaries
reclassified to investments in affiliates 151
--------------
Decrease in cash and cash equivalents $ 39
==============
</TABLE>
(5) Investments in Affiliates
Liberty/Ventures Group has various investments accounted for under the
equity method. The following table includes Liberty/Ventures Group's
carrying amount and percentage ownership of the more significant
investments at December 31, 1997 and the carrying amount at December
31, 1996.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------------------- ------------------------
Percentage Carrying Carrying
Ownership Amount Amount
-------------------- --------------------- ------------------------
dollar amounts in millions
<S> <C> <C> <C>
PCS Ventures 30% - 35% $ 607 830
Telewest Communications plc
("Telewest") 27% 324 488
TCG 28% 295 276
Flextech 37% 261 --
Cablevision 26% 239 --
USA Networks, Inc. ("USAI") and
related investments 21% 348 342
Various foreign equity
investments (other than
Telewest, Flextech and
Cablevision) various 209 222
QVC, Inc. 43% 134 104
Other various 237 368
------------- -------------
$ 2,654 2,630
============= =============
</TABLE>
(continued)
151
<PAGE> 153
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Summarized unaudited combined financial information for affiliates is as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
------------------ -----------------
Combined Financial Position amounts in millions
- ---------------------------
<S> <C> <C>
Investments $ 3,857 2,747
Property and equipment, net 5,419 4,360
Franchise costs and other intangibles, net 5,617 4,264
Other assets, net 9,460 5,984
------------------ -----------------
Total assets $ 24,353 17,355
================== =================
Debt $ 11,554 5,492
Other liabilities 5,351 4,301
Owners' equity 7,448 7,562
------------------ -----------------
Total liabilities and equity $ 24,353 17,355
================== =================
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Combined Operations amounts in millions
- -------------------
<S> <C> <C> <C>
Revenue $ 7,107 4,576 3,615
Operating expenses (7,635) (4,727) (3,435)
Depreciation and
amortization (1,152) (547) (359)
---------- ---------- ----------
Operating loss (1,680) (698) (179)
Interest expense (656) (375) (220)
Other, net (443) (267) (198)
---------- ---------- ----------
Net loss $ (2,779) (1,340) (597)
========== ========== ==========
</TABLE>
The PCS Ventures include Sprint Spectrum Holding Company, L. P.
("Sprint Spectrum") and MinorCo, L.P. (collectively, "Sprint PCS" or
the "Sprint PCS Partnerships") and PhillieCo Partnership I, L.P.
("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox") and Liberty/Ventures
Group. The partners of PhillieCo are subsidiaries of Sprint, Cox and
Liberty/Ventures Group. Liberty/Ventures Group has a 30% partnership
interest in each of the Sprint PCS Partnerships and a 35% partnership
interest in PhillieCo. During the years ended December 31, 1997, 1996
and 1995, the PCS Ventures accounted for $493 million, $133 million and
$34 million, respectively, of Liberty/Ventures Group's share of
affiliates' losses.
(continued)
152
<PAGE> 154
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
From inception through December 31, 1997, the four partners have
contributed approximately $4.0 billion to the Sprint PCS Partnerships
(of which Liberty/Ventures Group contributed an aggregate of
approximately $1.3 billion). The partners had agreed in forming the
Sprint PCS Partnerships to contribute up to $4.2 billion of equity,
thereto from inception through fiscal 1999, subject to certain
requirements. The remaining $200 million (of which Liberty/Ventures
Group's share is approximately $60 million) will be contributed by the
end of the second quarter of 1998. Sprint PCS's business plan will
require additional capital financing prior to the end of 1998. Sources
of funding for Sprint PCS's capital requirements may include vendor
financing, public offerings or private placements of equity and/or debt
securities, commercial bank loans and/or capital contributions from the
Sprint PCS partners. However, there can be no assurance that any
additional financing can be obtained on a timely basis, on terms
acceptable to Sprint PCS or the Sprint PCS partners and within the
limitations contained in the agreements governing Sprint PCS's existing
debt.
Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized
management to operate Sprint PCS in accordance with such budget. The
Sprint PCS partners may mutually agree to make additional capital
contributions. However, the Sprint PCS partners have no such obligation
in the absence of an approved budget, and there can be no assurance the
Sprint PCS partners will reach such an agreement or approve the 1998
proposed budget. In addition, the failure by the Sprint PCS partners to
approve a business plan may impair the ability of Sprint PCS to obtain
required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS partners could result in the
delay or abandonment of Sprint PCS's development and expansion plans
and expenditures, the failure to meet regulatory requirements or other
potential adverse consequences.
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership
board has resulted in the occurrence of a "Deadlock Event" under the
Sprint PCS partnership agreement as of January 1, 1998. Under the
Sprint PCS partnership agreement, if one of the Sprint PCS partners
refers the budget issue to the chief executive officers of the
corporate parents of the Sprint PCS partners for resolution pursuant to
specified procedures and the issue remains unresolved, buy/sell
provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other Sprint
PCS partners, or, in certain circumstances, liquidation of Sprint PCS.
Discussions among the Sprint PCS partners about restructuring their
interests in Sprint PCS in lieu of triggering such buy/sell procedures
are ongoing. However, there is no certainty the discussions will result
in a change to the partnership structure or will avert the triggering
of the resolution and buy/sell procedures referred to above or a
liquidation of Sprint PCS.
(continued)
153
<PAGE> 155
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Telewest is a company that is currently operating and constructing
cable television and telephony systems in the UK. Telewest was formed
on October 3, 1995 upon the merger (the "Telewest Merger") of Telewest
with SBC CableComms (UK). Prior to the Telewest Merger,
Liberty/Ventures Group had an effective ownership interest of
approximately 36% in Telewest. As a result of the dilution of
Liberty/Ventures Group's ownership interest in Telewest that occurred
in connection with the Telewest Merger, Liberty/Ventures Group
recognized a gain of approximately $165 million (before deducting
deferred income taxes of $58 million). Telewest accounted for $145
million, $109 million and $70 million of Liberty/Ventures Group's share
of its affiliates' losses during the years ended December 31, 1997,
1996 and 1995, respectively.
At December 31, 1997, Liberty/Ventures Group held 133 million of
Telewest's convertible preference shares, which are convertible into
Telewest's ordinary shares on a one-for-one basis under certain terms
and conditions, and 246 million of Telewest's ordinary shares. On
December 31, 1997, the reported closing price on the London Stock
Exchange of the Telewest ordinary shares was (pound)0.70 per share
($1.16 per share).
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27 million
shares of Class A common stock at $16.00 per share to the public for
aggregate net proceeds of approximately $410 million. As a result of
the TCG IPO, Liberty/Ventures Group's ownership interest in TCG was
reduced from approximately 35% to approximately 31%. Accordingly,
Liberty/Ventures Group recognized a gain amounting to $13 million
(before deducting deferred income tax expense of approximately $5
million).
During 1997, TCG issued approximately 6.6 million shares of its Class A
common stock for certain acquisitions. The total consideration paid by
TCG through the issuance of common stock for such acquisitions was
approximately $123 million. In addition, effective November 5, 1997,
TCG consummated a public offering of 7.3 million shares of its Class A
common stock. TCG received net proceeds from its sale of shares
pursuant to such offering of $318 million (after deducting expenses and
fees). As a result of the above transactions, Liberty/Ventures Group's
ownership interest in TCG decreased from 31% to 28%. In connection with
the dilution of Liberty/Ventures Group's ownership interest in TCG,
Liberty/Ventures Group recognized non-cash gains in 1997 aggregating
$112 million (before deducting deferred income tax expense of
approximately $43 million). TCG accounted for $66 million, $51 million
and $30 million of Liberty/Ventures Group's share of its affiliates'
losses during the years ended December 31, 1997, 1996 and 1995,
respectively.
In January 1998, TCG entered into certain agreements pursuant to which
it agreed to be acquired by AT&T. Upon consummation, Liberty/Ventures
Group would receive in exchange for all of its interest in TCG,
approximately 47 million shares of AT&T Common Stock.
(continued)
154
<PAGE> 156
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On December 31, 1997, Liberty/Ventures Group owned 1 million shares of
TCG's Class A common stock and 49 million shares of TCG's Class B
common stock. TCG's Class A common stock had a closing price on the
Nasdaq financial market of $54.875 per share on December 31, 1997.
On April 25, 1995, TINTA acquired a 51% ownership interest in
Cablevision, an entity engaged in the multi-channel video distribution
business in Buenos Aires, Argentina, for an adjusted purchase price of
$282 million, before liabilities assumed. The purchase price was paid
with cash consideration of $195 million (including a previously paid
$20 million deposit) and TINTA's issuance of $87 million principal
amount of secured negotiable promissory notes payable to the selling
shareholders.
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision to unaffiliated third parties (the "Buyers") for cash
proceeds of $120 million. A portion of such proceeds were loaned to TCI
pursuant to an unsecured promissory note. See note 11. In addition, on
October 9, 1997, Cablevision issued approximately 3.5 million shares of
stock in the aggregate to the Buyers for $80 million in cash and notes
receivable with an aggregate principal amount of $240 million, plus
accrued interest at the London Interbank Offered Rate ("LIBOR"), due
within the earlier of two years or at the request of Cablevision's
board of directors. The 1997 transactions, (collectively, the
"Cablevision Sale") reduced TINTA's interest in Cablevision to 26.2%.
TINTA recognized a gain of $49 million on the Cablevision Sale. As a
result of the Cablevision Sale, effective October 1, 1997, TINTA ceased
to consolidate Cablevision and began to account for Cablevision using
the equity method of accounting. Cablevision accounted for $3 million
of Liberty/Ventures Group's share of its affiliates' losses during the
year ended December 31, 1997.
The $154 million excess of TINTA's aggregate historical cost basis in
Cablevision over TINTA's proportionate share of Cablevision's net
assets is being amortized over an estimated useful life of 20 years.
As of April 29, 1996, Liberty/Ventures Group and The News Corporation
Limited ("News Corp.") formed two sports programming Ventures. In the
U.S., Liberty/Ventures Group and News Corp. formed Fox/Liberty Networks
LLC ("Fox Sports") into which Liberty/Ventures Group contributed
interests in its national and regional sports networks and into which
News Corp. contributed its fx cable network and certain other assets.
Liberty/Ventures Group received a 50% interest in Fox Sports and a
distribution of $350 million in cash. No gain or loss was recognized as
the cash distribution approximated the carrying amount of the assets
contributed.
(continued)
155
<PAGE> 157
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Internationally, News Corp. and a limited liability company wholly
owned by TCI and attributed to Liberty/Ventures Group
("Liberty/TINTA"), formed a venture ("Fox Sports International") to
operate previously existing sports services in Latin American and
Australia and a variety of new sports services throughout the world
except in Asia and in the United Kingdom, Japan and New Zealand where
prior arrangements preclude an immediate collaboration. Liberty/TINTA
owns 50% of Fox Sports International with News Corp. owning the other
50%. News Corp. contributed various international sports rights and
certain trademark rights. Liberty/TINTA contributed Prime Deportiva, a
Spanish language sports service distributed in Latin America and in
Hispanic markets in the United States; an interest in Torneos y
Competencias S.A. ("Torneos"), an Argentinean sports programming and
production business; various international sports and satellite
transponder rights and cash. Liberty/TINTA also contributed its 50%
interest in Premier Sports and All-Star Sports. Both are Australian
24-hour sports services available via multi-channel, multi-point
distribution systems or cable television. Fox Sports International
accounted for $30 million and $21 million of Liberty/Ventures Group's
share of its affiliates' losses during the years ended December 31,
1997 and 1996, respectively. During the third quarter of 1997, Fox
Sports International distributed (i) its 35% interest in Torneos to
Liberty/TINTA and (ii) certain Australian sports rights to News Corp.
Pursuant to an agreement among Liberty/Ventures Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and
amended in August 1996 (the "BDTV Agreement"), Liberty/Ventures Group
contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the
"Silver King Option") to purchase 2 million shares of Class B common
stock of Silver King Communications, Inc. ("Silver King") (which shares
represented voting control of Silver King at such time) and $4 million
in cash, representing the exercise price of the Silver King Option.
BDTV-I is a corporation formed by Liberty/Ventures Group and Mr. Diller
pursuant to the BDTV Agreement, in which Liberty/Ventures Group owns
over 99% of the equity and none of the voting power (except for
protective rights with respect to certain fundamental corporate
actions) and Mr. Diller owns less than 1% of the equity and all of the
voting power. BDTV-I exercised the Silver King Option shortly after its
contribution, thereby becoming the controlling stockholder of Silver
King. Such change in control of Silver King had been approved by the
Federal Communications Commission ("FCC") in June 1996, subject,
however, to the condition that the equity interest of Liberty/Ventures
Group in Silver King not exceed 21.37% without the prior approval of
the FCC (the "FCC Order").
(continued)
156
<PAGE> 158
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King acquired Home Shopping Network, Inc.
("HSN") by merger of HSN with a subsidiary of Silver King in December
1996 (the "HSN Merger") where HSN is the surviving corporation and a
subsidiary of Silver King following the HSN Merger. Liberty/Ventures
Group accounted for the HSN Merger as a sale of a portion of its
investment in HSN and accordingly, recorded a pre-tax gain of
approximately $47 million. In order to effect the HSN Merger in
compliance with the FCC Order, Liberty/Ventures Group agreed to defer
receiving certain shares of Silver King that would otherwise have
become issuable to it in the HSN Merger until such time as it was
permitted to own such shares. As a result, the HSN Merger was
structured so that Liberty/Ventures Group received (i) 15.6 million
shares of Class B common stock of Silver King, all of which shares
Liberty/Ventures Group contributed to BDTV II INC. ("BDTV-II"), (ii)
the contractual right (the "Contingent Right") to be issued up to an
additional 5.2 million shares of Class B common stock of Silver King
from time to time upon the occurrence of certain events which would
allow Liberty/Ventures Group to own additional shares in compliance
with the FCC Order (including events resulting in the dilution of
Liberty/Ventures Group's percentage equity interest), and (iii)
approximately 739,000 shares of Class B common stock and 17.6 million
shares of common stock of HSN (representing approximately 19.9% of the
equity of HSN). BDTV-II is a corporation formed by Liberty/Ventures
Group and Barry Diller pursuant to the BDTV Agreement, in which the
relative equity ownership and voting power of Liberty/Ventures Group
and Mr. Diller are substantially the same as their respective equity
ownership and voting power in BDTV-I. Liberty/Ventures Group accounts
for its investments in BDTV-I and BDTV-II under the equity method.
As a result of the HSN Merger, HSN is no longer included in the
combined financial results of Liberty/Ventures Group. Subsequent to the
HSN Merger, Silver King was renamed HSN, Inc. ("HSNI").
At December 31, 1997, Liberty/Ventures Group held 41 million shares and
share equivalents of HSNI, including shares held through BDTV-I and
BDTV-II, after giving effect of a 2 for 1 stock dividend effective in
March 1998. HSNI's closing price on the Nasdaq financial market, as
adjusted, on December 31, 1997 was $25.75.
In February 1998, pursuant to an Investment Agreement among Universal
Studios, Inc. ("Universal"), HSNI, HSN and Liberty/Ventures Group,
dated as of October 1997 and amended and restated as of December 1997,
HSNI consummated a transaction (the "Universal Transaction") through
which USA Networks Partners, Inc., a subsidiary of Universal, sold its
50% interest in USAI, a New York general partnership, to HSNI and
Universal contributed the remaining 50% interest in USAI and its
domestic television production and distribution operations to HSNI.
Subsequent to these transactions, HSNI was renamed USAI. In connection
with the Universal Transaction, Universal, USAI, HSN and
Liberty/Ventures Group became parties to a number of other agreements
relating to, among other things, (i) the management of USAI, (ii) the
purchase and sale or other transfer of voting securities of USAI,
including securities convertible or exchangeable for voting securities
of USAI, and (iii) the voting of such securities.
(continued)
157
<PAGE> 159
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the Universal Transaction, each of Universal and
Liberty/Ventures Group has been granted a preemptive right with respect
to future issuances of USAI's capital stock, subject to certain
limitations, to maintain their respective percentage ownership
interests in USAI that they had immediately prior to such issuances. In
addition, with respect to issuances of USAI's capital stock in certain
specified circumstances, Universal will be obligated to maintain the
percentage ownership interest in USAI that it had immediately prior to
such issuances. At the closing of the Universal Transaction, Universal
(i) was issued 6 million shares of USAI's Class B Common Stock, 7
million shares of USAI's Common Stock and 109 million common equity
shares ("LLC Shares") of USANi LLC, a limited liability company formed
to hold all of the businesses of USAI and its subsidiaries, except for
its broadcasting business and its equity interest in Ticketmaster
Group, Inc. and (ii) received a cash payment of $1.3 billion. Pursuant
to an Exchange Agreement relating to the LLC Shares (the "LLC Exchange
Agreement"), 74 million of the LLC Shares issued to Universal are each
exchangeable for one share of USAI's Class B Common Stock and the
remainder of the LLC Shares issued to Universal are each exchangeable
for one share of USAI's Common Stock.
At the closing of the Universal Transaction, Liberty/Ventures Group was
issued 1.2 million shares of USAI's Class B Common Stock, representing
all of the remaining shares of USAI's Class B Common Stock issuable
pursuant to Liberty/Ventures Group's Contingent Right. Of such shares,
800,000 shares of Class B Common Stock were contributed to BDTV IV INC.
("BDTV-IV"), a newly-formed entity having substantially the same terms
as BDTV-I and BDTV-II (with the exception of certain transfer
restrictions). In addition, Liberty/Ventures Group purchased 10 LLC
Shares at the closing of the Universal Transaction for an aggregate
purchase price of $200. At that time, Liberty/Ventures Group agreed to
contribute $300 million in cash to USANI LLC by June 30, 1998 in
exchange for an aggregate of 15 million LLC Shares and/or shares of
USAI's Common Stock. Liberty/Ventures Group's cash purchase price will
increase at an annual interest rate of 7.5% beginning from the date of
the closing of the Universal Transaction through the date of
Liberty/Ventures Group's purchase of such securities. Pursuant to the
LLC Exchange Agreement, each LLC Share issued or to be issued to
Liberty/Ventures Group is exchangeable for one share of USAI's Common
Stock.
On June 5, 1995, Flextech, a company engaged in the distribution and
production of programming for multi-channel video distribution systems
in the UK, completed the sale of newly issued Flextech ordinary shares
and newly issued convertible non-preference shares ("Flextech
Non-Preference Shares") to subsidiaries of Hallmark Cards Incorporated
("Hallmark") (the "Hallmark Subscription") and US WEST, Inc. ("US
WEST") (the "US WEST Subscription") in exchange for (pound)48 million
($77 million using the applicable exchange rate) in cash and
convertible redeemable preferred shares of Thomson Directories Limited,
respectively. The Hallmark Subscription and the US WEST Subscription
are collectively referred to herein as the "Flextech Transactions."
(continued)
158
<PAGE> 160
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the Flextech Transactions, Liberty/Ventures Group
recorded a $51 million increase to combined equity and a $93 million
increase to minority interests in equity of subsidiaries. No gain was
recognized in the combined statements of operations due primarily to
the existence of certain contingent obligations of TINTA to purchase
Flextech Non-Preference Shares and/or Flextech ordinary shares of TINTA
from subsidiaries of US WEST and Hallmark.
In January 1997, Liberty/Ventures Group's voting interest in Flextech
was reduced to 50% and Liberty/Ventures Group ceased to include
Flextech in its combined financial results and began to account for
Flextech using the equity method of accounting. In April 1997, Flextech
and BBC Worldwide Limited ("BBC Worldwide") formed two separate joint
Ventures (the "BBC Joint Ventures") and entered into certain related
transactions. The consummation of the BBC Joint Ventures and related
transactions resulted in, among other things, a reduction of
Liberty/Ventures Group's economic ownership interest in Flextech from
46.2% to 36.8%. Liberty/Ventures Group continues to maintain a voting
interest in Flextech of approximately 50%. As a result of such
dilution, Liberty/Ventures Group recorded a $152 million increase to
the carrying value of Liberty/Ventures Group's investment in Flextech,
a $53 million increase to deferred income tax liability, a $66 million
increase to combined equity and a $33 million increase to minority
interests in attributed subsidiaries. No gain was recognized in the
statement of operations due primarily to certain contingent obligations
of Liberty/Ventures Group with respect to one of the BBC Joint
Ventures. Flextech accounted for $16 million of Liberty/Ventures
Group's share of its affiliates' losses during the year ended December
31, 1997.
Flextech has undertaken to finance the working capital requirements of
a joint venture with BBC Worldwide (the "Principal Joint Venture"). If
Flextech defaults in its funding obligation to the Principal Joint
Venture and fails to cure within 42 days after receipt of notice from
BBC Worldwide, BBC Worldwide is entitled, within the following 90 days,
to require that TINTA assume all of Flextech's funding obligations to
the Principal Joint Venture. Flextech is obligated to provide the
Principal Joint Venture with a primary credit facility of (pound)88
million ($145 million) and subject to certain restrictions, a standby
credit facility of (pound)30 million ($50 million).
The $20 million excess of Liberty/Ventures Group's historical cost
basis in Flextech over Liberty/Ventures Group's proportionate share of
Flextech's net assets is being amortized over an estimated useful life
of 20 years.
Based on the (pound)5.27 ($8.70) per share closing price of the
Flextech ordinary shares on the London Stock Exchange, the Flextech
ordinary shares owned by Liberty/Ventures Group had an aggregate market
value of (pound)305 million ($503 million) at December 31, 1997.
(continued)
159
<PAGE> 161
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In addition to Telewest, Flextech, Fox Sports International and
Cablevision, Liberty/Ventures Group has other less significant equity
method investments in video distribution and programming businesses
located in the UK, other parts of Europe, Asia, Latin America and
certain other foreign countries. In the aggregate, such other foreign
equity method investments accounted for $84 million, $70 million and
$54 million of Liberty/Ventures Group's share of its affiliates' losses
in 1997, 1996 and 1995, respectively.
Liberty/Ventures Group and/or other subsidiaries of TCI have guaranteed
notes payable and other obligations of certain of its affiliates (the
"Guaranteed Obligations"). At December 31, 1997, the U.S. dollar
equivalent of the amounts borrowed pursuant to the Guaranteed
Obligations aggregated $26 million.
Certain of Liberty/Ventures Group's affiliates are general partnerships
and any subsidiary of TCI which is attributed to Liberty/Ventures Group
that is a general partner in a general partnership is, as such, liable
as a matter of partnership law for all debts (other than non-recourse
debts) of that partnership in the event liabilities of that partnership
were to exceed its assets.
(6) Investment in Time Warner
On October 10, 1996, Time Warner and Turner Broadcasting System, Inc.
("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS
shareholders received 0.75 of a Time Warner common share for each TBS
Class A and Class B common share held, and each holder of TBS Class C
preferred stock received 0.80 of a Time Warner common share for each of
the 6 shares of TBS Class B common stock into which each share of Class
C preferred stock could have been converted.
Time Warner, TBS, TCI and Liberty Media Corporation entered into an
Agreement Containing Consent Order with the Federal Trade Commission
("FTC") dated August 14, 1996, as amended on September 4, 1996 (the
"FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other
things, Liberty/Ventures Group agreed to exchange the shares of Time
Warner common stock to be received in the TBS/Time Warner Merger for
shares of a separate series of Time Warner common stock with limited
voting rights (the "TW Exchange Stock"). Holders of the TW Exchange
Stock are entitled to one one-hundredth (l/100th) of a vote for each
share with respect to the election of directors. Holders of the TW
Exchange Stock will not have any other voting rights, except as
required by law or with respect to limited matters, including
amendments of the terms of the TW Exchange Stock adverse to such
holders. Subject to the federal communications laws, each share of the
TW Exchange Stock will be convertible at any time at the option of the
holder on a one-for-one basis for a share of Time Warner common stock.
Holders of TW Exchange Stock are entitled to receive dividends ratably
with the Time Warner common stock and to share ratably with the holders
of Time Warner common stock in assets remaining for common stockholders
upon dissolution, liquidation or winding up of Time Warner.
(continued)
160
<PAGE> 162
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the TBS/Time Warner Merger, Liberty/Ventures Group
received approximately 50.6 million shares of the TW Exchange Stock in
exchange for its TBS holdings. As a result of the TBS/Time Warner
Merger, Liberty/Ventures Group recognized a pre-tax gain of
approximately $1.5 billion in the fourth quarter of 1996. Additionally,
Liberty/Ventures Group and Time Warner entered into, among other
agreements, an agreement providing for the grant to Time Warner of an
option to enter into a contract with Southern Satellite Systems, Inc.
("Southern"), a wholly-owned subsidiary of Liberty/Ventures Group which
distributes the TBS SuperStation ("WTBS") signal in the United States
and Canada, pursuant to which Southern would provide Time Warner with
certain uplinking and distribution services relating to WTBS and would
assist Time Warner in converting WTBS from a superstation into a
copyright paid cable programming service. On June 24, 1997, under the
new agreement, Liberty/Ventures Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern and
certain of its subsidiaries (together with Southern, the "Southern
Business") through a purchase of assets (the "Southern Option").
Liberty/Ventures Group received 6.4 million shares of TW Exchange Stock
valued at $306 million in consideration for the grant. Such amount has
been reflected as a deferred option premium in the accompanying
combined balance sheet as of December 31, 1997. In September 1997, Time
Warner exercised the Southern Option. Pursuant to the Southern Option,
Time Warner acquired the Southern Business, effective January 1, 1998,
for $213 million, which was paid in cash together with the assumption
of certain liabilities on January 2, 1998.
As security for borrowings under one of its credit facilities,
Liberty/Ventures Group has pledged a portion of its TW Exchange Stock.
At December 31, 1997 such pledged portion had an aggregate fair value
of approximately $1.4 billion.
See note 8.
(7) Other Investments
Other investments and related receivables are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
amounts in millions
<S> <C> <C>
Marketable equity securities, at fair value $ 248 115
Investment in preferred stock, at cost, including premium 371 --
Other investments, at cost, and related receivables 76 130
---------- ----------
$ 695 245
========== ==========
</TABLE>
(continued)
161
<PAGE> 163
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of TCI
attributed to Liberty/Ventures Group, which held non-voting class C
common stock of International Family Entertainment, Inc. ("IFE")
("Class C Stock") and $23 million of IFE 6% convertible secured notes
due 2004, convertible into Class C Stock, ("Convertible Notes"),
contributed its Class C Stock and Convertible Notes to Fox Kids
Worldwide, Inc. ("FKW") in exchange for a new series of 30 year
non-convertible 9% preferred stock of FKW with a stated value of $345
million. As a result of the exchange, Liberty/Ventures Group recognized
a pre-tax gain of approximately $304 million.
During the year ended December 31, 1997, TSX Corporation ("TSX"), an
equity affiliate of Liberty/Ventures Group, and Antec Corporation
("Antec") entered into a business combination with Antec being the
surviving entity. In connection with such transaction, Liberty/Ventures
Group recognized a $29 million gain (before deducting deferred income
tax expense of approximately $12 million) representing the difference
between the fair value of the Antec shares received ($52 million) and
the carrying value of Liberty/Ventures Group's investment in TSX at the
date of the transaction ($23 million). Upon completion of this
transaction, the Company's ownership interest decreased from an
approximate 45% interest in TSX to an approximate 16% ownership
interest in Antec.
Management of Liberty/Ventures Group estimates the market value,
calculated using a variety of approaches including, multiple of cash
flow, per subscriber value, a value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty/Ventures
Group's other investments aggregated $766 million and $357 million at
December 31, 1997 and 1996, respectively. No independent appraisals
were conducted for those assets.
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted
average
interest
rate December 31,
--------------- ------------------------------------
1997 1996
--------------- ---------------
amounts in millions
<S> <C> <C> <C>
Bank credit facilities:
Communications Capital Corp (a) 6.3% $ 292 --
TCI Music, Inc. (b) 6.6% 53 --
Puerto Rico Subsidiary (c) 6.2% 45 --
Debentures (d) 4.5% 345 345
Cablevision debt -- -- 152
Other (e) 10.0% 22 31
------------- ------------
$ 757 528
============= ============
</TABLE>
(continued)
162
<PAGE> 164
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) Payable by Communications Capital Corp. ("CCC")
This revolving credit agreement, as amended, provides for
borrowings up to $500 million through August of 2000. Interest
on borrowings under the agreement is tied to, at CCC's option,
the bank's prime rate or LIBOR plus an applicable margin. The
revolving credit agreement provides as security for this
indebtedness a portion of Liberty/Ventures Group's TW Exchange
Stock. CCC must pay an annual commitment fee of .2% of the
unfunded portion of the commitment.
(b) Payable by TCI Music, Inc. ("TCI Music")
On December 30, 1997 TCI Music entered into a revolving loan
agreement (the "TCI Music Revolving Loan Agreement") which
provides for borrowings up to $100 million. Interest on
borrowings under the agreement is tied to LIBOR plus an
applicable margin or at the banks base rate dependent on TCI
Music's leverage ratio, as defined, for the preceding quarter.
The TCI Music Revolving Loan Agreement matures on June 30,
2005 with principal reductions beginning semi-annually on June
30, 2000 based on a scheduled percentage of the total
commitment. A commitment fee is charged on the unborrowed
portion of the TCI Music Revolving Loan Agreement commitment
ranging from .25% to .375% based upon the leverage ratio for
the preceding quarter.
(c) Payable by Puerto Rico Subsidiary
TINTA's Puerto Rico subsidiary (the "Puerto Rico Subsidiary")
entered into a reducing revolving bank facility which is
unsecured and provides for maximum borrowing commitments of
$100 million (the "Puerto Rico Bank Facility"). The
availability of such commitments for borrowing is subject to
the Puerto Rico Subsidiary's compliance with applicable
financial covenants and other customary conditions. Commencing
March 31, 2000, the maximum commitments will be reduced
quarterly through March 31, 2006. Borrowings under the Puerto
Rico Bank Facility bear interest at variable rates. In
addition, the Puerto Rico Subsidiary is required to pay a
commitment fee equal to 0.375% on the average daily unused
portion of the maximum borrowing commitments, payable
quarterly in arrears and at maturity. The Puerto Rico Bank
Facility contains restrictive covenants which require, among
other things, the maintenance of certain financial ratios
(primarily the ratios of cash flow to total debt and cash flow
to debt service, as defined), and includes certain limitations
on indebtedness, investments, guarantees, acquisitions,
dispositions, dividends, liens and encumbrances, and
transactions with affiliates. If TCI's ownership interest in
TINTA were to fall below 50.1%, borrowings under the Puerto
Rico Bank Facility would be secured by the assets of the
Puerto Rico Subsidiary and the variable interest rates on such
borrowings would be increased.
(continued)
163
<PAGE> 165
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(d) Debentures
On February 8, 1996, TINTA received net cash proceeds of
approximately $336 million from the issuance of 4-1/2%
Convertible Subordinated Debentures (the "TINTA Debentures")
due 2006 having an aggregate principal amount of $345 million.
The TINTA Debentures are convertible into shares of TINTA
Series A common stock at a price of $27.30 per share of TINTA
Series A common stock, subject to anti-dilution adjustments.
Interest on the TINTA Debentures is payable on February 15 and
August 15 of each year, commencing August 15, 1996. The TINTA
Debentures may be redeemed by TINTA in whole or in part, at
any time on or after February 15, 1999. Pending its use by
TINTA, the net proceeds from the sale of the TINTA Debentures
were loaned to TCI pursuant to an unsecured promissory note.
See note 11.
(e) Other
On July 7, 1997, Encore Media Group LLC ("Encore Media Group")
obtained a new $625 million senior, secured facility (the "EMG
Senior Facility") in the form of a $225 million reducing
revolving line of credit and a $400 million, 364-day revolving
credit facility convertible to a term loan. Interest on the
EMG Senior Facility is tied to, at Encore Media Group's
option, the bank's prime rate plus an applicable margin or the
LIBOR rate plus an applicable margin. Encore Media Group is
required to pay a commitment fee which varies based on a
leverage ratio. The credit agreement for the EMG Senior
Facility contains certain provisions which limit Encore Media
Group as to additional indebtedness, sale of assets, liens,
guarantees, and distributions. Additionally, Encore Media
Group must maintain certain specified financial ratios. The
EMG Senior Facility serves to replace the Encore Media
Corporation ("EMC") bank credit facility which was terminated.
No borrowings were outstanding at December 31, 1997.
The U.S. dollar equivalent of the annual maturities of Liberty/Ventures
Group's debt for each of the next five years are as follows: 1998: $22
million; 1999: $0; 2000: $294 million; 2001: $5 million and 2002: $9
million.
With the exception of the TINTA Debentures, which had a fair value of
$295 million at December 31, 1997, Liberty/Ventures Group believes that
the carrying value of Liberty/Ventures Group's debt approximated its
fair value at December 31, 1997.
(continued)
164
<PAGE> 166
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(9) Income Taxes
TCI files a consolidated federal income tax return with all of its 80%
or more owned subsidiaries. Consolidated subsidiaries in which TCI owns
less than 80% each file a separate tax return. TCI and such
subsidiaries calculate their respective tax liabilities on a separate
return basis. Income tax expense for Liberty/Ventures Group is based
upon those items in the consolidated tax calculations of TCI applicable
to Liberty/Ventures Group. Intergroup tax allocation represents an
apportionment of tax expense or benefit (other than deferred taxes) and
alternative minimum taxes to Liberty/Ventures Group in relation to its
amount of taxable earnings or losses. Such amounts are reflected as
borrowings from or loans to related parties.
A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI and
certain subsidiaries of TCI was implemented effective July 1, 1995. The
Old Tax Sharing Agreement formalized certain of the elements of a
pre-existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes
and the settlement procedures with respect to the intercompany
allocation of current tax attributes. Under the Old Tax Sharing
Agreement, Old Liberty/Ventures Group and TCI Ventures Group were
responsible to TCI for their share of consolidated income tax
liabilities (computed as if TCI were not liable for the alternative
minimum tax) determined in accordance with the Old Tax Sharing
Agreement, and TCI was responsible to Old Liberty/Ventures Group and
TCI Ventures Group to the extent that the income tax attributes
generated by Old Liberty/Ventures Group and TCI Ventures Group and
their attributed subsidiaries were utilized by TCI to reduce its
consolidated income tax liabilities (computed as if TCI were not liable
for the alternative minimum tax). In the combined financial statements
of Liberty/Ventures Group, the tax liabilities and benefits of such
entities so determined are charged or credited to an intercompany
account between TCI and Liberty/Ventures Group. Such intercompany
account was required to be settled only upon the date that an entity
ceases to be a member of TCI's consolidated group for federal income
tax purposes. Under the Old Tax Sharing Agreement, TCI retains the
burden of any alternative minimum tax and has the right to receive the
tax benefits from an alternative minimum tax credit attributable to any
tax period beginning on or after July 1, 1995 and ending on or before
October 1, 1997.
(continued)
165
<PAGE> 167
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective October 1, 1997, (the "Effective Date"), the Old Tax Sharing
Agreement was replaced by a new tax sharing agreement, as amended by
the First Amendment thereto (the "New Tax Sharing Agreement"), which
governs the allocation and sharing of income taxes by TCI Group, Old
Liberty/Ventures Group and TCI Ventures Group. Effective for periods on
and after the Effective Date, federal income taxes will be computed
based upon the type of tax paid by TCI (on a regular tax or alternative
minimum tax basis) on a separate basis for each Group. Based upon these
separate calculations, an allocation of tax liabilities and benefits
will be made such that each Group will be required to make cash
payments to TCI based on its allocable share of TCI's consolidated
federal income tax liabilities (on a regular tax or alternative minimum
tax basis, as applicable) attributable to such Group and actually used
by TCI in reducing its consolidated federal income tax liability. Tax
attributes and tax basis in assets would be inventoried and tracked for
ultimate credit to or charge against each Group. Similarly, in each
taxable period that TCI pays alternative minimum tax, the federal
income tax benefits of each Group, computed as if such Group were
subject to regular tax, would be inventoried and tracked for payment to
or payment by each Group in years that TCI utilizes the alternative
minimum tax credit associated with such taxable period. The Group
generating the utilized tax benefits would receive a cash payment only
if, and when, the unutilized taxable losses of the other Group are
actually utilized. If the unutilized taxable losses expire without ever
being utilized, the Group generating the unutilized tax benefits will
never receive payment for such benefits. Pursuant to the New Tax
Sharing Agreement, state and local income taxes are calculated on a
separate return basis for each Group (applying provisions of state and
local tax law and related regulations as if the Group were a separate
unitary or combined group for tax purposes), and TCI's combined or
unitary tax liability is allocated among the Groups based upon such
separate calculation.
Notwithstanding the foregoing, items of income, gain, loss, deduction
or credit resulting from certain specified transactions that are
consummated after the Effective Date pursuant to a letter of intent or
agreement that was entered into prior to the Effective Date will be
shared and allocated pursuant to the terms of the Old Tax Sharing
Agreement as amended.
(continued)
166
<PAGE> 168
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Income tax benefit (expense) consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------------ ------------- ----------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1997:
State and local income tax expense, including intergroup
tax allocation $ (3) (32) (35)
Federal income tax benefit, including intergroup tax
allocation 159 11 170
Foreign tax (expense) benefit (9) 4 (5)
------------ ------------- ----------
$ 147 (17) 130
============ ============= ==========
Year ended December 31, 1996:
State and local income tax expense, including intergroup
tax allocation $ (3) (92) (95)
Federal income tax benefit (expense), including
intergroup tax allocation 29 (371) (342)
Foreign income tax expense (12) (8) (20)
------------ ------------- ----------
$ 14 (471) (457)
============ ============= ==========
Year ended December 31, 1995:
State and local income tax benefit (expense), including
intergroup tax allocation $ (2) 6 4
Federal benefit, including intergroup tax allocation 59 17 76
Foreign income tax expense (9) (15) (24)
------------ ------------- ----------
$ 48 8 56
============ ============= ==========
</TABLE>
Income tax benefit (expense) differs from the amounts computed by
applying the U.S. federal income tax rate of 35% as a result of the
following:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
amounts in millions
<S> <C> <C> <C>
Computed expected tax benefit (expense) $ 189 (439) 18
Dividends excluded for income tax purposes 8 2 1
Minority interest of attributed subsidiaries 3 -- 5
Amortization not deductible for income tax purposes (10) (10) (11)
State and local income taxes, net of federal income tax
benefit (23) (60) --
Recognition of difference in income tax basis of
investments in attributed subsidiaries (10) 67 --
Effect of foreign tax rate differential on earnings of
attributed foreign subsidiary 1 1 5
Increase in valuation allowance (26) (24) (8)
Gain on sale of attributed subsidiary's stock 21 -- 43
Effect of deconsolidations on deferred tax expenses (11) -- --
Other, net (12) 6 3
---------- ---------- ----------
$ 130 (457) 56
========== ========== ==========
</TABLE>
(continued)
167
<PAGE> 169
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating and capital loss carryforwards $ 237 108
Future deductible amount attributable to accrued stock
compensation and deferred compensation 58 9
Intangible assets due principally to increase in tax
basis upon consummation of merger of attributed
subsidiary 16 --
Other future deductible amounts due principally to
non-deductible accruals 10 15
------------ ------------
Deferred tax assets 321 132
------------ ------------
Less valuation allowance 95 62
------------ ------------
Net deferred tax assets 226 70
------------ ------------
Deferred tax liabilities:
Property and equipment, due principally to differences
in depreciation 17 86
Lease obligations, capitalized for income tax purposes 4 17
Franchise costs, not deductible for income tax purposes 6 189
Foreign currency translation adjustments included in
combined equity but not recognized for income tax
purposes 3 13
Unrecognized gain on sale of assets -- 14
Investments in affiliates, due principally to losses
of affiliates recognized for income tax purposes in
excess of losses recognized for financial statement
purposes 1,153 553
------------ ------------
Deferred tax liabilities 1,183 872
------------ ------------
Net deferred tax liabilities $ 957 802
============ ============
</TABLE>
The valuation allowance relates principally to deferred tax assets
arising from net operating loss carryforwards of @ Home.
At December 31, 1997, Liberty/Ventures Group had net operating and
capital loss carryforwards for income tax purposes aggregating
approximately $597 million which, if not utilized to reduce taxable
income in future periods, will begin to expire at various dates
beginning in the year 2003.
(continued)
168
<PAGE> 170
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain subsidiaries of Liberty/Ventures Group had additional net
operating loss carryforwards for income tax purposes aggregating $113
million and these net operating losses are subject to certain rules
limiting their usage.
For purposes of these combined financial statements, Liberty/Ventures
Group has already received benefit for approximately $75 million of the
net operating loss carryforwards disclosed above. Liberty/Ventures
Group is responsible to TCI to the extent this amount of net operating
loss carryforwards is utilized by TCI in future periods.
(10) At Home Corporation
In April 1997, @Home, a subsidiary of TCI which is attributed to
Liberty/Ventures Group, issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs.
On July 11, 1997, @Home completed its initial public offering (the
"@Home IPO"), in which 10.4 million shares of @Home common stock were
sold for net cash proceeds of approximately $100 million. As a result
of the @Home IPO, Liberty/Ventures Group's economic interest in @Home
decreased from 43% to 39% which economic interest represents an
approximate 72% voting interest. In connection with the associated
dilution of Liberty/Ventures Group's ownership interest of @Home,
Liberty/Ventures Group recognized a non-cash gain of $60 million.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home
has issued warrants to such cable operators to purchase 10.9 million
shares of @Home's Series A common stock. Of these warrants, warrants to
purchase 10.2 million shares were exercisable as of March 4, 1998.
@Home may issue additional stock, or warrants in connection with its
efforts to expand its distribution of the @Home service to other cable
operators. The exercise of warrants or stock issued by @Home will
reduce Liberty/Ventures Group's equity interest and voting power in
@Home. See note 14.
(11) Combined Equity
General
The rights of holders of Liberty/Ventures Group Stock upon liquidation
of TCI are based upon the ratio of the aggregate market capitalization,
as defined, of the Liberty/Ventures Group Stock to the aggregate market
capitalization, as defined, of the TCI Group Stock and Liberty/Ventures
Group Stock.
(continued)
169
<PAGE> 171
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock Repurchases and Issuances
On January 12, 1998, TCI purchased 12.4 million shares of United Video
Satellite Group, Inc.'s ("UVSG") Series A common stock held by Lawrence
Flinn, Jr., UVSG's Chairman Emeritus, in exchange for 12.7 million
shares of TCI Ventures Group Series A Stock and 7.3 million shares of
Liberty Group Series A Stock. As a result of such transaction
Liberty/Ventures Group increased its ownership in the equity of UVSG to
approximately 73% and approximately 93% of the total voting power of
UVSG.
During the year ended December 31, 1997, pursuant to a stock repurchase
program approved by the Board, Liberty/Ventures Group repurchased
916,500 shares of Liberty Group Series A Stock in open market
transactions and 219,937 shares of Liberty Group Series A Stock from
the spouse of an officer and director of TCI at an aggregate cost of
$18 million. During 1997, pursuant to a stock repurchase program
approved by the Board, TCI purchased 338,196 shares of TCI Ventures
Group Stock in open market transactions at a cost to Liberty/Ventures
Group of $4 million.
Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a
wholly-owned TCI subsidiary attributed to TCI Group. TCI exchanged 47.2
million shares of TCI Group Series A Stock for shares of Kearns-Tribune
Corporation which held 17.9 million shares of TCI Group Stock and 10.1
million shares of Liberty Group Stock. Liberty/Ventures Group purchased
from TCI Group the 10.1 million shares of Liberty Group Stock that were
acquired in such transaction for $168 million.
During the third quarter of 1997, Liberty/Ventures Group commenced a
tender offer (the "Liberty Tender Offer") to purchase up to an
aggregate of 22.5 million shares of Liberty Group Stock at a price of
$20 per share through October 3, 1997. During the fourth quarter of
1997, Liberty/Ventures Group repurchased 21.7 million shares of Liberty
Group Series A Stock and 82,074 shares of Liberty Group Series B Stock
at an aggregate cost of approximately $435 million pursuant to the
Liberty Tender Offer. All of the above described purchases are
reflected as a reduction of combined equity in the accompanying
combined financial statements.
(continued)
170
<PAGE> 172
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the fourth quarter of 1997, TCI entered into a Total Return
Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the
Equity Swap Facility, TCI has the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares
("Equity Swap Shares") of TCI Group Series A Stock and TCI Ventures
Group Series A Stock with an aggregate purchase price of up to $300
million. TCI has the right, but not the obligation, to purchase Equity
Swap Shares through the September 30, 2000 termination date of the
Equity Swap Facility. During such period, TCI is to settle periodically
any increase or decrease in the market value of the Equity Swap Shares.
If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from
the other Equity Swap Shares. If the market value of Equity Swap Shares
is less than the Counterparty's cost, TCI, at its option, will settle
such difference with shares of TCI Group Series A Stock or TCI Ventures
Group Series A Stock or, subject to certain conditions, with cash or
letters of credit. In addition, TCI is required to periodically pay the
Counterparty a fee equal to a LIBOR-based rate on the Counterparty's
cost to acquire the Equity Swap Shares. Due to TCI's ability to issue
shares to settle periodic price fluctuation and fees under the Equity
Swap Facility, TCI records all amounts received or paid under this
arrangement as increases or decreases, respectively, to equity. As of
December 31, 1997, the Equity Swap Facility has acquired 345,000 shares
of TCI Group Series A Stock and 380,000 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $3 million
less than the fair value of such Equity Swap Shares at December 31,
1997. The costs and benefits associated with the TCI Ventures Group
Series A Stock held in the Equity Swap Facility are attributed to
Liberty/Ventures Group.
Stock Options and Stock Appreciation Rights
Liberty/Ventures Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights on
certain TCI common stock (collectively, "Awards") granted by TCI to
certain TCI employees and/or directors who are involved with
Liberty/Ventures Group. Estimated compensation relating to stock
appreciation rights ("SARs") has been recorded through December 31,
1997, and is subject to future adjustment based upon vesting and market
value, and ultimately, on the final determination of market value when
such rights are exercised. As allowed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), Liberty/Ventures Group continues to account for
stock based compensation pursuant to Accounting Principles Board
Opinion No. 25, which Liberty/Ventures Group estimates that
compensation expense would not be materially different under Statement
123. The estimated compensation adjustment with respect to TCI SARs
resulted in increases (decreases) to Liberty/Ventures Group's share of
TCI's stock compensation liability of $235 million, $(9 million) and
$14 million for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, for the years ended December 31, 1997, 1996
and 1995, respectively, Liberty/Ventures Group made cash payments
relating to its share of TCI's stock compensation obligations of $64
million, less than $1 million and $3 million, respectively. The payable
or receivable arising from the compensation related to the Awards is
included in the amount due to related parties.
(continued)
171
<PAGE> 173
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Transactions with Officers and Directors
On January 5, 1998, TCI announced that a settlement (the "Magness
Settlement") had been reached in the litigation brought against it and
other parties in connection with the administration of the Estate of
Bob Magness (the "Magness Estate"), the late founder and former
Chairman of the Board of TCI.
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr.
John C. Malone, TCI's Chairman and Chief Executive Officer, and Dr.
Malone's wife (together with Dr. Malone, the "Malones"), under which
the Malones granted to TCI the right to acquire any shares of TCI stock
which are entitled to cast more than one vote per share (the
"High-Voting Shares") owned by the Malones, which currently consist of
an aggregate of approximately 60 million High-Voting shares upon Dr.
Malone's death or upon a contemplated sale of the High-Voting Shares
(other than a minimal amount) to third persons. In either such event,
TCI has the right to acquire the shares at a maximum price equal to the
then relevant market price of shares of Series A Stock plus a ten
percent premium. The Malones also agreed that if TCI were ever to be
sold to another entity, then the maximum premium that the Malones would
receive on their High-Voting Shares would be no greater than a ten
percent premium over the price paid for the relevant shares of Series A
Stock. TCI paid $150 million to the Malones in consideration of them
entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness (the first wife of Bob
Magness) and the Magness Estate (collectively, the "Magness Family")
also entered into a call agreement with TCI (with substantially the
same terms as the one entered into by the Malones, including a call on
the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of
approximately 49 million High-Voting Shares. The Magness Family was
paid $124 million by TCI in consideration of them entering into the
Magness Call Agreement. Additionally, on February 9, 1998, the Magness
Family entered into a shareholders' agreement with the Malones and TCI
under which (i) the Magness Family and the Malones agreed to consult
with each other in connection with matters to be brought to the vote of
TCI's shareholders, subject to the proviso that if they cannot mutually
agree on how to vote the shares, Dr. Malone has an irrevocable proxy to
vote the High-Voting Shares owned by the Magness Family, (ii) the
Magness Family may designate a nominee for TCI's Board of Directors and
Dr. Malone has agreed to vote his High Voting Shares for such nominee
and (iii) certain "tag along rights" have been created in favor of the
Magness Family and certain "drag along rights" have been created in
favor of the Malones.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was
allocated to each of the Groups. Liberty/Ventures Group's share of the
Call Payments of $140 million was paid during the first quarter of 1998
and will be reflected as a reduction of combined equity.
(continued)
172
<PAGE> 174
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Transactions with TCI and Other Related Parties
Prior to July 1997, Liberty/Ventures Group's other investments included
a 49.9% partnership interest in QE+ Ltd. ("QE+"), a limited partnership
which distributed "STARZ!," a first-run movie premium programming
service launched in 1994. Entities attributed to TCI Group held the
remaining 50.1% partnership interest.
During July 1997, Liberty/Ventures Group, TCI Group, and the 10%
minority holder of EMC, an attributed subsidiary of Liberty/Ventures
Group, entered into a series of transactions pursuant to which the
businesses of "Encore," a movie premium programming service, and STARZ!
were contributed to Encore Media Group. Upon completion of the
transaction, Liberty/Ventures Group owned 80% of Encore Media Group and
TCI Group owned the remaining 20%. In connection with these
transactions, the 10% minority interest in EMC was exchanged for
approximately 2.4 million shares of Liberty Group Series A Stock, which
was accounted for as an acquisition of a minority interest.
Liberty/Ventures Group received its 80% ownership interest in Encore
Media Group in exchange for (i) the contribution of its 49.9% interest
in QE+, (ii) the contribution of EMC, (iii) the issuance of a $307
million note payable to TCI Group (the "EMG Promissory Note"), (iv) the
cancellation and forgiveness of amounts due for certain services
provided to QE+ equal to 4% of the gross revenue of QE+ ("STARZ Content
Fees") and (v) the termination of an option to increase
Liberty/Ventures Group's ownership interest in QE+.
TCI Group received the remaining 20% interest in Encore Media Group and
the aforementioned consideration from Liberty/Ventures Group in
exchange for the contribution of TCI Group's 50.1% ownership interest
in QE+ and certain capital contributions made by TCI Group to QE+. In
addition, TCI Group entered into a 25 year affiliation agreement with
Encore Media Group (the "EMG Affiliation Agreement") pursuant to which
TCI Group will pay monthly fixed amounts in exchange for unlimited
access to all of the existing Encore and STARZ! services.
Upon formation of Encore Media Group, the operations of STARZ! are
included in the combined financial results of Liberty/Ventures Group.
The EMG Promissory Note is included in amounts due to related parties.
Prior to the formation of Encore Media Group, STARZ Content Fees were
included in revenue from related parties.
Effective December 31, 1997, Liberty/Ventures Group and TCI Group
agreed to amend the above transactions. Pursuant to the amendment, the
above described series of transactions were rescinded, retroactive to
July 1, 1997. Such rescission was given effect as of December 31, 1997
for financial reporting purposes. Simultaneously, Liberty/Ventures
Group and TCI Group entered into a new agreement whereby the EMG
Affiliation Agreement was amended to permanently reduce the monthly
fixed amounts for the life of the contract. TCI Group's 20% ownership
interest in Encore Media Group was eliminated and the EMG Promissory
Note was reduced by $32 million. The amounts to be paid to Encore Media
Group pursuant to the EMG Affiliation Agreement were reduced to amounts
which reflect current market prices.
(continued)
173
<PAGE> 175
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Due to the related party nature of the above-described transactions,
the $133 million excess of the consideration paid over the carryover
basis of the assets transferred (including a deferred tax asset of $98
million) was reflected as a decrease to combined equity. Subsequent to
the amendment, 100% of the operations of Encore Media Group are
included in the combined financial results of Liberty/Ventures Group.
Effective July 11, 1997, pursuant to an Agreement and Plan of Merger,
dated as of February 6, 1997, as amended (the "DMX Merger Agreement"),
by and among TCI, TCI Music, a wholly-owned subsidiary of TCI, a
wholly-owned subsidiary of TCI Music ("DMX Merger Sub") and DMX, Inc.
("DMX"), Merger Sub was merged with and into DMX, with DMX as the
surviving corporation (the "DMX Merger"). As a result of the DMX
Merger, stockholders of DMX became stockholders of TCI Music.
In connection with the DMX Merger, TCI and TCI Music entered into an
agreement pursuant to the which, effective as of the closing of the DMX
Merger: (i) TCI Music issued to TCI (as designee of certain of its
indirect subsidiaries), 62.5 million shares of Series B Common Stock,
$.01 par value per share, of TCI Music ("TCI Music Series B Common
Stock") and a promissory note in the amount of $40 million (the "TCI
Music Note"), (ii) until December 31, 2006, certain subsidiaries of TCI
transferred to TCI Music the right to receive all revenue from sales of
DMX music services to their residential and commercial subscribers, net
of an amount equal to 10% of revenue from such sales to residential
subscribers and net of the revenue otherwise payable to DMX as license
fees for DMX music services under affiliation agreements currently in
effect, (iii) TCI contributed to TCI Music certain commercial digital
DMX tuners that are not in service as of the effective date of the DMX
Merger, and (iv) TCI granted to each stockholder who became a
stockholder of TCI Music pursuant to the DMX Merger, one right (a
"Right") with respect to each whole share of Series A Common Stock,
$.01 par value per share, of TCI Music ("TCI Music Series A Common
Stock" and together with the TCI Music Series B Common Stock, the "TCI
Music Common Stock") acquired by such stockholder in the DMX Merger
pursuant to the terms of a Rights Agreement among TCI, TCI Music and
the rights agent (the "Rights Agreement"). Upon consummation of the DMX
Merger, each outstanding share of DMX Common Stock was converted into
the right to receive (i) one-quarter of a share of TCI Music Series A
Common Stock, (ii) one Right with respect to each whole share of TCI
Music Series A Common Stock and (iii) cash in lieu of the issuance of
fractional shares of TCI Music Series A Common Stock and Rights. Each
Right entitles the holder to require TCI to purchase from such holder
one share of TCI Music Series A Common Stock for $8.00 per share,
subject to reduction by the aggregate amount per share of any dividend
and certain other distributions, if any, made by TCI Music to its
stockholders, and, payable at the election of TCI, in cash, a number of
shares of TCI Group Series A Stock, having an equivalent value or a
combination thereof, if during the one-year period beginning on the
effective date of the DMX Merger, the price of TCI Music Series A
Common Stock does not equal or exceed $8.00 per share for a period of
at least 20 consecutive trading days.
(continued)
174
<PAGE> 176
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subsequently, TCI Music and TCI entered into an Amended and Restated
Contribution Agreement to be effective as of July 11, 1997 which
provides, among other things, for TCI to deliver, or cause certain of
its subsidiaries to deliver to TCI Music fixed monthly payments
(subject to inflation and other adjustments) through 2017.
Effective with the DMX Merger, TCI beneficially owned approximately
45.7% of the outstanding shares of TCI Music Series A Common stock and
100% of the outstanding shares of TCI Music Series B Common Stock,
which represented 89.6% of the equity and 98.7% of the voting power of
TCI Music. Simultaneously with the DMX Merger, Liberty/Ventures Group
acquired the TCI-owned TCI Music Common Stock by agreeing to reimburse
TCI for any amounts required to be paid by TCI pursuant to TCI's
contingent obligation under the Rights Agreement and issuing an $80
million promissory note (the "Music Note") to TCI. The Music Note may
be reduced by the payment of cash or the issuance by TCI of shares of
Liberty/Ventures Group Stock for the benefit of entities attributed to
TCI Group. Additionally, Liberty/Ventures Group may elect to pay $50
million of the Music Note by delivery of a Stock Appreciation Rights
Agreement that will give TCI Group the right to receive 20% of the
appreciation in value of Liberty/Ventures Group's investment in TCI
Music, to be determined at July 11, 2002. TCI Music was included in the
combined financial results of Liberty/Ventures Group as of the date of
the DMX Merger. Due to the related party nature of the transaction, the
$86 million excess of the consideration paid over the carryover basis
of the TCI Music Common Stock acquired by Liberty/Ventures Group from
TCI was reflected as a decrease in combined equity. The Music Note is
included in amounts due to related parties.
The estimated aggregate fair value of the consideration issued to
entities not controlled by TCI (the "Unaffiliated Stockholders") in the
DMX Merger and the carryover basis of the consideration issued to
entities controlled by TCI has been allocated to excess cost as the net
book values of DMX's assets and liabilities approximate their
respective fair values. The number of shares and Rights issued is based
upon DMX Common Stock ownership as of June 30, 1997. The estimated fair
value of the consideration issued to Unaffiliated Stockholders in the
DMX Merger is being accreted to the value of $8.00 per share, subject
to reduction by the aggregate amount per share of any dividend and
certain other distributions, if any, made by TCI Music to its
stockholders during the one-year period beginning on the effective date
of the DMX Merger. Such accretion is reflected as an increase in excess
cost with a corresponding increase to minority interest.
(continued)
175
<PAGE> 177
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In December 1997, TCI Music issued convertible preferred stock and
common stock in connection with two acquisitions. After giving effect
to such issuances and assuming the conversion of the TCI Music
convertible preferred stock, Liberty/Ventures Group, at December 31,
1997, owned TCI Music securities representing 78% of TCI Music's common
stock and 97% of the voting power attributable to such TCI Music common
stock. In connection with the issuance of such common shares,
Liberty/Ventures Group recorded a $19 million increase to combined
equity. No gain was recognized in the statements of operations due
primarily to Liberty/Ventures Group's contingent obligation under the
Rights Agreement.
Certain TCI corporate general and administrative costs are charged to
Liberty/Ventures Group at rates set at the beginning of the year based
on projected utilization for that year. During the years ended December
31, 1997, 1996 and 1995 Liberty/Ventures Group was allocated $13
million, $11 million and $7 million, respectively, in corporate general
and administrative costs by TCI Group.
During 1997, entities attributed to Liberty/Ventures Group made
marketing support payments to entities attributed to TCI Group. Charges
by TCI Group for such arrangements for the year ended December 31, 1997
aggregated $19 million.
Certain subsidiaries attributed to Liberty/Ventures Group produce
and/or distribute sports and other programming and other services to
cable television operators (including TCI Group) and others. Charges to
TCI Group are based upon customary rates charged to others.
HSN pays a commission to TCI Group for merchandise sales to customers
who are customers of TCI Group's cable systems. Aggregate commissions
and charges paid to TCI Group were $7 million and $6 million for the
years ended December 31, 1996 and 1995, respectively.
A subsidiary of TCI that is a member of Liberty/Ventures Group, leases
certain digital boxes under a capital lease. During 1997, such digital
boxes were subleased to TCI Group under an operating lease.
Liberty/Ventures Group recognized revenue of $15 million from TCI Group
during the year ending December 31, 1997 in connection with such lease.
In January 1998, Liberty/Ventures Group's interest in such attributed
subsidiary was transferred to TCI Group. In connection therewith, TCI
Group assumed the capital lease obligations totaling $176 million and
paid $7 million in cash to Liberty/Ventures Group. Such transfer will
be accounted for at historical cost due to the related party nature of
the transaction.
The Puerto Rico Subsidiary purchases programming services from TCI
Group. The charges, which approximate TCI Group's cost and are based on
the aggregate number of subscribers served by the Puerto Rico
Subsidiary, aggregated $6 million, $4 million and $3 million during the
years ended December 31, 1997, 1996 and 1995, respectively.
(continued)
176
<PAGE> 178
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the third quarter of 1997, Liberty/Ventures Group sold certain
assets (the "SUMMITrak Assets") to CSG Systems, Inc. ("CSG") for cash
consideration of $106 million, plus five-year warrants to purchase up
to 1.5 million shares of CSG common stock at $24 per share (the "CSG
Warrants") and $12 million in cash, once certain numbers of TCI
affiliated customers are being processed on a CSG billing system. Under
certain circumstances, TCI may also be eligible to receive certain
other contingent royalties. In connection with the sale of the
SUMMITrak Assets, TCI Group committed to purchase billing services from
CSG through 2012. In light of such commitment, Liberty/Ventures Group
has reflected the $30 million excess (after deducting deferred income
taxes of $17 million) of the cash received over the book value of the
SUMMITrak Assets as an increase to combined equity.
During the fourth quarter of 1997, Liberty/Ventures Group's remaining
assets in TCI SUMMITrak of Texas, Inc. and TCI SUMMITrak L.L.C. were
transferred to TCI Group in exchange for a $19 million reduction of the
intercompany amount owed by Liberty/Ventures Group to TCI Group. Such
transfer was accounted for at historical cost due to the related party
nature of the transaction.
Due to Related Parties
The components of "Due to related parties" are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------------- --------------
amounts in millions
<S> <C> <C>
Note receivable from TCI Group $ (88) (176)
Notes payable to TCI Group, including accrued interest 378 --
Intercompany account 240 42
---------------- --------------
$ 530 (134)
================ ==============
</TABLE>
Amounts outstanding under the note receivable from TCI Group bear
interest at variable rates based on TCI's weighted average cost of bank
borrowings of similar maturities (6.7% at December 31, 1997). Principal
and interest is due and payable as mutually agreed from time to time by
TCI and Liberty/Ventures Group.
Amounts outstanding under the notes payable to TCI Group bear interest
at varying rates from 6.5% to 12.5%. Principal maturities are as
follows: 1998 - $375 million and 1999 - $1 million.
(continued)
177
<PAGE> 179
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The non-interest bearing intercompany account includes certain income
tax and stock compensation allocations that are to be settled at some
future date. All other amounts included in the intercompany account are
to be settled within thirty days following notification.
TCI Group has provided a revolving loan facility (the "Ventures
Intergroup Credit Facility") to Liberty/Ventures Group for a five-year
period commencing on September 10, 1997. Such facility permits
aggregate borrowings at any one time outstanding of up to $500 million
(subject to reduction as provided below), which borrowings bear
interest at a rate per annum equal to The Bank of New York's prime rate
(as in effect from time to time) plus 1% per annum, payable quarterly.
A commitment fee equal to 3/8% per annum of the average unborrowed
availability under the Ventures Intergroup Credit Facility is payable
by Liberty/Ventures Group to TCI Group on a quarterly basis. The
maximum amount of borrowings permitted under the Ventures Intergroup
Credit Facility will be reduced on a dollar-for-dollar basis by up to
$300 million if and to the extent that the aggregate amount of any
additional capital that Liberty/Ventures Group is required to
contribute to Sprint PCS Partnerships subsequent to September 10, 1997
is less than $300 million. No borrowings were outstanding pursuant to
the Ventures Intergroup Credit Facility at December 31, 1997. In March
1998, Liberty/Ventures Group entered into a bank credit facility with a
term of one year which provides for aggregate borrowings of up to $400
million.
(12) Acquisitions and Dispositions
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended, among UVSG, TCI
and TCI Merger Sub, Inc. ("UVSG Merger Sub"), pursuant to which UVSG
Merger Sub was merged into UVSG, with UVSG as the surviving corporation
(the "UVSG Merger"). Liberty/Ventures Group acquired 12.4 million
shares of UVSG Class B common stock and 2.1 million shares of UVSG
Class A common stock, together representing approximately 39% of the
issued and outstanding common stock of UVSG and approximately 85% of
the total voting power of UVSG common stock immediately after the UVSG
Merger, resulting in UVSG becoming a majority-controlled attributed
entity of Liberty/Ventures Group. The UVSG Merger has been accounted
for by the purchase method. Accordingly, the results of operations of
UVSG have been combined with those of Liberty/Ventures Group since
January 25, 1996 and Liberty/Ventures Group recorded UVSG's assets and
liabilities at fair value.
On October 1, 1996, Cablevision acquired 99.99% of the issued and
outstanding capital stock of Oeste Cable Color S.A. ("OCC"), a cable
television operation, for a purchase price of $112 million (the "OCC
Acquisition"). Cash consideration of $44 million was paid at closing
and an additional cash payment of $22 million was paid on December 1,
1996. The remaining purchase price was satisfied by Cablevision's
issuance of $46 million principal amount of secured negotiable
promissory notes (the "OCC Notes"). The OCC Notes were repaid in their
entirety during the second quarter of 1997. The OCC Acquisition has
been accounted for by the purchase method. Accordingly, the results of
operations of OCC have been consolidated with those of Cablevision
since the date of acquisition and Cablevision recorded OCC's assets and
liabilities at fair value.
(continued)
178
<PAGE> 180
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On October 17, 1995, IVS Cable Holdings Limited ("IVS"), a consolidated
subsidiary of Flextech, completed the sale of a group of cable
television subsidiaries to an unaffiliated third party for aggregate
cash proceeds of (pound)63 million ($99 million using the applicable
exchange rate) (the "IVS Subsidiary Sale"). Flextech, which, at the
time, indirectly owned 91.7% of IVS, received (pound)59 million ($94
million using the applicable exchange rate) of the cash proceeds from
the IVS Subsidiary Sale.
On July 18, 1995, TINTA completed an initial public offering (the
"TINTA IPO") in which it sold 20 million shares of TINTA Series A
common stock to the public for consideration of $16.00 per share
aggregating $320 million, before deducting related expenses of
approximately $19 million. The shares sold to the public represented
17% of TINTA's total issued and outstanding common stock. Also in July
1995, TINTA issued 687,500 shares of TINTA Series A common stock as
partial consideration for a 35% ownership interest in Torneos (the "TYC
Acquisition"). As a result of the TINTA IPO and the TYC Acquisition,
Liberty/Ventures Group recognized a gain amounting to $123 million.
(13) Commitments and Contingencies
Encore Media Group is obligated to pay fees for the rights to exhibit
certain films that are released by various producers through 2017 (the
"Film Licensing Obligations"). Based on subscriber levels at December
31, 1997, these agreements require minimum payments aggregating
approximately $695 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.
TINTA has guaranteed the obligation of an affiliate ("The Premium Movie
Partnership") to pay fees for the license to exhibit certain films
through 2000. Although the aggregate amount of The Premium Movie
Partnership's license fee obligations is not currently estimable, TINTA
believes that the aggregate payments pursuant to such obligations could
be significant. If TINTA were to fail to fulfill its obligations under
the guarantee, the beneficiaries have the right to demand an aggregate
payment from TINTA of approximately $46 million. Although TINTA has not
had to perform under such guarantee to date, TINTA cannot be certain
that it will not be required to perform under such guarantee in the
future.
Liberty/Ventures Group leases business offices, has entered into pole
rental and transponder lease agreements and uses certain equipment
under lease arrangements. Rental expense under such arrangements
amounted to $84 million, $102 million and $89 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
(continued)
179
<PAGE> 181
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A summary of future minimum lease payments under noncancellable
operating and capital leases as of December 31, 1997 follows:
<TABLE>
<CAPTION>
Years ending December 31: Operating Capital
-------------- ----------------
amounts in millions
<S> <C> <C>
1998 $ 67 71
1999 66 70
2000 52 65
2001 36 59
2002 34 58
Thereafter 88 206
--------------
529
Less amounts representing interest 142
--------------
Capital lease obligations $ 387
==============
</TABLE>
It is expected that in the normal course of business, leases that
expire generally will be renewed or replaced by leases on other
properties; thus, it is anticipated that future minimum lease
commitments will not be less than the amount shown for 1998.
Effective as of December 16, 1997, NDTC, on behalf of TCI
Communications, Inc. and other cable operators that may be designated
from time to time by NDTC ("Approved Purchasers"), entered into an
agreement (the "Digital Terminal Purchase Agreement") with General
Instrument Corporation ("GI") to purchase advanced digital set-top
devices. The hardware and software incorporated into these devices will
be designed and manufactured to be compatible and interoperable with
the OpenCable(TM) architecture specifications adopted by CableLabs, the
cable television industry's research and development consortium, in
November 1997. NDTC has agreed that Approved Purchasers will purchase,
in the aggregate, a minimum of 6.5 million set-top devices during the
calendar years 1998, 1999 and 2000 at an average price of $318 per
set-top device. GI agreed to provide NDTC and its Approved Purchasers
the most favorable prices, terms and conditions made available by GI to
any customer purchasing advanced digital set-top devices. In connection
with NDTC's purchase commitment, GI agreed to grant warrants to
purchase its common stock proportional to the number of devices ordered
by each organization, which as of the effective date of the Digital
Terminal Purchase Agreement, would have represented at least a 10%
equity interest in GI (on a fully diluted basis). It is anticipated
that the value associated with such equity interest would be attributed
to TCI Group upon purchase and deployment of the digital set-top
devices. 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)
180
<PAGE> 182
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Also in December 1997, NDTC entered into a memorandum of understanding
with GI which contemplates the sale to GI of certain of the assets of
NDTC's set-top authorization business, the license of certain related
technology to GI, and an additional cash payment in exchange for
approximately 21.4 million shares of stock of GI. In connection
therewith, NDTC would also enter into a service agreement pursuant to
which it will provide certain services to GI's set-top authorization
business.
During 1997, TCI began an enterprise-wide comprehensive review of its
computer systems and related software to ensure systems properly
recognize the year 2000 and continue to process business information.
The systems being evaluated include all internal use software and
devices and those systems and devices that manage the distribution of
Liberty/Ventures Group, as well as third parties' products.
Additionally, Liberty/Ventures Group has initiated a program of
communications with its significant suppliers, customers and affiliated
companies to determine the readiness of third parties' and the impact
on Liberty/Ventures Group if those third parties fail to remediate
their own year 2000 issues.
Over the last year, Liberty/Ventures Group converted its financial
applications to commercial products which are anticipated to be year
2000 ready, or outsourced portions of its financial applications to
third party vendors who are expected to be year 2000 ready.
Notwithstanding such efforts, Liberty/Ventures Group is in the process
of finalizing its assessment of the impact of year 2000.
Liberty/Ventures Group is utilizing both internal and external
resources to identify, correct or reprogram, and test systems for year
2000 readiness. Confirmations have been received from certain primary
suppliers indicating that they are either year 2000 ready or have plans
in place to ensure readiness. As part of Liberty/Ventures Group's
assessment of its year 2000 issue, it is evaluating the level of
validation it will require of third parties to ensure their year 2000
readiness. Liberty/Ventures Group's manual assessment of the impact of
the year 2000 date change should be complete by mid-1998.
Management of Liberty/Ventures Group has not yet determined the cost
associated with its year 2000 readiness efforts and the related
potential impact on Liberty/Ventures Group's results of operations.
Amounts expended to date have not been material, although there can be
no assurance that costs ultimately required to be paid to ensure
Liberty/Ventures Group's year 2000 readiness will not have an adverse
effect on Liberty/Ventures Group's financial position. Additionally,
there can be no assurance that the systems of other companies on which
Liberty/Ventures Group relies will be converted in time or that any
such failure to convert by another company will not have an adverse
effect on Liberty/Ventures Group's financial condition or position.
(14) Restatement Associated with Costs of Distribution Agreements.
Liberty/Ventures Group has restated its combined financial statements
to record non-cash costs of certain distribution agreements as assets
to be amortized over the exclusivity periods set forth in the
respective distribution agreements. Such non-cash costs had originally
been expensed in the period that the underlying warrants had become
exercisable. This restatement resulted in a $164 million increase to
other assets and a $99 million increase to minority interests in
attributed subsidiaries at December 31, 1997. In addition, the
restatement resulted in a $65 million decrease to net loss for the year
ended December 31, 1997. See note 10.
181
<PAGE> 183
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Nine months ended September 30, 1998 and 1997
Tele-Communications, Inc. ("TCI" or the "Company") is currently traded
through six separate series of common stock which represent three targeted
groups of assets. "TCI Group", which is traded through Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share ("TCI Group Series A
Stock"), and Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share ("TCI Group Series B Stock", and together with the TCI
Group Series A Stock, the "TCI Group Stock") is intended to reflect the separate
performance of TCI's domestic cable and communications business. "Liberty Media
Group", which is traded through Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, par value $1.00 per share ("Liberty Group Series A Stock")
and Tele-Communications, Inc. Series B Liberty Media Group Common Stock, par
value $1.00 per share ("Liberty Group Series B Stock", and together with the
Liberty Group Series A Stock, the "Liberty Group Stock"), is intended to reflect
the separate performance of TCI's assets which produce and distribute
programming services. "TCI Ventures Group", which is traded through
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, par value
$1.00 per share ("TCI Ventures Group Series A Stock") and Tele-Communications,
Inc. Series B TCI Ventures Group Common Stock, par value $1.00 per share ("TCI
Ventures Group Series B Stock", and together with the TCI Ventures Group Series
A Stock, the "TCI Ventures Group Stock"), is intended to reflect the separate
performance of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets. For additional
information concerning targeted stock, see note 1 to the accompanying
consolidated financial statements of TCI.
On June 24, 1998, the Board of Directors of TCI (the "Board") announced
its intention, subject to shareholder approval, to combine Liberty Media Group
and TCI Ventures Group (collectively, "Liberty/Ventures Group"). Under the terms
of the proposed combination (the "Liberty/Ventures Combination"), each
outstanding share of TCI Ventures Group Series A Stock will be reclassified as
.52 of a share of Liberty Group Series A Stock (following the Liberty/Ventures
Combination, the "Liberty/Ventures Group Series A Stock") and each outstanding
share of TCI Ventures Group Series B Stock will be reclassified as .52 of a
share of Liberty Group Series B Stock (following the Liberty/Ventures
Combination, the "Liberty/Ventures Group Series B Stock").
Following the Liberty/Ventures Combination the Liberty/Ventures Group
Series A Stock and the Liberty/Ventures Group Series B Stock (and collectively,
the "Liberty/Ventures Group Stock") will represent one hundred percent of the
equity value attributable to Liberty/Ventures Group. The Liberty/Ventures
Combination will not result in any transfer of assets or liabilities of TCI or
any of its subsidiaries or affect the rights of creditors of TCI or of holders
of TCI's or any of its subsidiaries' debt.
182
<PAGE> 184
\
The following discussion and analysis has been prepared in conjunction
with the solicitation of shareholder approval of the proposed Liberty/Ventures
Combination, and accordingly, includes references to the proposed
Liberty/Ventures Group and analysis of the financial condition and results of
operations of the proposed Liberty/Ventures Group. Liberty Media Group and TCI
Ventures Group will continue to exist until such time as the Liberty/Ventures
Combination or another shareholder approved transaction is consummated. The
following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and financial statements included in Part II of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. The following
discussion focuses on material trends, risks and uncertainties affecting the
results of operations and financial condition of the Company, TCI Group and
Liberty/Ventures Group.
Certain statements herein 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 cost 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 Federal Communications Commission ("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 statements contained herein related to year 2000 are
hereby denominated as "Year 2000 Statements" within the meaning of the Year 2000
Information and Readiness Disclosure Act.
183
<PAGE> 185
Proposed Merger
TCI and AT&T Corp. ("AT&T") have agreed to a merger (the "AT&T/TCI
Merger") pursuant to, and subject to the terms and conditions set forth in the
Agreement and Plan of Restructuring and Merger, dated as of June 23, 1998 (the
"Merger Agreement"), among TCI, AT&T and an indirect wholly-owned subsidiary of
AT&T. In the Merger, TCI will become a wholly-owned subsidiary of AT&T and each
share of TCI Group Series A Stock will be converted into .7757 of a share of
common stock, par value $1.00 per share, of AT&T ("AT&T Common Stock") and each
share of TCI Group Series B Stock will be converted into .8533 of a share of
AT&T Common Stock. The Liberty/Ventures Combination is not conditioned upon the
AT&T/TCI Merger. Upon closing of the AT&T/TCI Merger, the shareholders of
Liberty/Ventures Group will be issued separate shares of a new targeted stock of
AT&T in exchange for the shares of Liberty/Ventures Group Stock held. If the
Liberty/Ventures Combination and reclassification of TCI Ventures Group Stock
does not occur prior to the AT&T/TCI Merger, then in the AT&T/TCI Merger, each
share of TCI Ventures Group Series A Stock and TCI Ventures Group Series B Stock
will be converted into .52 of a share of the new targeted stock of AT&T into
which the Liberty Group Series A Stock will be exchanged ("New Liberty Media
Group Series A Tracking Stock") and the Liberty Group Series B Stock will be
exchanged ("New Liberty Media Group Series B Tracking Stock" and together with
the New Liberty Media Group Series A Tracking Stock "New Liberty Media Group
Tracking Stock"), respectively. In general, the holders of shares of New Liberty
Media Group Class A Tracking Stock and the holders of shares of New Liberty
Media Group Class B Tracking Stock will vote together as a single class with the
holders of shares of AT&T Common Stock on all matters presented to such
stockholders, with the holders being entitled to one-tenth (1/10th) of a vote
for each share of New Liberty Media Group Class A Tracking Stock held, one vote
per share of New Liberty Media Group Class B Tracking Stock held, and one vote
per share of AT&T Common Stock held.
In the Merger, (i) TCI's Class B 6% Cumulative Redeemable Exchangeable
Junior Preferred Stock will remain outstanding, (ii) TCI's Convertible Preferred
Stock, Series C-TCI Group will be converted into a number of shares of AT&T
Common Stock equal to .7757 times the current conversion rate of such preferred
stock (132.86 shares per preferred share), (iii) TCI's Convertible Preferred
Stock Series C-Liberty Media Group will be converted into a number of shares of
New Liberty Media Group Class A Tracking Stock equal to the current conversion
rate of such preferred stock (56.25 shares per preferred share), (iv) TCI's
Redeemable Convertible TCI Group Preferred Stock, Series G will be converted
into a number of shares of AT&T Common Stock equal to .7757 times the current
conversion rate of such preferred stock (1.19 shares per preferred share) and
(v) TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H
will be converted into a number of shares of New Liberty Media Group Class A
Tracking Stock equal to the current conversion rate of such preferred stock
(0.590625 of a share per preferred share).
184
<PAGE> 186
The shares of New Liberty Media Group Tracking Stock to be issued in
the AT&T/TCI Merger will be a newly authorized class of common stock of AT&T
which will be intended to reflect the separate performance of the businesses and
assets attributed to Liberty/Ventures Group. Pursuant to the Merger Agreement,
immediately prior to the AT&T/TCI Merger, certain assets attributed to
Liberty/Ventures Group (including, among others, the shares of AT&T Common Stock
received in the merger of AT&T and Teleport Communications Group, Inc. ("TCG"),
the stock of At Home Corporation ("@Home") attributed to Liberty/Ventures Group,
the assets and business of the National Digital Television Center, Inc. ("NDTC")
and Liberty/Ventures Group's equity interest in Western Tele-Communications,
Inc. ("WTCI") will be transferred to TCI Group in exchange for approximately
$5.5 billion in cash. Also, upon consummation of the AT&T/TCI Merger, through a
new tax sharing agreement between Liberty/Ventures Group and AT&T,
Liberty/Ventures Group will become entitled to the benefit of all of the net
operating loss carryforwards available to the entities included in TCI's
consolidated income tax return as of the date of the AT&T/TCI Merger.
Additionally, certain warrants currently attributed to TCI Group will be
transferred to Liberty/Ventures Group in exchange for up to $176 million in
cash. Certain agreements to be entered into at the time of the AT&T/TCI Merger
as contemplated by the Merger Agreement will, among other things, provide
preferred vendor status to Liberty/Ventures Group for digital basic distribution
on AT&T's systems of new programming services created by Liberty/Ventures Group
and its affiliates, provide for a renewal of existing affiliation agreements and
provide for the business of Liberty/Ventures Group to continue to be managed
following the AT&T/TCI Merger by certain members of TCI's management who manage
the businesses of Liberty/Ventures Group.
If TCI terminates the Merger Agreement due to (i) the failure of AT&T's
stockholders to approve the AT&T/TCI Merger prior to March 31, 1999, (ii) the
withdrawal or modification by the AT&T Board of Directors of its approval of the
transaction, or (iii) the failure to obtain necessary governmental and
regulatory approvals by September 30, 1999, which failure occurs as a result of
the announcement by AT&T of a significant transaction which delays receipt of
such governmental approvals, AT&T will pay to TCI the sum of $1.75 billion in
cash. If AT&T terminates the Merger Agreement, under certain circumstances,
including the failure of TCI stockholders to approve the transaction prior to
March 31, 1999 or the withdrawal or modification by the Board of its approval of
the Merger, TCI will pay to AT&T the sum of $1.75 billion in cash.
Consummation of the AT&T/TCI Merger is subject to the satisfaction or
waiver of customary conditions to closing, including but not limited to, the
separate approvals of the stockholders of AT&T and TCI, receipt of all necessary
governmental consents and approvals, and effectiveness of the registration
statement registering the AT&T Common Stock and New Liberty Media Group Tracking
Stock to be issued to TCI stockholders in the AT&T/TCI Merger. As a result,
there can be no assurance that the AT&T/TCI Merger will be consummated or, if
the AT&T/TCI Merger is consummated, as to the date of such consummation.
185
<PAGE> 187
Magness Settlement
On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the Estate
of Bob Magness (the "Magness Estate"), the late founder and former Chairman of
the Board of TCI in exchange (the "Exchange") for an equal number of shares of
TCI Group Series B Stock (which shares are entitled to ten votes per share)
owned by the Magness Estate, (b) the Magness Estate sold (the "Sale") the shares
of TCI Group Series A Stock received in the Exchange, together with
approximately 1.5 million shares of TCI Group Series A Stock that the Magness
Estate previously owned (collectively, the "Option Shares"), to two investment
banking firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment Bankers
whereby TCI has the option, but not the obligation, to purchase the Option
Shares at any time on or before June 16, 1999 (the "Option Period"). The
preceding transactions are referred to collectively as the "June 16 Stock
Transaction". During the Option Period, the Company and the Investment Bankers
are to settle quarterly any increase or decrease in the market value of the
Option Shares. If the market value of the Option Shares exceeds the Investment
Bankers' cost, Option Shares with a fair value equal to the difference between
the market value and cost will be segregated from the other Option Shares. If
the market value of the Option Shares is less than the Investment Bankers' cost,
the Company, at its option, will settle such difference with shares of TCI Group
Series A Stock or TCI Ventures Group Series A Stock or, subject to certain
conditions, with cash or letters of credit. In addition, the Company is required
to pay the Investment Bankers a quarterly fee equal to the London Interbank
Offered Rate ("LIBOR") plus 1% on the Sale Price, as adjusted for payments made
by the Company pursuant to any quarterly settlement with the Investment Bankers.
Due to the Company's ability to settle quarterly price fluctuations and fees
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock,
the Company records all amounts received or paid under this arrangement as
increases or decreases, respectively, to equity. During the fourth quarter of
1997, the Company repurchased 4 million shares of TCI Group Series A Stock from
one of the Investment Bankers for an aggregate cash purchase price of $66
million. Additionally, as a result of the September 10, 1997 exchange of shares
of TCI Ventures Group Stock for TCI Group Stock and certain open market
transactions, the Investment Bankers disposed of 4,210,308 shares of TCI Group
Series A Stock and acquired 23,407,118 shares of TCI Ventures Group Series A
Stock during the last half of 1997. As a result of the foregoing transactions
and certain transactions related to the January 5, 1998 settlement of litigation
involving the Magness Estate, as described below, the Option Shares were
comprised of 6,201,042 shares of TCI Group Series A Stock and 11,740,610 shares
of TCI Ventures Group Series A Stock at September 30, 1998. At September 30,
1998, the market value of the Option Shares exceeded the Investment Bankers'
cost by $254 million. The costs and benefits associated with the Option Shares
are attributed to TCI Group. Pursuant to a certain Letter Agreement, dated June
16, 1997, between Dr. Malone, TCI's Chairman and Chief Executive Officer, and
the Magness Estate, Dr. Malone agreed to waive certain rights of first refusal
with respect to shares of Series B TCI Group Stock beneficially owned by the
Magness Estate. Such rights of first refusal arise from a letter agreement,
dated June 17, 1988, among Bob Magness, Kearns-Tribune Corporation and Dr.
Malone, pursuant to which Dr. Malone was granted a right of first refusal to
acquire any shares of TCI Group Series B Stock which the other parties proposed
to sell. As a result of Dr. Malone's rights under such June 17, 1988 letter
agreement, such waiver was necessary in order for the Magness Estate to
consummate the Exchange and the Sale.
186
<PAGE> 188
In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from TCI up to
30,545,864 shares of the Series B TCI Group Stock acquired by TCI from the
Magness Estate pursuant to the Exchange. Such acquisition may be made in
exchange for either, or any combination of, shares of Series A TCI Group Stock
owned by Dr. Malone (exchanged on a one for one basis), or cash in an amount
equal to the average closing sale price of the Series B TCI Group Stock for the
five trading days preceding the acquisition.
In connection with certain legal procedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob Magness'
sons, Sharon Magness, Bob Magness' surviving second wife and the original
personal representatives of the Magness Estate advanced various claims, causes
of action, demands, complaints and requests against one or more of the others.
In addition, Kim Magness and Gary Magness, in a Complaint And Request To Void
Sale Of TCI Stock, And For Damages And Surcharge, filed on October 29, 1997 (the
"Voiding Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal representatives of
the Magness Estate. Among other matters, the Voiding Action challenged the June
16 Stock Transaction on various fiduciary bases and requested recision of such
transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon Magness, the
Magness Estate, the Estate of Betsy Magness (the first wife of Bob Magness) and
Dr. Malone agreed to settle their respective claims against each other relating
to the Magness Estate and the June 16 Stock Transaction, in each case without
any of those parties admitting any of the claims or allegations against that
party (the "Magness Settlement").
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that 10,201,041 shares of TCI Group Series A Stock and
11,666,506 shares of TCI Ventures Group Series A Stock were returned to TCI as
authorized but unissued shares, and the Magness Estate paid $11 million to TCI
representing a reimbursement of the Exchange fees incurred by TCI from June 16,
1997 through February 9, 1998 with respect to such returned shares. TCI then
issued to the Magness Estate 10,017,145 shares of TCI Group Series B Stock and
12,034,298 shares of TCI Ventures Series B Stock.
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr. Malone and
Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the
Malones granted to TCI the right to acquire any shares of TCI stock which are
entitled to cast more than one vote per share (the "High-Voting Shares") owned
by the Malones, which currently consist of an aggregate of approximately 60
million High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third persons. In
either such event, TCI has the right to acquire the shares at a maximum price
equal to the then relevant market price of shares of "low-voting" Series A Stock
plus a ten percent premium. The Malones also agreed that if TCI were ever to be
sold to another entity, then the maximum premium that the Malones would receive
on their High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid $150 million
to the Malones in consideration of them entering into the Malone Call Agreement.
187
<PAGE> 189
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain cases, on
behalf of the Estate of Betsy Magness and the Magness Estate (collectively, the
"Magness Family") also entered into a call agreement with TCI (with
substantially the same terms as the one entered into by the Malones, including a
call on the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of approximately 49
million High-Voting Shares. The Magness Family was paid $124 million by TCI in
consideration of them entering into the Magness Call Agreement.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was reflected as
a $274 million reduction of additional paid-in capital. The Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, $134 million and $140
million of the Call Payments were allocated to TCI Group and Liberty/Ventures
Group, respectively.
Additionally, on February 9, 1998, the Magness Family entered into a
stockholders' agreement (the "Stockholders' Agreement") with the Malones and TCI
under which (i) the Magness Family and the Malones agree to consult with each
other in connection with matters to be brought to the vote of TCI's
shareholders, subject to the proviso that if they cannot mutually agree on how
to vote the shares, Dr. Malone has an irrevocable proxy to vote the High-Voting
Shares owned by the Magness Family, (ii) the Magness Family may designate a
nominee for the Board and Dr. Malone has agreed to vote his High Voting Shares
for such nominee and (iii) certain "tag along rights" have been created in favor
of the Magness Family and certain "drag along rights" have been created in favor
of the Malones. In addition, the Malone Right granted by TCI to Dr. Malone to
acquire 30,545,864 shares of TCI Group Series B Stock was reduced to an option
to acquire 14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms
of the Stockholders' Agreement, the Magness Family has the right to participate
in the reduced Malone Right on a proportionate basis with respect to 12,406,238
shares of the 14,511,570 shares subject to the Malone Right. On June 24, 1998,
Dr. Malone delivered notice to TCI Group exercising his right to purchase up to
14,511,570 shares of TCI Group Series B Stock at a per share price of $35.5875
pursuant to the Malone Right. In addition, a representative of the Magness
Family advised Dr. Malone that the Magness Family would participate in such
purchase up to the Magness Family's proportionate right. On October 14, 1998,
8,718,770 shares of TCI Group Series B Stock were issued to Dr. Malone upon
payment of cash consideration totaling $310 million. On October 16, 1998,
5,792,800 shares of TCI Group Series B Stock were issued to the Magness Family
upon payment of cash consideration totaling $206 million. In connection with the
acquisition of the TCI Group Series B Stock by Dr. Malone, TCI executed certain
waivers to the Stockholders' Agreement and TCI and the Magness Family executed a
waiver to the Malone Call Agreement to, among other things, permit the pledge of
TCI Group Series B Stock owned by Dr. Malone as collateral to the lenders who
provided the proceeds for the purchase of the shares of TCI Group Series B
Stock.
188
<PAGE> 190
Year 2000
During the three months ended September 30, 1998, the Company continued
its enterprise-wide, comprehensive efforts to assess and remediate its computer
systems and related software and equipment to ensure such systems, software and
equipment recognize, process and store information in the year 2000 and
thereafter. The Company's year 2000 remediation efforts include an assessment of
its most critical systems, such as customer service and billing systems,
headends and other cable plant, systems that support the Company's programming
services, business support operations, and other equipment and facilities. The
Company also continued its efforts to verify the year 2000 readiness of its
significant suppliers and vendors and continued to communicate with significant
business partners and affiliates to assess such partners and affiliates' year
2000 status.
The Company formed 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. It is comprised of a 90 member full-time staff and is
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 systems, software and equipment. Phase 1, Assessment,
involves the inventory of all 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 equipment and systems. Phase 3,
Testing, involves testing the Company's 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 September 30, 1998, the Company's overall progress by phase was as
follows:
<TABLE>
<CAPTION>
Percentage of all
Equipment/Systems Expected
Phase In Phase * Completion Date
------- ------------------ ---------------
<S> <C> <C>
Phase 1-Assessment 92% April 1999
Phase 2-Remediation 54% July 1999
Phase 3-Testing 10% July 1999
Phase 4-Implementation 5% July 1999
</TABLE>
- ---------------------
*The percentages set forth above do not total 100% because many
projects have elements in more than one phase. For purposes of this table, such
projects have been attributed to each applicable phase. In addition, the
percentages set forth above are based on the number of projects in each phase
compared to the total number of year 2000 projects.
The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such projects will be
completed on such dates.
The Company is completing an inventory of its important systems with
embedded technologies and is currently determining the correct remediation
approach. The embedded technologies assessments are expected to be complete by
December of 1998.
189
<PAGE> 191
During the three months ended September 30, 1998, the Company continued
its survey of significant third-party vendors and suppliers whose systems,
services or products are important to the Company's operations (e.g., suppliers
of addressable controllers and set-top boxes, and the provider of the Company's
billing services). The year 2000 readiness of such providers is critical to
continued provision of the Company's cable service. The Company has received
information that the most critical systems, services or products supplied to the
Company by third parties are either year 2000 ready or are expected to be year
2000 ready by mid-1999. The Company is currently developing contingency plans
for systems provided by vendors who have not responded to the Company's surveys.
In addition to the survey process described above, management of the
Company has identified its most critical supplier/vendor relationships and has
instituted a verification process to determine the vendor's year 2000 readiness.
Such verification includes, as deemed necessary, reviewing vendors' test and
other data and engaging in regular conferences with vendors' year 2000 teams.
The Company is also requiring testing to validate the year 2000 compliance of
certain critical products and services and is contracting with independent
consultants to conduct such testing.
Significant market value is associated with the Company's investments
in certain public and private corporations, partnerships and other businesses.
Accordingly, the Company is monitoring the public disclosure of such
publicly-held business entities to determine their year 2000 readiness,
including Cablevision Systems Corporation ("CSC"), Time Warner, Inc. ("Time
Warner"), and AT&T. In addition, the Company has surveyed and monitored the year
2000 status of certain privately-held business entities in which the Company has
significant investments.
The Company was informed by CSC that, at September 30, 1998, the
remediation and testing of CSC's critical systems was underway and a target date
of June 1999 had been established for completion of all remediation and testing
of year 2000 compliance of all such systems. The Company was informed by AT&T
that, at September 30, 1998, AT&T had completed 99% of its assessments and was
remediating its noncompliant systems. The Company has been informed that AT&T
has set a target date of December 1998 for completion of the assessment,
remedation and testing of all customer-affecting systems. A target date of
mid-year 1999 has been established for enterprise-wide year 2000 compliance. For
updated information related to CSC, Time Warner, and AT&T's year 2000 programs,
please refer to CSC, Time Warner, and AT&T's most recent periodic filings with
the Securities and Exchange Commission.
Year 2000 expenses and capital expenditures incurred in the three
months ended September 30, 1998 were $4 million and less than $1 million,
respectively. Expenses and capital expenditures incurred in the nine months
ended September 30, 1998 were $6 million and less than $1 million, respectively.
Management of the Company currently estimates the remaining costs to be not less
than $71 million, bringing the total estimated cost associated with the
Company's year 2000 remediation efforts to be not less than $77 million
(including $32 million for replacement of noncompliant IT Systems). Also
included in this estimate is $9 million in future payments to be made pursuant
to unfulfilled executory contracts or commitments with vendors for year 2000
remediation services. Although no assurances can be given, management currently
expects that (i) cash flow from operations will fund the costs associated with
year 2000 compliance and (ii) the total projected cost associated with the
Company's year 2000 program will not be material to the Company's financial
position, results of operations or cash flows.
The Company is a widely distributed enterprise in which allocation of
certain resources, including IT support is decentralized. Accordingly, the
Company does not consolidate an IT budget. Therefore, total estimated year 2000
costs as a percentage of an IT budget are not available. There are currently no
planned IT projects being deferred due to year 2000 costs.
190
<PAGE> 192
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. Management
believes that its year 2000 program will significantly reduce the Company's
risks associated with the changeover to the year 2000 and has implemented
certain contingency plans to minimize the effect of any potential year 2000
related disruptions. The risks and the uncertainties discussed below and the
associated contingency plans relate to systems, software, equipment, and
services that the Company has deemed critical in regard to customer service,
business operations, financial impact or safety.
The failure of addressable controllers contained in the cable system
headends could disrupt the delivery of premium services to customers and could
necessitate crediting customers for failure to receive such premium services. In
this unlikely event, management expects that it will identify and transmit the
lowest cost programming tier. Unless other contingency plans are developed with
the programmers, premium and adult content channels would not likely be
transmitted until the addressable controller had been repaired.
Customer service networks and/or automated voice response systems
failure could prevent access to customer account information, hamper
installation scheduling and disable the processing of pay-per-view requests. The
Company plans to have its customer service representatives answer telephone
calls from customers in the event of outages and expects to retrieve needed
customer information manually from the billing service provider.
A failure of the services provided by billing systems service providers
could result in a loss of customer records which could disrupt the ability to
bill customers for a protracted period. The Company plans to prepare electronic
backup records of its customer billing information prior to the year 2000 to
allow for data recovery. In addition, the Company continues to monitor the year
2000 readiness of its key customer-billing suppliers.
Advertising revenue could be adversely affected by the failure of
certain equipment which could impede or prevent the insertion of advertising
spots in the Company's programming. The Company anticipates that it can minimize
such effect by manually resetting the dates each day until the equipment is
repaired.
The Company owns investments in numerous cable programming operators
and other businesses. The market value of the Company's investment in these
entities could be adversely impacted by material failures of such entities to
address year 2000 remediation issues (including supplier and vendor issues)
related to their programming services and businesses. Further, due to tax and
strategic considerations, the Company has a limited ability to dispose of these
investments if year 2000 issues develop. Therefore, as a contingency plan, the
Company has undertaken an extensive effort to verify and in certain cases assist
in the year 2000 remediation efforts of companies in which it has significant
investments.
Security and fire protection systems failure could leave facilities
vulnerable to intrusion and fire. The Company expects to return such systems to
normal functioning by turning the power off and then on again ("power off/on").
The Company also plans to have additional security staff on site and plans to
implement a backup plan for communicating with local fire and police
departments. Also, certain personal computers interface 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.
191
<PAGE> 193
In the event that the local public utility cannot supply power, the
Company expects to supply power for a limited time to the Company's cable
headends, the NDTC and office sites through backup generators.
The financial impact of any or all of the above worst-case scenarios
has not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios.
If critical systems related to the Company's cable TV and programming
services are not successfully remediated, the Company could face claims of
breach of contract from customers of the NDTC, from parties to cable system sale
or exchange agreements, from certain programming providers and from other cable
TV businesses that rely on the Company's programming services. The Company has
not determined the possible losses from any such claims of breach of contract.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
GENERAL
Summarized operating data with respect to TCI is presented below for
the indicated periods:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
1998(a) 1997 1998(a) 1997
------------ ------------ ------------ ------------
amounts in millions
<S> <C> <C> <C> <C>
Revenue $ 1,825 1,934 5,510 5,637
Operating, selling, general and administrative
expenses 1,147 1,156 3,458 3,405
Year 2000 costs 4 -- 6 --
AT&T merger costs 1 -- 11 --
Stock compensation 11 160 423 231
Depreciation and amortization 421 396 1,289 1,177
------------ ------------ ------------ ------------
Operating income 241 222 323 824
Interest expense (272) (300) (808) (883)
Share of losses of affiliates, net (397) (253) (986) (591)
Minority interests in earnings of consolidated
subsidiaries, net (30) (35) (95) (129)
Gain on dispositions of assets 2,680 398 4,018 481
Other, net 21 24 3 46
------------ ------------ ------------ ------------
2,002 (166) 2,132 (1,076)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 2,243 56 2,455 (252)
Income tax benefit (expense) (903) (78) (1,068) 18
------------ ------------ ------------ ------------
Net earnings (loss) $ 1,340 (22) 1,387 (234)
============ ============ ============ ============
</TABLE>
(a) Restated - see note 18 to the accompanying consolidated financial
statements of TCI.
The operating results of each of TCI Group and Liberty/Ventures Group
are separately discussed below.
192
<PAGE> 194
TCI GROUP
TCI Group operates principally in the domestic cable and communications
industry. The table below sets forth, for the periods presented, the percentage
relationship that certain items bear to revenue. This summary provides trend
data relating to the normal recurring operations of TCI Group. Other items of
significance are discussed under separate captions below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------- ----------------------------------------------
1998 1997 1998 1997
--------------------- --------------------- --------------------- ---------------------
dollar amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue 100% $ 1,479 100% $ 1,618 100% $ 4,560 100% $ 4,779
Operating expenses (37) (546) (36) (580) (37) (1,685) (37) (1,792)
Selling, general and
administrative expenses (22) (329) (20) (330) (22) (986) (20) (952)
Year 2000 costs -- (3) -- -- -- (5) -- --
AT&T merger costs -- (1) -- -- -- (11) -- --
Stock compensation (1) (13) (4) (61) (4) (160) (2) (99)
Depreciation and amortization
(25) (362) (21) (338) (24) (1,111) (22) (1,032)
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 15% $ 225 19% $ 309 13% $ 602 19% $ 904
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The operation of TCI Group's cable television systems is regulated at
the federal, state and local levels. The Cable Television Consumer Protection
and Competition Act of 1992 and the Telecommunications Act of 1996 (the "Cable
Acts") established rules under which TCI Group's basic and tier service rates
and its equipment and installation charges ("Regulated Services") are regulated
if a complaint is filed by a customer or if the appropriate franchise authority
is certified by the FCC to regulate rates. At September 30, 1998, approximately
68% of TCI Group's basic customers were served by cable television systems that
were subject to such rate regulation.
During the nine months ended September 30, 1998, 74% of TCI Group's
revenue was derived from Regulated Services. As noted above, any increases in
rates charged for Regulated Services are regulated by the Cable Acts. Moreover,
competitive factors may limit TCI Group's ability to increase its service rates.
193
<PAGE> 195
On March 4, 1998, TCI Group 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 (as adjusted
for a two-for-one stock split) (the "CSC Transaction"). In addition, TCI
completed, during the first nine months of 1998, six transactions whereby TCI
Group contributed cable television systems serving in the aggregate
approximately 1,224,000 customers to six separate joint ventures (collectively,
the "1998 Joint Ventures") in exchange for non-controlling ownership interests
in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998
Joint Ventures of debt owed by TCI Group to external parties aggregating $323
million and intercompany debt owed to TCI Group aggregating $1,533 million. The
CSC Transaction and the formation of the 1998 Joint Ventures are collectively
referred to herein as the "1998 Contribution Transactions." Since January 1,
1997, TCI Group has also consummated certain other acquisitions and
dispositions. Such transactions affect the comparability of TCI Group's results
of operations for the three and nine months ended September 30, 1998 and 1997.
For additional information see notes 5 and 7 to the combined financial
statements of TCI Group which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q.
TCI Group's revenue decreased $139 million or 9% for the three months
ended September 30, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the 1998 Contribution Transactions and
other dispositions, revenue increased 3%. Revenue from TCI Group's customers
accounted for 3% of such increase in revenue, primarily due to the net effect of
a 5% increase in basic revenue, an increase in revenue from digital products and
an 8% decrease in traditional premium revenue. TCI Group experienced a 3%
increase in its average basic rate, an increase in the number of average basic
customers of 2%, an 8% decrease in its average rate for traditional premium
services and a decrease of less than 1% in the number of average traditional
premium subscriptions. Additionally, the December 31, 1997 termination of an
agreement pursuant to which TCI Group provided fulfillment services to a third
party resulted in a 1% decrease in revenue. Advertising sales and other revenue
accounted for the remaining 1% increase in revenue. A significant portion of the
increase in advertising sales is attributable to arrangements with programming
suppliers that may not continue at current levels in future periods.
TCI Group's revenue decreased $219 million or 5% for the nine months
ended September 30, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the 1998 Contribution Transactions and
other dispositions, revenue increased 2%. Revenue from TCI Group's customers
accounted for 2% of such increase in revenue, primarily due to the net effect of
a 5% increase in basic revenue, an increase in revenue from digital products and
an 11% decrease in traditional premium revenue. TCI Group experienced a 5%
increase in its average basic rate, an increase in the number of average basic
customers of less than 1%, a 5% decrease in its average rate for traditional
premium services and a 6% decrease in the number of average traditional premium
subscriptions. Additionally, the December 31, 1997 termination of an agreement
pursuant to which TCI Group provided fulfillment services to a third party
resulted in a 1% decrease in revenue. Advertising sales and other revenue
accounted for the remaining 1% increase in revenue. A significant portion of the
increase in advertising sales is attributable to arrangements with programming
suppliers that may not continue at current levels in future periods.
194
<PAGE> 196
Operating expenses decreased $34 million or 6% and $107 million or 6%
for the three and nine months ended September 30, 1998, respectively, as
compared to the corresponding prior year periods. Exclusive of the effects of
acquisitions, the 1998 Contribution Transactions and other dispositions, such
expenses increased 5% and 1%, respectively. Such increases relate primarily to
higher programming and labor costs, which were partially offset by reductions
attributable to higher capitalized labor and overhead resulting primarily from
increased installation and construction activities. It is anticipated that TCI
Group's programming costs will increase in future periods.
Selling, general and administrative expenses decreased $1 million or
less than 1% and increased $34 million or 4% for the three and nine months ended
September 30, 1998, respectively, as compared to the corresponding prior year
periods. Exclusive of the effects of acquisitions, the 1998 Contribution
Transactions and other dispositions, such expenses increased 12% and 16%,
respectively. Such increases are due primarily to general increases in expenses
relating to the launch of digital products and other initiatives, and other
individually insignificant increases in general and administrative expenses in
1998, which increases were partially offset by increases in marketing incentives
received from programming suppliers. The majority of such marketing incentives
are associated with the Company's launch of digital services and accordingly may
not continue at current levels in future periods.
Year 2000 costs include fees and other expenses incurred directly in
connection with TCI's comprehensive efforts to review and correct computer
systems, equipment and related software to ensure readiness for the year 2000.
See detailed discussion above.
AT&T merger costs were incurred in the second and third quarters of
1998, as a result of a Merger Agreement dated June 23, 1998, between TCI and
AT&T. Such costs include investment advisory, legal and accounting fees, and
other incremental pre-closing costs directly related to the Merger. See note 2
to the combined financial statements of TCI Group, which are included in the
Company's Quarterly Report on Form 10-Q.
TCI Group records stock compensation relating to restricted stock
awards, options and/or stock appreciation rights granted by TCI to certain TCI
Group employees and directors who are involved with TCI Group. The estimated
compensation liability relating to stock appreciation rights has been recorded
as of September 30, 1998, and is subject to future adjustment based upon vesting
and market values and, ultimately, on the final determination of market values
when such rights are exercised.
Depreciation and amortization expense increased $24 million or 7% and
$79 million or 8% for the three and nine months ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
increases represent the net effect of (i) increases attributable to
acquisitions, capital expenditures and differences in the composition of TCI
Group's depreciable property and equipment and (ii) decreases attributable to
the 1998 Contribution Transactions and other dispositions.
Other Income and Expenses
TCI Group's interest expense decreased $56 million or 19% and $107
million or 13% for the three and nine months ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
decreases are primarily the result of debt reductions attributable to the 1998
Contribution Transactions.
195
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TCI Group's share of CSC's losses, including amortization of the
difference between the recorded value of TCI Group's investment in CSC and TCI
Group's proportionate share of CSC's net deficiency, aggregated $76 million and
$156 million for the three months ended September 30, 1998 and for the period
from March 4, 1998 through September 30, 1998, respectively. TCI Group acquired
an equity interest in CSC on March 4, 1998. See note 5 to the combined financial
statements of TCI Group which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q.
TCI Group's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in the
domestic cable television business. TCI Group's share of net earnings (losses)
of other affiliates aggregated $(17 million) and $30 million for the three and
nine months ended September 30, 1998, respectively, as compared to $(16 million)
and $(50 million) for the corresponding prior year periods. A significant
portion of the change from the nine months ended September 30, 1997 to the nine
months ended September 30, 1998 is attributable to TCI Group's share of 1998
gains recognized by two affiliates on the sale of certain assets.
During the nine months ended September 30, 1998 and 1997, TCI Group
purchased notes payable which had aggregate principle balances of $352 million
and $190 million, respectively. In connection with such purchases, TCI Group
recognized losses on early extinguishment of debt of $44 million and $11 million
for the nine months ended September 30, 1998 and 1997, respectively. Such losses
relate to prepayment penalties and the retirement of deferred loan costs.
Minority interests in earnings of attributed subsidiaries aggregated
$48 million and $143 million for the three and nine months ended September 30,
1998, respectively, as compared to $42 million and $125 million for the
corresponding prior year periods. The majority of such amounts represent the
accrual of dividends on the Trust Preferred Securities issued in 1997 and 1996
and the accrual of dividends on certain preferred securities issued in 1996 by a
TCI subsidiary that is attributed to TCI Group. See note 10 to the combined
financial statements of TCI Group which are included in the Company's September
30, 1998 Quarterly Report on Form 10-Q.
Gain on disposition of assets of $842 million for the nine months ended
September 30, 1998 relates primarily to the March 4, 1998 contribution of cable
television systems by TCI Group to CSC and certain of the 1998 Joint Ventures.
See notes 5 and 7 to the combined financial statements of TCI Group, which are
included in the Company's September 30, 1998 Quarterly Report on Form 10-Q.
Net Earnings
As a result of the above-described fluctuations in TCI Group's results
of operations, (i) TCI Group's net earnings (before preferred stock dividend
requirements) of $52 million for the three months ended September 30, 1998
changed by $110 million, as compared to TCI Group's net loss (before loss of TCI
Ventures Group and preferred stock dividend requirements) of $58 million for the
three months ended September 30, 1997, and (ii) TCI Group's net earnings (before
preferred stock dividend requirements) of $148 million for the nine months ended
September 30, 1998 changed by $251 million, as compared to TCI Group's net loss
(before loss of TCI Ventures Group and preferred stock dividend requirements) of
$103 million for the nine months ended September 30, 1997.
196
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LIBERTY/VENTURES GROUP
Liberty/Ventures Group consists principally of the following assets and
their related liabilities: (i) TCI's businesses which provide programming
services including production, acquisition and distribution through all
available formats and media of branded entertainment, educational and
informational programming and software, including multimedia products, (ii)
TCI's businesses engaged in electronic retailing, direct marketing, advertising
sales relating to programming services, infomercials and transaction processing,
(iii) TCI's businesses engaged in international cable, telephony and programming
businesses (iv) TCI's principal interests in the telephony business consisting
primarily of TCI's investment in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residential
and business customers nationwide under the Sprint(R) brand (a registered
trademark of Sprint Communications Company, L.P.) (the "PCS Ventures"), TCI's
equity interest in AT&T and WTCI, a wholly-owned subsidiary of TCI that provides
long distance transport of video, voice and data traffic and other
telecommunications services to interexchange carriers on a wholesale basis using
primarily a digital broadband microwave network located throughout a 12 state
region, (v) TCI's businesses engaged in high speed multimedia Internet services,
and (vi) other assets, including NDTC, which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets. A significant portion of Liberty/Ventures Group's operations are
conducted through corporations and partnerships in which Liberty/Ventures Group
holds a 20%-50% ownership interest. As Liberty/Ventures Group generally accounts
for such ownership interests using the equity method of accounting, the
financial condition and results of operations of such entities are not reflected
on a combined basis within Liberty/Ventures Group's combined financial
statements.
Liberty/Ventures Group's programming services include production,
acquisition and distribution through all available formats and media of branded
entertainment, educational and informational programming and software, including
multimedia products ("Entertainment and Information Programming Services").
Liberty/Ventures Group's international services include businesses which provide
programming services and operating television, telephone and Internet
distribution networks around the world ("International Services").
Liberty/Ventures Group operates NDTC which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets ("Digital Compression and Authorization Services") and Liberty/Ventures
Group is engaged in the business of providing high speed multimedia Internet
services ("Internet Services"). To enhance the reader's understanding, separate
financial data has been provided below for Entertainment and Information
Programming Services, International Services, Digital Compression and
Authorization Services and Internet Services. Liberty/Ventures Group holds
significant equity investments, the results of which are not a component of
operating income, but are discussed below under "Other Income and Expense".
Other items of significance are discussed separately below.
197
<PAGE> 199
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------------------------
1998* 1997
----------------------- -----------------------
dollar amounts in millions
<S> <C> <C> <C> <C>
Revenue:
Entertainment and Information Programming
Services $ 1,004 88% $ 686 71%
International Services 44 4 206 21
Digital Compression and Authorization
Services 76 7 70 7
Internet Services 29 2 4 --
Corporate and other (16) (1) 6 1
---------- -------- ---------- --------
$ 1,137 100% $ 972 100%
========== ======== ========== ========
Operating, selling, general and administrative:
Entertainment and Information Programming
Services $ (833) 85% $ (558) 72%
International Services (34) 3 (132) 17
Digital Compression and Authorization
Services (54) 6 (42) 5
Internet Services (54) 6 (35) 5
Corporate and other 1 -- (8) 1
---------- -------- ---------- --------
$ (974) 100% $ (775) 100%
========== ======== ========== ========
Depreciation, amortization, other non-cash
charges, stock compensation and year 2000
costs:
Entertainment and Information Programming
Services $ (93) 21% $ (50) 18%
International Services (21) 5 (57) 21
Digital Compression and Authorization
Services (29) 7 (23) 8
Internet Services (50) 11 (6) 2
Corporate and other (244) 56 (141) 51
---------- -------- ---------- --------
$ (437) 100% $ (277) 100%
========== ======== ========== ========
Operating income (loss):
Entertainment and Information Programming
Services $ 78 $ 78
International Services (11) 17
Digital Compression and Authorization
Services (7) 5
Internet Services (75) (37)
Corporate and other (259) (143)
---------- ----------
$ (274) $ (80)
========== ==========
</TABLE>
* Restated - see note 18 to the accompanying combined financial
statements of Liberty/Ventures Group.
198
<PAGE> 200
Entertainment and Information Programming Services
On June 24, 1997 Liberty/Ventures Group granted Time Warner an option
to acquire Southern Satellite Systems, Inc. and certain of its subsidiaries (the
"Southern Business") through a purchase of assets (the "Southern Option").
Liberty/Ventures Group received 6.4 million shares of a separate series of Time
Warner common stock (the "TW Exchange Stock") valued at $306 million in
consideration for the grant. In September 1997, Time Warner exercised the
Southern Option. Pursuant to the Southern Option, Time Warner acquired the
Southern Business, effective January 1, 1998, for $213 million, which was paid
in cash, together with the assumption of certain liabilities on January 2, 1998.
Effective January 1, 1998, the Southern Business is no longer included in the
combined financial statements of Liberty/Ventures Group.
Subsequent to June 30, 1997, Liberty/Ventures Group and TCI Group
entered into a series of transactions pursuant to which the businesses of
"Encore", a movie premium programming service, and "STARZ!", a first run movie
premium programming service, were contributed to Encore Media Group LLC ("Encore
Media Group"), a subsidiary of TCI that is attributed to Liberty/ Ventures
Group. Upon the July 1997 formation of Encore Media Group, the operations of
STARZ! are included in the combined financial results of Liberty/Ventures Group.
Simultaneously with the July 1997 merger of TCI Music, Inc. ("TCI
Music") and DMX, Inc. ("DMX") (the "DMX Merger"), TCI's controlling ownership
interest in TCI Music was transferred to Liberty/Ventures Group in exchange for
an $80 million promissory note (the "Music Note") and an agreement to reimburse
TCI for any amounts required to be paid by TCI pursuant to TCI's contingent
obligation under a Rights Agreement to purchase certain shares of TCI Music's
common stock (the "Rights Agreement") (see note 10 to the accompanying combined
financial statements of Liberty/Ventures Group). Accordingly, TCI Music has been
included in the combined financial statements of Liberty/Ventures Group since
the date of the DMX Merger.
Effective February 1, 1998, Turner-Vision, Inc. ("Turner-Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("SNG") in exchange for an
approximate 20% interest in SNG. As a result of this transaction,
Turner-Vision's results of operations have been included in the combined
financial results of Liberty/Ventures Group as of February 1, 1998.
Excluding the effect of the acquisitions and dispositions described
above, revenue from Entertainment and Information Programming Services increased
8% or $51 million during the nine months ended September 30, 1998, as compared
to the nine months ended September 30, 1997. The increase is primarily
attributable to higher revenue from the distribution of Encore services to cable
operators, including TCI Group and higher revenue from United Video Satellite
Group, Inc. ("UVSG"). Additionally, Netlink International ("Netlink") had
increased revenue during the first nine months of 1998 compared to the same
period in 1997 of approximately $5 million, primarily due to increased rates as
a result of increased copyright fees.
199
<PAGE> 201
Operating, selling, general and administrative expenses from
Entertainment and Information Programming Services, as adjusted for the effect
of the above acquisitions and dispositions, decreased 1% or $3 million for the
nine months ended September 30, 1998 compared to the same period of 1997. ETC
w/tci, Inc. had an $11 million decrease in its operating, selling, general and
administrative expenses during the nine months ended September 30, 1998 compared
to the same period in 1997. Decreased operating, selling, general and
administrative expenses related to UVSG were offset by increased first run
program license fees of $16 million and increased music rights cost and
marketing support costs of $3 million each for the Encore services and increased
operating, selling, general and administrative expenses of $7 million at Netlink
primarily due to increased copyright fees for the nine months ended September
30, 1998 compared to 1997. Additionally, Liberty/Ventures Group incurred start
up costs of approximately $2 million during the nine months ended September 30,
1998 for a new package of Spanish language channels.
The increase in stock compensation of Entertainment and Information
Programming Services for the nine months ended September 30, 1998 as compared to
the corresponding period in 1997 is due to increases in stock compensation for
Encore Media Group and UVSG.
Revenue from TCI Music contributed $63 million to revenue from
Entertainment and Information Programming Services for the nine months ended
September 30, 1998. Additionally, revenue from STARZ! contributed $218 million
and Turner-Vision contributed $63 million to revenue for the nine months ended
September 30, 1998. As discussed above, operations for TCI Music, STARZ! and
Turner-Vision were not included in the combined financial results of
Liberty/Ventures Group for the entire nine months ended September 30, 1997.
Operating, selling, general and administrative expenses for Entertainment and
Information Programming Services for the nine months ended September 30, 1998
included $59 million from the operations of TCI Music, $208 million from the
operations of STARZ! and $56 million from the operations of Turner-Vision.
International Services
This information reflects the results of operations of
Tele-Communications International, Inc. ("TINTA"). Effective October 1, 1997,
TINTA ceased to consolidate Cablevision S.A. ("Cablevision") and began to
account for Cablevision using the equity method of accounting. Accordingly,
effective October 1, 1997, the results of operations of Cablevision were no
longer included in the combined financial results of Liberty/Ventures Group. The
following table sets forth summary information with respect to the operating
results of Cablevision that were included in International Services for the nine
months ended September 30, 1997 (amounts in millions):
<TABLE>
<S> <C>
Revenue $ 174
Operating costs and expenses (106)
Depreciation and amortization (41)
----------
Operating income $ 27
==========
</TABLE>
Revenue from International Services decreased by $162 million or 79%
during the nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997. Operating, selling, general and administrative
expenses for the International Services decreased $98 million or 74% for the
nine months ended September 30, 1998, compared to the corresponding prior year
period. Such decreases in revenue and expense are primarily attributable to the
deconsolidation of Cablevision in 1997. The $36 million or 63% decrease in
depreciation and amortization expense during the nine month period ended
September 30, 1998 as compared to the corresponding prior year period is
primarily the result of the effect of the deconsolidation of Cablevision.
200
<PAGE> 202
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including TINTA's Puerto
Rico subsidiary's (the "Puerto Rico Subsidiary") cable television systems. The
Puerto Rico Subsidiary's cable television systems represent $36 million of
Liberty/Ventures Group's revenue for the nine months ended September 30, 1998.
The Puerto Rico Subsidiary has property and business interruption insurance
aggregating $15 million that is subject to a deductible of $1 million. The
Puerto Rico Subsidiary has submitted a property damage claim to its insurance
carrier for approximately $12 million which represents the estimated replacement
cost of its damaged property. As a result of the damage caused by Hurricane
Georges, the Puerto Rico Subsidiary, at September 30, 1998, recorded an
impairment by reducing the net book value of the damaged property and equipment
by $8 million and recorded a receivable in the same amount for a portion of the
estimated proceeds under its property insurance coverage. Subsequent to
September 30, 1998, the Puerto Rico Subsidiary received a $2 million advance on
its insurance coverage from the insurance carrier. Liberty/Ventures Group has
applied $1 million of such advance to property losses and $1 million to business
interruption losses.
The balance of the receivable is deemed probable of collection.
Although there can be no assurance, the Puerto Rico Subsidiary
currently estimates that 85% of its cable distribution systems and related
support equipment will be restored by the end of 1998 and fully restored by the
end of the first quarter of 1999. In addition to property damage caused by
Hurricane Georges, the Puerto Rico Subsidiary will also suffer a loss in revenue
from its pre-hurricane customers. As of September 30, 1998, approximately 23% of
the Puerto Rico Subsidiary's pre-hurricane basic customers were receiving cable
television services. Although there can be no assurance, the Puerto Rico
Subsidiary estimates that it will regain 80% and 100% of its pre-hurricane
customer base by December 31, 1998 and June 30, 1999, respectively. The loss of
revenue from September 21, 1998 through December 31, 1998 has been preliminarily
estimated at $7 million, of which $1 million relates to the period from
September 21, 1998 through September 30, 1998. In addition, the estimated loss
of revenue for the first quarter of 1999 is approximately $3 million. The Puerto
Rico Subsidiary's business interruption insurance will cover the first $3
million in lost revenue. The Puerto Rico Subsidiary currently estimates that
lost revenue of approximately $7 million will not be covered under its business
interruption insurance. However, no assurance can be given that the Puerto Rico
Subsidiary will not incur losses in excess of current estimates. In addition,
all insurance claims are subject to approval by the Puerto Rico Subsidiary's
insurance carrier. Accordingly, no assurance can be given that amounts claimed
under the Puerto Rico Subsidiary's insurance coverage will be paid in their
entirety.
Digital Compression and Authorization Services
This information reflects the results of NDTC. Revenue from Digital
Compression and Authorization Services increased $6 million or 9% during the
nine months ended September 30, 1998 compared to the corresponding period of
1997. Operating, selling, general and administrative expenses from Digital
Compression and Authorization Services increased $12 million or 29% during the
nine months ended September 30, 1998 compared to the corresponding prior year
period. A significant number of NDTC's major customers are affiliates of TCI
including entities attributed to Liberty/Ventures Group, and NDTC derives a
substantial portion of its revenue from such affiliated companies. For the nine
months ended September 30, 1998 and 1997, revenue from services provided to TCI
and its consolidated subsidiaries accounted for 35% and 38%, respectively, of
NDTC's total revenue.
201
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Internet Services
This information reflects the results of operations of @Home. Revenue
from Internet Services increased $25 million during the nine months ended
September 30, 1998 compared to the corresponding period of the previous year.
Operating, selling, general and administrative expenses increased $19 million
during the nine months ended September 30, 1998 compared to the corresponding
period of 1997.
Corporate and Other
This information includes general corporate expenses, Liberty/Ventures
Group's intercompany eliminations and the results of operations of WTCI.
Stock compensation for corporate and other was $232 million and $112
million during the nine months ended September 30, 1998 and 1997, respectively.
Liberty/Ventures Group records stock compensation expense relating to restricted
stock awards, options and/or stock appreciation rights granted by TCI to certain
TCI employees and/or directors who are involved with Liberty/Ventures Group.
Estimated compensation relating to stock appreciation rights has been recorded
through September 30, 1998 pursuant to APB Opinion No. 25. Such estimate is
subject to future adjustment based upon vesting and market value, and
ultimately, on the final determination of market value when such rights are
exercised.
Other Income and Expense
Interest expense increased $31 million for the nine months ended
September 30, 1998 compared to the corresponding period in 1997. Such increase
is attributable to the increase in Liberty/Ventures Group's outstanding debt.
Dividend and interest income was $66 million and $43 million during the
nine months ended September 30, 1998 and 1997, respectively. Dividends received
on Liberty/Ventures Group's investment in AT&T Common Stock contributed $16
million to the increase in Liberty/Ventures Group's dividend and interest
income. Also included in Liberty/Ventures Group's dividend and interest income
are dividends received on the TW Exchange Stock and a 30 year non-convertible 9%
preferred stock of Fox Kids Worldwide, Inc. ("FKW") with a stated value of $345
million (the "FKW Preferred Stock").
Liberty/Ventures Group's share of losses of affiliates was $861 million
for the nine months ended September 30, 1998 compared to $545 million for the
corresponding period in 1997.
202
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Liberty/Ventures Group's share of losses from its investment in the PCS
Ventures increased $206 million during the nine month period ended September 30,
1998 as compared to the corresponding prior year period. The increase in the
share of losses is attributed primarily to increases in (i) selling, general and
administrative costs associated with Sprint Spectrum Holding Company L.P.'s
("Sprint Spectrum") efforts to increase its customer base, (ii) depreciation
expense resulting from capital expenditures made to expand its PCS network and
(iii) interest expense associated with higher amounts of outstanding debt. It is
expected that Sprint Spectrum and MinorCo, L.P. (collectively "Sprint PCS") will
continue to incur significant operating losses and significant negative cash
flow from operating activities during the next several years while it continues
to expand its PCS network and build its customer base. Sprint PCS's operating
profitability will depend upon many factors, including, among others, its
ability to (i) market its products and services successfully, (ii) achieve its
projected market penetration, (iii) manage customer turnover rates effectively
and (iv) price its products and services competitively. There can be no
assurance that Sprint PCS will achieve or sustain operating profitability or
positive cash flow from operating activities in the future. If Sprint PCS does
not achieve and maintain operating profitability and positive cash flow from
operating activities on a timely basis, it may not be able to meet its debt
service requirements.
Liberty/Ventures Group's share of Telewest Communications plc's
("Telewest") net losses decreased $21 million during the nine months ended
September 30, 1998, compared to the corresponding period of 1997. Such change is
primarily attributable to the net effects of (i) changes in foreign currency
transaction losses, (ii) an increase in operating cash flow resulting from
revenue growth and (iii) an increase in interest expense. In connection with a
previous merger transaction, Telewest issued debentures (the "Telewest
Debentures"). Changes in the exchange rate used to translate the Telewest
Debentures into U.K. pounds sterling and the adjustment of a foreign currency
option contract to market value caused Telewest to experience foreign currency
transaction gains of $19 million during the nine months ended September 30, 1998
and foreign currency transaction losses of $55 million during the nine months
ended September 30, 1997. It is anticipated that Telewest will continue to
experience realized and unrealized foreign currency transaction gains and losses
throughout the term of the Telewest Debentures, which mature in 2006 and 2007,
if not redeemed earlier.
As described above, effective October 1, 1997, TINTA ceased to
consolidate Cablevision and began to account for Cablevision using the equity
method of accounting. Consequently, Liberty/Ventures Group's share of losses
from Cablevision accounted for an increase of $14 million for the nine month
period ended September 30, 1998.
Liberty/Ventures Group's share of losses of affiliates attributable to
its interest in Discovery Communications, Inc. ("Discovery") increased $23
million during the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997. While Discovery's revenue increased by 27%
during the first nine months of 1998, its earnings before interest, taxes,
depreciation and amortization decreased by 44%, principally because of costs
associated with launching new digital services, continuing investments in the
retail business as well as new joint ventures including joint ventures with the
British Broadcasting Corporation. Interest expense for Discovery was 113% higher
in the first nine months of 1998 compared to the same period in 1997 mainly due
to increased debt caused by significant cash payments made to distributors in
support of the launch of "Animal Planet" and its new digital services.
203
<PAGE> 205
The share of losses of Fox/Liberty Networks LLC ("Fox Sports") was
responsible for approximately $76 million of the increase in share of losses of
affiliates for the first nine months of 1998 compared to the same period of
1997. Prior to the first quarter of 1998, Liberty/Ventures Group had no
obligation, nor intention, to fund Fox Sports. During 1998, Liberty/Ventures
Group made the determination to provide funding to Fox Sports based on specific
transactions consummated by Fox Sports. Consequently, Liberty/Ventures Group's
share of losses of Fox Sports for the nine months ended September 30, 1998
includes previously unrecognized losses of Fox Sports of approximately $64
million. Losses for Fox Sports were not recognized in prior periods due to the
fact that Liberty/Ventures Group's investment in Fox Sports was less than zero.
The minority interests' share of net losses increased $42 million
during the nine month period ended September 30, 1998 as compared to the
corresponding prior year period. Such increase is primarily attributable to
increases in net losses for @Home and TINTA.
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T
was consummated. As a result of such merger, Liberty/Ventures Group received in
exchange for its 26% interest in TCG, approximately 47 million shares of AT&T
Common Stock. Liberty/Ventures Group recognized a gain of $2.3 billion
(excluding related tax expense of $883 million) on such transaction based on the
difference between the carrying value of Liberty/Ventures Group's interest in
TCG and the fair value of the AT&T Common Stock received.
Pursuant to the Southern Option, Time Warner acquired the Southern
Business, effective January 1, 1998 for $213 million in cash. Liberty/Ventures
Group recognized a $515 million pre-tax gain in connection with these
transactions in the first quarter of 1998. See note 5 to the accompanying
combined financial statements of Liberty/Ventures Group.
Liberty/Ventures Group recognized a gain of $38 million from the
increase in SNG's equity, net of the dilution of its interest in SNG, that
resulted from the above described transaction with Turner-Vision. See note 8 to
the accompanying combined financial statements of Liberty/Ventures Group.
On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG. As a result of
such merger transaction, Liberty/Ventures Group's interest in TCG was reduced to
approximately 26%. In connection with the increase in TCG's equity, net of the
dilution of Liberty/Ventures Group's interest in TCG, that resulted from such
merger, Liberty/Ventures Group recorded a non-cash gain of $201 million (before
deducting deferred income taxes of $71 million). See note 6 to the accompanying
combined financial statements of Liberty/Ventures Group.
During the third quarter of 1998, @Home completed a public offering
(the "@Home Offering") in which 2.9 million shares of @Home common stock were
sold for net cash proceeds of approximately $125 million. In connection with the
@Home Offering, Liberty/Ventures Group paid $37 million to purchase 800,000
shares of @Home common stock and Liberty/Ventures Group's economic interest in
@Home decreased to 38.8%. In connection with the associated increase in @Home's
equity, net of the dilution of Liberty/Ventures Group's ownership interest in
@Home, Liberty/Ventures Group recognized a gain of $17 million during the third
quarter of 1998.
204
<PAGE> 206
Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which holders of
General Cable received Telewest shares and cash for each share of General Cable
held. As a result of the General Cable Merger, Liberty/Ventures Group's
ownership interest in Telewest decreased to 22%. In connection with the increase
in Telewest's equity, net of the dilution of Liberty/Ventures Group's interest
in Telewest, Liberty/Ventures Group recognized a non-cash gain of $58 million
(excluding related tax expense of $20 million) during the third quarter of 1998.
In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs. On July
11, 1997, @Home completed its initial public offering (the "@Home IPO"), in
which 10.4 million shares of @Home common stock were sold for net cash proceeds
of approximately $100 million. As a result of the @Home IPO, Liberty/Ventures
Group's economic interest in @Home decreased from 43% to 39%, which economic
interest represents an approximate 72% voting interest. In connection with the
associated increase in @Home's equity, net of the dilution of Liberty/Ventures
Group's ownership interest in @Home, Liberty/Ventures Group recognized a gain of
$60 million during the third quarter of 1997.
On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
Liberty/Ventures Group, which held non-voting Class C common stock of
International Family Entertainment, Inc. ("IFE") ("Class C Stock") and $23
million of IFE 6% convertible secured notes due 2004, convertible into Class C
Stock, ("Convertible Notes"), contributed its Class C Stock and Convertible
Notes to FKW in exchange for the FKW Preferred Stock. As a result of the
exchange, Liberty Media Group recognized a pre-tax gain of approximately $304
million during the third quarter of 1997.
During 1997, TCG issued 4.9 million shares of its Class A common stock
for certain acquisitions. The total consideration paid by TCG through the
issuance of common stock was approximately $93 million. As a result of such
share issuances, Liberty/Ventures Group's ownership interest in TCG was reduced
to approximately 30%. As a result of the increase in TCG's equity, net of the
dilution of Liberty/Ventures Group's interest in TCG, Liberty/Ventures Group
recognized a gain of $21 million (excluding related tax expense of $8 million).
Net Losses
Liberty/Ventures Group's net earnings of $1,238 million during the nine
month period ended September 30, 1998 represents an increase in earnings of
$1,368 million as compared to Liberty/Ventures Group's net loss of $130 million
for the nine month period ended September 30, 1997. Included in such amounts was
the recognition of certain non-operating gains aggregating $3,176 million and
$490 million during the nine months ended September 30, 1998 and 1997,
respectively. Many of the entities included in Liberty/Ventures Group's combined
financial statements generally have sustained losses since their respective
inception dates. Any improvements in such entities' results of operations are
largely dependent upon the ability of such entities to increase their respective
customer bases while maintaining pricing structures and controlling costs. There
can be no assurance that any such improvements will occur.
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MATERIAL CHANGES IN FINANCIAL CONDITION
TCI GROUP
On March 4, 1998, TCI Group contributed to CSC certain of its cable
television systems in the CSC Transaction. CSC also assumed and repaid
approximately $574 million of debt owed by TCI Group to external parties and $95
million of debt owed to TCI Group. TCI Group has also entered into letters of
intent with CSC which provide for TCI Group to acquire a cable system in
Michigan and an additional 3% of CSC's Class A common shares and for CSC to (i)
acquire cable systems serving approximately 250,000 customers in Connecticut and
(ii) assume $110 million of TCI Group's debt. The ability of TCI Group to sell
or increase its investment in CSC is subject to certain restrictions and
limitations set forth in a stockholders agreement with CSC. For additional
information concerning the CSC Transaction, see note 5 to the combined financial
statements of TCI Group, which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q.
In addition to the CSC Transaction, TCI also completed, during the
first nine months of 1998, 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 TCI Group to
external parties aggregating $323 million and intercompany debt owed to TCI
Group aggregating $1,533 million. TCI Group has agreed to take certain steps to
support compliance by certain of the 1998 Joint Ventures with their payment
obligations under certain debt instruments, up to an aggregate contingent
commitment of $980 million. In light of such contingent commitments, TCI Group
has deferred any gains on the formation of such 1998 Joint Ventures.
Accordingly, TCI Group has recorded deferred gains aggregating $163 million and
recognized net gains aggregating $263 million in connection with the formation
of the 1998 Joint Ventures. The deferred gains will not be recognized until such
time as TCI Group's contingent commitments are eliminated. TCI Group uses the
equity method of accounting to account for its investments in CSC and the 1998
Joint Ventures.
Including the 1998 Contribution Transactions, TCI Group, as of
September 30, 1998, has, since January 1, 1997, contributed, or signed
agreements or letters of intent to contribute within the next twelve months,
certain cable television systems (the "Contributed Cable Systems") serving
approximately 3.9 million basic customers to joint ventures in which TCI Group
will retain non-controlling ownership interests (the "Contribution
Transactions"). Following the completion of the Contribution Transactions, the
Contributed Cable Systems will no longer be included in TCI Group's combined
financial statements. Accordingly it is anticipated that the completion of the
Contribution Transactions, as currently contemplated, will result in an
aggregate estimated reduction (based on actual amounts with respect to the 1998
Contribution Transactions and currently contemplated amounts with respect to the
pending Contribution Transactions) to TCI Group's debt of $4.8 billion and
aggregate estimated reductions (based on 1997 amounts) to TCI Group's annual
revenue and annual operating income before depreciation, amortization, other
non-cash items and stock compensation of $1.8 billion and $815 million,
respectively. No assurance can be given that any of the pending Contribution
Transactions will be consummated.
During the nine months ended September 30, 1998, pursuant to a stock
repurchase program approved by the Board, TCI Group repurchased 66,041 shares of
TCI Group Series A Stock at an aggregate cost of $2 million.
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In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, TCI Group paid $134
million during the first quarter of 1998 for its allocated share of the Call
Payments. For additional information see note 13 to the combined financial
statements of TCI Group, which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q.
During the fourth quarter of 1997, TCI Group entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the Equity
Swap Facility, TCI Group has the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares ("Equity Swap
Shares") of TCI Group Series A Stock and TCI Ventures Group Series A Stock with
an aggregate purchase price of up to $300 million. TCI Group has the right, but
not the obligation, to purchase Equity Swap Shares through the September 30,
2000 termination date of the Equity Swap Facility. During such period, TCI Group
is to settle periodically any increase or decrease in the market value of the
Equity Swap Shares. If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from the other
Equity Swap Shares. If the market value of the Equity Swap Shares is less than
the Counterparty's cost, TCI Group, at its option, will settle such difference
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In addition, TCI
Group is required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares.
Due to TCI Group's ability to issue shares to settle periodic price fluctuations
and fees under the Equity Swap Facility, TCI Group records all amounts received
or paid under this arrangement as increases or decreases, respectively, to
equity. As of September 30, 1998, the Equity Swap Facility had acquired
4,935,780 shares of TCI Group Series A Stock and 1,171,800 shares of TCI
Ventures Group Series A Stock at an aggregate cost that was approximately $49
million less than the fair value of such Equity Swap Shares at September 30,
1998. The costs and benefits associated with the TCI Group Series A Stock held
by the Equity Swap Facility are attributed to TCI Group.
TCI Group's fixed annual commitments pursuant to a 25 year affiliation
agreement between Encore Media Group and TCI Group (the "EMG Affiliation
Agreement") increase annually from $220 million in 1998 to $315 million in 2003,
and will increase with inflation thereafter through 2022.
In 1996, a subsidiary attributed to Liberty/Ventures Group (i) issued
preferred stock in connection with a previous acquisition, which is convertible
at the option of the holders into 1,084,056 of TCI Group Series A Common Stock
beginning in April 1999 or sooner in the event of a change in control of TCI and
(ii) acquired an option contract from TCI Group in exchange for a $14 million
increase in the intercompany amount due to TCI Group. Such option contract
provided Liberty/Ventures Group with the right to acquire 1,084,056 shares of
TCI Group Series A Stock at a price equivalent to the fair value at the time of
exercise less $14.625 per share. During September 1998, TCI Group assigned its
obligation under the option contract to Liberty/Ventures Group. As a result of
such assignment, TCI Group recorded a $16 million reduction in due from related
parties and a corresponding adjustment of combined equity (deficit).
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On July 11, 1997, TCI Music merged with DMX. Simultaneously with the
DMX Merger, substantially all of TCI's controlling ownership interest in TCI
Music was transferred from TCI Group to Liberty/Ventures Group in exchange for
an $80 million promissory note and an agreement to reimburse TCI for any amounts
required to be paid by TCI pursuant to its contingent obligation under the
Rights Agreement to purchase up to 14,896,648 shares (6,812,393 of which were
owned by subsidiaries of TCI) of TCI Music common stock at a price of $8.00 per
share. Prior to the July 1998 expiration of the rights under the Rights
Agreement, TCI was notified of the tender of 4,892,077 shares and associated
rights. On August 27, 1998, Liberty/Ventures Group paid $39 million to satisfy
TCI's obligation to purchase such tendered shares. The Music Note may be reduced
by the payment of cash or the issuance by TCI of shares of Liberty/Ventures
Group Stock (or Liberty Group Stock if prior to the Liberty/Ventures
Combination) for the benefit of entities attributed to TCI Group. Additionally,
Liberty/Ventures Group may elect to pay $50 million of the Music Note by
delivery of a Stock Appreciation Rights Agreement that will give TCI Group the
right to receive 20% of the appreciation in value of Liberty/Ventures Group's
investment in TCI Music, to be determined at July 11, 2002.
A subsidiary of TCI that was attributed to Liberty/Ventures Group
leases certain equipment under a capital lease. During 1997, such equipment was
subleased to TCI Group under an operating lease. In January 1998, TCI Group paid
$7 million to Liberty/Ventures Group in exchange for Liberty/Ventures Group's
assignment of its ownership interest in such subsidiary to TCI Group. Due to the
related party nature of the transaction, the $50 million total of the cash
payment and the historical cost of the net liabilities assumed by TCI Group
(including capital lease obligations aggregating $176 million) has been
reflected as an increase to TCI Group's combined deficit.
At September 30, 1998, TCI Group had approximately $2.1 billion of
availability in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although TCI
Group was in compliance with the restrictive covenants contained in its credit
facilities at said date, additional borrowings under the credit facilities are
subject to TCI Group's continuing compliance with the restrictive covenants
after giving effect to such additional borrowings. Such restrictive covenants
require, among other things, the maintenance of certain earnings, specified cash
flow and financial ratios (primarily the ratios of cash flow to total debt and
cash flow to debt service, as defined), and include certain limitations on
indebtedness, investments, guarantees, dispositions, stock repurchases and/or
dividend payments. See note 8 to the combined financial statements of TCI Group,
which are included in the Company's September 30, 1998 Quarterly Report on Form
10-Q, for additional information regarding TCI Group's debt.
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One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of "Operating Cash
Flow" (operating income before depreciation, amortization, other non-cash items,
year 2000 costs, AT&T merger costs and stock compensation) ($1,889 million and
$2,035 million during the nine months ended September 30, 1998 and 1997,
respectively) to interest expense ($736 million and $843 million during the nine
months ended September 30, 1998 and 1997, respectively), is determined by
reference to the combined statements of operations. TCI Group's interest
coverage ratio was 257% and 241% during the nine months ended September 30, 1998
and 1997, respectively. Management of TCI Group believes that the foregoing
interest coverage ratio is adequate in light of the relative predictability of
its cable television operations and interest expense. However, TCI Group's
current intent is to continue to reduce its outstanding indebtedness such that
its interest coverage ratio could be increased. There is no assurance that TCI
Group will be able to achieve such objective. In the event TCI Group is unable
to achieve such objective, management believes that net cash provided by
operating activities, the ability of TCI Group to obtain additional financing
(including the available lines of credit and access to public debt markets),
issuances and sales of TCI's equity or equity of its subsidiaries, attributable
to TCI Group, and proceeds from disposition of assets will provide adequate
sources of short-term and long-term liquidity in the future. See TCI Group's
combined statements of cash flows included in TCI Group 's combined financial
statements, which are included in the Company's September 30, 1998 Quarterly
Report on Form 10-Q.
Operating Cash Flow is a measure of value and borrowing capacity within
the cable television industry and is not intended to be a substitute for cash
flows provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in TCI Group's combined statements of cash flows. Net
cash provided by operating activities ($793 million and $1,047 million during
the nine months ended September 30, 1998 and 1997, respectively) generally
reflects net cash from the operations of TCI Group available for TCI Group's
liquidity needs after taking into consideration the aforementioned additional
substantial costs of doing business not reflected in Operating Cash Flow.
The amount of capital expended by TCI Group for property and equipment
was $1,017 million, $273 million and $538 million during the nine months ended
September 30, 1998 and 1997, and the year ended December 31, 1997, respectively.
In light of TCI Group's plans to upgrade the capacity of its cable distribution
systems, and its plans to increase the number of customers who subscribe to
digital video services, TCI Group anticipates that its annual capital
expenditures during the next several years will significantly exceed the amount
expended during 1997. In this regard, TCI Group estimates that it will expend
approximately $1.7 billion to $1.9 billion over the next three years to expand
the capacity of its cable distribution systems. TCI Group expects that the
actual amount of capital that will be required in connection with its plans to
increase the number of digital video service customers will be significant.
However, TCI Group cannot reasonably estimate such actual capital requirement
since such actual capital requirement is dependent upon the extent of any
customer increases and the average installed per-unit cost of digital set-top
devices. As described below, TCI is obligated to purchase a significant number
of digital set-top devices over the next three years.
TCI Group's restricted cash is primarily comprised of proceeds received
in connection with certain asset dispositions. Such proceeds, which aggregated
$353 million and $34 million at September 30, 1998 and December 31, 1997,
respectively, are designated to be reinvested in certain identified assets for
income tax purposes.
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TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $191
million at September 30, 1998. With respect to TCI Group's guarantees of $166
million of such obligations, TCI Group has been indemnified for any loss, claim
or liability that TCI Group may incur, by reason of such guarantees. As
described in note 7 to the combined financial statements of TCI Group, which are
included in the Company's September 30, 1998 Quarterly Report on Form 10-Q, TCI
Group also has provided certain credit enhancements with respect to the 1998
Joint Ventures. TCI Group also has guaranteed the performance of certain
affiliates and other parties with respect to such parties' contractual and other
obligations. Although there can be no assurance, management of TCI Group
believes that it will not be required to meet its obligations under such
guarantees, or if it is required to meet any of such obligations, that they will
not be material to TCI Group.
TCI Group has provided a revolving loan facility to Liberty/Ventures
Group for a five-year period commencing on September 10, 1997 (the "Ventures
Intergroup Credit Facility"). Such facility permits aggregate outstanding
borrowings at any one time of up to $500 million (subject to reduction as
provided below), which borrowings bear interest at a rate per annum equal to The
Bank of New York's prime rate (as in effect from time to time) plus 1% per
annum, payable quarterly. A commitment fee equal to 3/8% per annum of the
average unborrowed availability under the Ventures Intergroup Credit Facility is
payable by Liberty/Ventures Group to TCI Group on a quarterly basis. Such
commitment fee was $1 million for the nine months ended September 30, 1998.
Borrowings outstanding pursuant to the Ventures Intergroup Credit Facility were
$37 million at September 30, 1998.
TCI Group is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, TCI Group 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.
TCI Group is committed to purchase billing services pursuant to three
successive five year agreements. Pursuant to such arrangement, TCI Group is
obligated at September 30, 1998 to make minimum payments aggregating
approximately $1.6 billion through 2012. Such minimum payments are subject to
inflation and other adjustments pursuant to the terms of the underlying
agreements.
Pursuant to certain agreements between TCI and TCI Music, TCI Group is
obligated at September 30, 1998 to make minimum revenue payments through 2017
and minimum license fee payments through 2007 aggregating approximately $412
million to TCI Music. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
TCI Group is a direct obligor or guarantor of the payment of certain
amounts that may be due pursuant to motion picture output, distribution and
license agreements. As of September 30, 1998, the amount of such obligations or
guarantees was approximately $273 million. The future obligations of TCI Group
with respect to these agreements is not currently determinable because such
amount is dependent upon the number of qualifying films released theatrically by
certain motion picture studios as well as the domestic theatrical exhibition
receipts upon the release of such qualifying films.
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Effective as of December 16, 1997, NDTC, on behalf of TCI Group and
other cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital Terminal
Purchase Agreement") with General Instrument Corporation ("GI") to purchase
advanced digital set-top devices. The hardware and software incorporated into
these devices will be designed and manufactured to be compatible and
interoperable with the OpenCable(TM) architecture specifications adopted by
CableLabs, the cable television industry's research and development consortium,
in November 1997. NDTC has agreed that Approved Purchasers will purchase, in the
aggregate, a minimum of 6.5 million set-top devices during calendar years 1998,
1999 and 2000 at an average price of $318 per set-top device. Through September
30, 1998, approximately 1 million set-top devices had been purchased pursuant to
this commitment. GI agreed to provide NDTC and its Approved Purchasers the most
favorable prices, terms and conditions made available by GI to any customer
purchasing advanced digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization, which as of
the effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted basis).
Such warrants vest as annual purchase commitments are met. The value associated
with such equity interest will be attributed to TCI Group upon purchase and
deployment of the digital set-top devices. See note 2 to the combined financial
statements of TCI Group, which are included in the Company's September 30, 1998
Quarterly Report on Form 10-Q. 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 June 30, 1998, TCI Group entered into an Operating Lease Agreement
(the "Lease") with an unaffiliated third party (the "Lessor"). Under the Lease,
TCI Group agreed to sell to, and lease back from, the Lessor advanced digital
set-top devices with an initial aggregate net cost of up to $200 million. The
initial term of the Lease is two years, and it provides for renewal, at TCI
Group's option, for up to five additional consecutive one-year terms. Rent under
the lease is payable quarterly. At the end of the originally scheduled or
renewed lease term, TCI Group is required to either (i) purchase the equipment
at the Termination Value (as defined in the Lease), or (ii) arrange for the sale
of the leased equipment to a third party and pay the Lessor the difference
between the sale price and a predetermined guaranteed value, which in all cases
is less than the Termination Value. As of September 30, 1998, TCI Group has sold
and leased back advanced digital set-top devices under the Lease with an
aggregate cost of $109 million. Current annual lease payments with respect to
such leased equipment are $16 million. TCI Group has treated the Lease as an
operating lease in the combined financial statements of TCI Group, which are
included in the Company's September 30, 1998 Quarterly Report on Form 10-Q.
TCI Group's various partnerships and other affiliates accounted for by
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by TCI Group), through net
cash provided by their own operating activities and in certain circumstances
through required capital contributions from their partners.
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In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group may enter into variable and fixed rate exchange
agreements ("Interest Rate Swaps") pursuant to which it (i) pays fixed interest
rates (the "Fixed Rate Agreements") and receives variable interest rates and
(ii) pays variable interest rates (the "Variable Rate Agreements") and receives
fixed interest rates. During the nine months ended September 30, 1998 and 1997,
TCI Group's net payments pursuant to the Fixed Rate Agreements were less than $1
million for each period; and TCI Group's net receipts pursuant to the Variable
Rate Agreements were $8 million and $1 million, respectively. At September 30,
1998, all of TCI Group's Fixed Rate Agreements had expired. At September 30,
1998, TCI Group would be entitled to receive $78 million upon termination of the
Variable Rate Agreements.
In addition to the Variable Rate Agreements, TCI Group entered into
Interest Rate Swaps pursuant to which it pays a variable rate based on LIBOR
(5.8% at September 30, 1998) and receives a variable rate based on Constant
Maturity Treasury Index ("CMT") (4.7% at September 30, 1998) on a notional
amount of $400 million through September 2000; and pays a variable rate based on
LIBOR (5.7% at September 30, 1998) and receives a variable rate based on CMT
(4.8% at September 30, 1998) on notional amounts of $95 million through February
2000. During the nine months ended September 30, 1998, TCI Group's net payments
pursuant to such agreements were $1 million. At September 30, 1998, TCI Group
would be required to pay an estimated $4 million to terminate such Interest Rate
Swaps.
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, TCI Group does not anticipate that it
will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, as of September 30, 1998, TCI
Group 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 combined financial statements of TCI Group, which are included in the
Company's September 30, 1998 Quarterly Report on Form 10-Q, for additional
information regarding Interest Rate Swaps.
At September 30, 1998, after considering the net effect of the
aforementioned Interest Rate Swaps, TCI Group had $7,081 million (or 58%) of
fixed rate debt and $5,169 million (or 42%) of variable-rate debt. Accordingly,
in an environment of rising interest rates, TCI Group expects that it would
experience an increase in interest expense.
LIBERTY/VENTURES GROUP
Liberty/Ventures Group's sources of funds include its available cash
balances, net cash provided by operating activities, cash distributions from
affiliates, dividend and interest receipts, proceeds from asset sales,
availability under certain credit facilities, and loans and/or equity
contributions from TCI Group. To the extent cash needs of Liberty/Ventures Group
exceed cash provided by Liberty/Ventures Group, TCI Group may transfer funds to
Liberty/Ventures Group. Conversely, to the extent cash provided by
Liberty/Ventures Group exceeds cash needs of Liberty/Ventures Group,
Liberty/Ventures Group may transfer funds to TCI Group.
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The Liberty/Ventures Combination is not conditioned upon the AT&T/TCI
Merger. Upon closing of the AT&T/TCI Merger, the shareholders of
Liberty/Ventures Group will be issued separate shares of a new targeted stock of
AT&T in exchange for the shares of Liberty/Ventures Group Stock held. If the
Liberty/Ventures Combination and reclassification of TCI Ventures Group Stock
does not occur prior to the AT&T/TCI Merger, then in the AT&T/TCI Merger, each
share of TCI Ventures Group Stock will be converted into .52 of a share of New
Liberty Media Group Tracking Stock.
Pursuant to the Merger Agreement, immediately prior to the AT&T/TCI
Merger, certain assets attributed to Liberty/Ventures Group (including, the
shares of AT&T Common Stock received in the merger of AT&T and TCG, the stock of
@Home held by Liberty/Ventures Group, the assets and business of the NDTC and
WTCI) will be transferred to TCI Group in exchange for approximately $5.5
billion in cash. Also, upon consummation of the AT&T/TCI Merger, through a new
tax sharing agreement between Liberty/Ventures Group and AT&T, Liberty/Ventures
Group will become entitled to the benefit of all of the net operating loss
carryforwards available to the entities included in TCI's consolidated income
tax return as of the date of the AT&T/TCI Merger. Additionally, certain warrants
currently attributed to TCI Group will be transferred to Liberty/Ventures Group
in exchange for up to $176 million in cash. Certain agreements to be entered
into at the time of the AT&T/TCI Merger as contemplated by the Merger Agreement
will, among other things, provide preferred vendor status to Liberty/Ventures
Group for digital basic distribution on AT&T's systems of new programming
services created by Liberty/Ventures Group and its affiliates and provide for a
renewal of existing affiliation agreements. See note 2 to the accompanying
combined financial statements of Liberty/Ventures Group.
Liberty/Ventures Group's combined operating activities provided cash of
$3 million during the nine months ended September 30, 1998 and provided cash of
$219 million during the nine months ended September 30, 1997. As discussed
above, effective October 1, 1997, Cablevision's cash flows are no longer
included in Liberty/Ventures Group's combined statements of cash flows.
Cablevision's operating activities provided cash of $40 million during the nine
months ended September 30, 1997. Additionally, cash used by operating activities
of TCI Music is not included in Liberty/Ventures Group's combined statement of
cash flows during the 1997 period. Cash used by operating activities of TCI
Music was $3 million during the nine months ended September 30, 1998. At
September 30, 1998, @Home and UVSG held cash and cash equivalents of $204
million and $105 million, respectively. The cash balances of such entities are
generally intended to be applied towards the respective liquidity requirements
of such entities. It is not presently anticipated that any significant portion
of such cash balances will be distributed or otherwise made available to other
members of Liberty/Ventures Group.
During the nine months ended September 30, 1998 and 1997, cash used by
Liberty/Ventures Group's investing activities aggregated $1,097 million and $332
million, respectively. The 1998 and 1997 amounts include cash proceeds of $343
million and $201 million, respectively, received upon the disposition of assets.
Additionally, the 1998 and 1997 amounts include $1,263 million and $398 million,
respectively, that were used by Liberty/Ventures Group to fund investments in,
and loans to, affiliates.
During the nine months ended September 30, 1998 and 1997, cash provided
by Liberty/Ventures Group's financing activities aggregated $1,273 million and
$224 million, respectively. The 1998 and 1997 amounts include borrowings of debt
aggregating $2,061 million and $254 million, respectively. Outstanding debt on
Liberty/Ventures Group's combined balance sheets increased primarily due to the
addition of new credit facilities as well as increases on existing credit
facilities. See note 10 to the accompanying combined financial statements of
Liberty/Ventures Group.
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The Music Note may be reduced by the payment of cash or the issuance by
TCI of shares of Liberty/Ventures Group Stock for the benefit of entities
included within the TCI Group. During the second quarter of 1998, TCI issued
153,183 shares of Liberty Group Series B Stock valued at $5 million to an
individual who is an officer and director of TCI for the benefit of entities
included within the TCI Group. Accordingly, the Music Note was reduced by such
amount. Additionally, Liberty/Ventures Group may elect to pay $50 million of the
Music Note by delivery of a Stock Appreciation Rights Agreement that would give
TCI Group the right to receive 20% of the appreciation in value of
Liberty/Ventures Group's investment in TCI Music, to be determined at July 11,
2002.
In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, Liberty/Ventures Group
paid $140 million during the first quarter of 1998 for its allocated share of
the Call Payments. See note 11 to the accompanying combined financial statements
of Liberty/Ventures Group.
During the nine months ended September 30, 1998, pursuant to the stock
repurchase program, 239,450 shares of TCI Ventures Group Stock and 766,783
shares of Liberty Group Stock were repurchased at an aggregate cost of
approximately $30 million. Such amount is reflected as a decrease to combined
equity in the accompanying combined financial statements.
On July 13, 1998, Liberty/Ventures Group announced that it had made a
proposal to TINTA concerning the acquisition by Liberty/Ventures Group of all of
the outstanding shares of common stock of TINTA not beneficially owned by
Liberty/Ventures Group. Under the proposal, Liberty/Ventures Group would
exchange, in a merger transaction, 0.58 of a share of Liberty/Ventures Group
Series A Stock, or Liberty Group Series A Stock if prior to the Liberty/Ventures
Combination, for each share of Tele-Communications International, Inc. Series A
Common Stock acquired by Liberty/Ventures Group in the merger. Liberty/Ventures
Group's proposal, and a proposed merger agreement, has been approved by TINTA's
board of directors. The merger agreement provides that if the .58 exchange ratio
would yield a value to TINTA stockholders of less than $22.00 per TINTA share,
then TCI would be required to either increase the exchange ratio to an amount
that would yield a value of $22.00 per share or terminate the merger agreement.
Consummation of the merger is expected to occur in November 1998.
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During the fourth quarter of 1997, TCI entered into the Equity Swap
Facility. Pursuant to the Equity Swap Facility, TCI has the right to direct the
Counterparty to use the Equity Swap Facility to purchase Equity Swap Shares of
TCI Group Series A Stock and TCI Ventures Group Series A Stock with an aggregate
purchase price of up to $300 million. TCI has the right, but not the obligation,
to purchase Equity Swap Shares through the September 30, 2000 termination date
of the Equity Swap Facility. During such period, TCI is to settle periodically
any increase or decrease in the market value of the Equity Swap Shares. If the
market value of the Equity Swap Shares exceeds the Counterparty's cost, Equity
Swap Shares with a fair value equal to the difference between the market value
and cost will be segregated from the other Equity Swap Shares. If the market or
value of Equity Swap Shares is less than the Counterparty's cost, TCI, at its
option, will settle such difference with shares of TCI Group Series A Stock or
TCI Ventures Group Series A Stock or, subject to certain conditions, with cash
or letters of credit. In addition, TCI is required to periodically pay the
Counterparty a fee equal to a LIBOR-based rate on the Counterparty's cost to
acquire the Equity Swap Shares. Due to TCI's ability to issue shares to settle
periodic price fluctuation and fees under the Equity Swap Facility, TCI records
all amounts received or paid under this arrangement as increases or decreases to
equity. As of September 30, 1998, the Equity Swap Facility has acquired 4.9
million shares of TCI Group Series A Stock and 1.2 million shares of TCI
Ventures Group Series A Stock at an aggregate cost that was approximately $49
million less than the fair value of such Equity Swap Shares at September 30,
1998. The costs and benefits associated with the TCI Ventures Group Series A
Stock held by the Equity Swap Facility are attributed to Liberty/Ventures Group.
In 1996, a subsidiary attributed to Liberty/Ventures Group (i) issued
preferred stock in connection with a previous acquisition, which is convertible
at the option of the holders into 1,084,056 of TCI Group Series A Stock
beginning in April 1999 or sooner in the event of a change in control of TCI and
(ii) acquired an option contract from TCI Group in exchange for a $14 million
increase in the intercompany amount due to TCI Group. Such option contract
provided Liberty/Ventures Group with the right to acquire 1,084,056 shares of
TCI Group Series A Stock at a price equivalent to the fair value at the time of
exercise less $14.625 per share. During September 1998, TCI Group assigned its
obligations under the option contract to Liberty/Ventures Group. As a result of
such assignment, Liberty/Ventures Group recorded a $16 million reduction to the
intercompany amount due to TCI Group and a corresponding increase to combined
equity. In July 1998, Liberty/Ventures Group entered into an equity swap
transaction with a commercial bank, which provides Liberty/Ventures Group with
the right but not the obligation to acquire 1,084,056 shares of TCI Group Series
A Stock for approximately $45 million on or before April 19, 1999. In the event
Liberty/Ventures Group does not exercise its right to acquire such shares, any
difference between the counterparty's cost and the market value of the shares on
the settlement date will be settled in cash or shares of Liberty/Ventures Group
Series A Stock, or TCI Ventures Group Series A Stock if prior to the
Liberty/Ventures Combination, at Liberty/Ventures Group's option. Such shares
may be used to satisfy the exchange requirements of the aforementioned preferred
stock.
The board of directors of UVSG has authorized UVSG to repurchase from
time to time up to an aggregate of 2 million shares of UVSG's Class A common
stock. During the nine months ended September 30, 1998, UVSG repurchased
approximately 900,000 shares of stock for a total of $15 million.
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On January 12, 1998, TCI acquired from a minority shareholder of UVSG
24.8 million shares of UVSG Class A common stock (as adjusted for a two-for-one
stock split) in exchange for 12.7 million shares of TCI Ventures Group Series A
Stock and 7.3 million shares of Liberty Group Series A Stock. The aggregate
value assigned to the shares issued by TCI was based upon the market value of
such shares at the time the transaction was announced. As a result of such
transaction TCI increased its ownership in the equity of UVSG to approximately
73% and its voting power increased to 93%. In connection with such transaction,
during the first quarter of 1998, Liberty/Ventures Group recorded a $346 million
increase to combined equity.
Many of the entities the ownership of which, or the investment in
which, has been attributed to the Liberty/Ventures Group will require
significant additional capital in order to develop their respective businesses
and assets, to fund future operating losses and to fund future growth. In
certain cases, Liberty/Ventures Group has contractual commitments pursuant to
which (subject to certain conditions) it may be required to make significant
additional capital contributions to the entities in which it has investments.
TINTA and its consolidated subsidiaries also have commitments under various
partnership and other funding agreements to contribute capital or loan money to
fund capital expenditures and other capital requirements of certain affiliates.
There can be no assurance that any of Liberty/Ventures Group's entities will be
successful in generating sufficient cash flow from operating activities or
raising debt or equity capital in sufficient amounts or on terms acceptable to
them to be able to meet their respective capital requirements. There is also no
assurance that the anticipated capital requirements of Liberty/Ventures Group's
entities and/or affiliates will not significantly increase due to changing
circumstances, such as unanticipated opportunities, technological or marketing
hurdles, unanticipated expenses, and the like. The failure to generate
sufficient cash flow from operating activities or to raise sufficient funds may
require such entity to delay or abandon some or all of its development and
expansion plans or in certain instances, could result in the failure to meet
certain regulatory requirements, any and all of which could have a material
adverse effect on such entity's growth, its ability to compete in its industry
and its ability to service its debt.
The ability of one of Liberty/Ventures Group entities to fund the cash
flow deficits of other Liberty/Ventures Group entities is limited not only by
the structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of Liberty/Ventures Group entities. In addition, TINTA and certain of
the other Liberty/Ventures Group entities, such as Sprint PCS, are holding
companies, the assets of which consist solely or primarily of investments in
their subsidiaries and affiliates. As such, the ability of such holding
companies to meet their respective financial obligations and their funding and
other commitments to their respective subsidiaries and affiliates, is dependent
upon external financing and/or of dividends, loans or other payments from their
respective subsidiaries and affiliates, or repayment of loans and advances from
such holding companies. Accordingly, such holding companies' ability to meet
their respective liquidity requirements, including debt service, is limited as a
result of their dependence upon external financing and funds received from their
respective subsidiaries and affiliates. The payment of dividends or the making
of loans or advances to such holding companies by their respective subsidiaries
and affiliates may be subject, among other things, to statutory, regulatory or
contractual restrictions, are contingent upon the earnings of those subsidiaries
and affiliates, and are subject to various business considerations.
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From inception through September 1998, the Sprint PCS partners have
contributed $4.6 billion to Sprint PCS (of which Liberty/Ventures Group
contributed an aggregate of $1.4 billion). Sprint PCS's business plan will
require additional capital financing prior to the end of 1998. Sources of
funding for Sprint PCS's capital requirements may include vendor financing,
public offerings or private placements of equity and/or debt securities,
commercial bank loans and/or capital contributions from the Sprint PCS Partners.
However, there can be no assurance that any additional financing can be obtained
on a timely basis, on terms acceptable to Sprint PCS or the Sprint PCS Partners
and within the limitations contained in the agreements governing Sprint PCS's
existing debt.
Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized management
to operate Sprint PCS in accordance with such budget. The Sprint PCS partners
may mutually agree to make additional capital contributions. However, the Sprint
PCS partners have no such obligation in the absence of an approved budget, and
there can be no assurance the Sprint PCS partners will reach such an agreement
or approve the 1998 proposed budget. In addition, the failure by the Sprint PCS
partners to approve a business plan may impair the ability of Sprint PCS to
obtain required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS partners could result in the delay or
abandonment of Sprint PCS's development and expansion plans and expenditures,
the failure to meet regulatory requirements or other potential adverse
consequences.
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership board has
resulted in the occurrence of a "Deadlock Event" under the Sprint PCS
partnership agreement as of January 1, 1998. Under the Sprint PCS partnership
agreement, if one of the Sprint PCS partners refers the budget issue to the
chief executive officers of the corporate parents of the Sprint PCS partners for
resolution pursuant to specified procedures and the issue remains unresolved,
buy/sell provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other Sprint PCS
partners, or, in certain circumstances, liquidation of Sprint PCS.
In May 1998 the Sprint PCS partners entered into a series of agreements
pursuant to which Liberty/Ventures Group, Comcast Corporation ("Comcast") and
Cox Communications, Inc. ("Cox") would exchange their respective interests in
Sprint PCS and PhillieCo Partnership I, L.P. ("PhillieCo") for shares of a new
class of tracking stock of Sprint which would track the performance of Sprint's
newly created "PCS Group" (which would initially consist of Sprint PCS,
PhillieCo and certain PCS licenses which are separately owned by Sprint). The
consummation of such transactions is subject to a number of conditions,
including the approval of such transactions by the stockholders of Sprint. If
such transactions are consummated, Liberty/Ventures Group will initially hold
shares of Sprint PCS Group stock (as well as certain additional securities of
Sprint exercisable for or convertible into such securities) representing
approximately 24% of the equity value of Sprint attributable to the PCS Group,
subject to further dilution as a result of additional expected issuances of
shares of Sprint PCS stock (including in connection with a proposed initial
public offering of shares of Sprint PCS stock that may be consummated in
connection with such transactions). In connection with the execution of such
agreements, the Sprint PCS partners agreed to make up to $400 million in
additional capital contributions (of which Liberty/Ventures Group's share is
$120 million) to Sprint PCS pending the closing of such transactions. As of
September 30, 1998, all of such additional capital contributions had been made
to Sprint PCS. If the above-described transactions are consummated,
Liberty/Ventures Group would begin to account for its investment in the Sprint
PCS stock as an available-for-sale security. No assurance can be given that the
above-described transactions will be consummated.
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On June 30, 1998, Liberty/Ventures Group contributed $300 million in
cash to USANi LLC in exchange for an aggregate of 15 million equity shares of
USANi LLC (the "LLC Shares"). Liberty/Ventures Group's cash purchase price was
increased at an annual interest rate of 7.5% beginning from the date of the
closing of certain transactions with Universal Studios, Inc. (the "Universal
Transaction") through the date of Liberty/Ventures Group's purchase of such
securities. See note 4 to the accompanying combined financial statements of
Liberty/Ventures Group. Subject to certain restrictions, each LLC Share issued
or to be issued to Liberty/Ventures Group is exchangeable for one share of USA
Networks, Inc.'s ("USAI") common stock.
In connection with the Universal Transaction, each of Universal
Studios, Inc. and Liberty/Ventures Group was granted a preemptive right with
respect to future issuances of USAI's capital stock, subject to certain
limitations, to maintain their respective percentage ownership interests in USAI
that they had immediately prior to such issuances. On June 24, 1998,
Liberty/Ventures Group purchased approximately 4.7 million USAI shares of common
stock pursuant to a preemptive right of $20 per share in cash. In addition, on
July 27, 1998, Liberty/Ventures Group purchased 7.9 million LLC Shares at $20
per share as a result of the issuance of common stock by USAI in a transaction
to acquire the remaining stock of Ticketmaster Group, Inc.
which it previously did not own through a tax-free merger.
In January 1998, Liberty/Ventures Group's interest in a subsidiary of
TCI, attributed to Liberty/Ventures Group, which leases certain equipment under
a capital lease, was assigned to TCI Group. In connection therewith the TCI
Group assumed the attributed subsidiary's capital lease obligations totaling
$176 million and paid $7 million in cash to Liberty/Ventures Group.
As of September 30, 1998, Liberty/Ventures Group holds approximately 57
million shares of the TW Exchange Stock. During the nine months ended September
30, 1998, the unrealized appreciation, net of taxes, of the fair value of such
shares of TW Exchange Stock was $882 million based upon the market value of the
common stock into which the TW Exchange Stock is convertible. Holders of TW
Exchange Stock are entitled to receive dividends ratably with Time Warner common
stock. Liberty/Ventures Group received approximately $15 million and $14 million
in cash dividends for the first nine months of 1998 and 1997, respectively. It
is anticipated that Time Warner will continue to pay dividends on its common
stock and consequently that Liberty/Ventures Group will receive dividends on the
TW Exchange Stock it holds. However, there can be no assurance that such
dividends will continue to be paid.
Liberty/Ventures Group received approximately $23 million and $5
million in cash dividends on the FKW Preferred Stock during the nine months
ended September 30, 1998 and 1997, respectively. During the third quarter of
1998, Liberty/Ventures Group recognized dividend income of $16 million on its
AT&T Common Stock. No assurance can be given that such dividends on AT&T Common
Stock will continue to be paid.
Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which holders of
General Cable received 1.243 new Telewest shares and (pound)0.65 ($1.11) in cash
for each share of General Cable. In addition, holders of American Depository
shares of General Cable ("General Cable ADS") (each representing five General
Cable shares) received 6.215 new Telewest shares and (pound)3.25 ($5.53) in cash
for each share of General Cable ADS. Based upon Telewest's closing share price
of (pound)0.89 ($1.51) on April 14, 1998, the General Cable Merger was valued at
approximately (pound)649 million ($1.1 billion).
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The cash portion of the General Cable Merger was financed through an
offer to qualifying Telewest shareholders for the purchase of 261 million new
Telewest shares at a price of (pound)0.925 ($1.57) per share (the "Telewest
Offer"). Liberty/Ventures Group subscribed to 85 million Telewest ordinary
shares at an aggregate cost of (pound)78 million ($133 million) in connection
with the Telewest Offer. Immediately following the Telewest Offer,
Liberty/Ventures Group owned 28% of the issued and outstanding Telewest ordinary
shares.
In connection with the General Cable Merger, Liberty/Ventures Group
also converted its entire holdings of Telewest convertible preference shares
(133 million shares) into Telewest ordinary shares. As a result of the General
Cable Merger, Liberty/Ventures Group's ownership interest in Telewest decreased
to 22%. In connection with such dilution, Liberty/Ventures Group recognized a
non-cash gain of $58 million (excluding related tax expense of $20 million)
during the third quarter of 1998.
On August 21, 1998, Liberty/Ventures Group purchased 100% of the issued
and outstanding common stock of Pramer S.A., an Argentine programming company,
for $32 million in cash and the issuance of notes payable in the amount of $65
million (the "Pramer Notes"). Liberty/Ventures Group made an $11 million payment
on the Pramer Notes on October 1, 1998 and the remainder is due in 20 equal
monthly installments beginning October 15, 1998.
During the third quarter of 1998, 2.9 million shares of @Home common
stock were sold for net cash proceeds of approximately $125 million in the @Home
Offering.
On June 11, 1998, UVSG and The News Corporation Limited ("News Corp.")
announced the signing of a definitive agreement whereby News Corp.'s TV Guide
properties will be combined with UVSG to create a platform for offering
television guide services to consumers and advertising. As part of this
combination, a unit of News Corp. will receive consideration consisting of $800
million in cash and 60 million shares of UVSG's stock (as adjusted for a
two-for-one stock split), including 22.5 million shares of its Class A common
stock and 37.5 million shares of its Class B common stock (as adjusted for a
two-for-one stock split). As a result of the transaction, and certain other
pending transactions, News Corp., Liberty/Ventures Group and UVSG's public
stockholders will own on an economic basis approximately 40%, 44% and 16%,
respectively, of UVSG. Following the transaction, News Corp. and
Liberty/Ventures Group will each have approximately 48% of the voting power of
UVSG's outstanding stock. Upon consummation of such transaction, the results of
operations, cash flows and financial position of UVSG will no longer be included
in Liberty/Ventures Group's combined financial statements. UVSG had revenue of
$443 million and operating income of $48 million for the nine months ended
September 30, 1998. No assurance can be given that such transaction will be
consummated or consummated on the terms contemplated by the parties.
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Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC, entered into
an agreement with GI to purchase advanced digital set-top devices. The hardware
and software incorporated into these devices will be designed and manufactured
to be compatible and interoperable with the OpenCable(TM) architecture
specifications adopted by CableLabs, the cable television industry's research
and development consortium, in November 1997. NDTC has agreed that Approved
Purchasers will purchase, in the aggregate, a minimum of 6.5 million set-top
devices over the next three years at an average price of $318 per set-top
device. Through September 30, 1998, approximately 1 million set-top devices had
been purchased pursuant to this commitment. GI agreed to provide NDTC and its
Approved Purchasers the most favorable prices, terms and conditions made
available by GI to any customer purchasing advanced digital set-top devices. In
connection with NDTC's purchase commitment, GI agreed to grant warrants to
purchase its common stock proportional to the number of devices ordered by each
organization, which as of the effective date of the Digital Terminal Purchase
Agreement, would have represented at least a 10% equity interest in GI (on a
fully diluted basis). Such warrants vest as annual purchase commitments are met.
The value associated with such equity interest will be attributed to TCI Group
upon purchase and deployment of the digital set-top devices. See note 2 to the
accompanying combined financial statements of Liberty/Ventures 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, Liberty/Ventures Group acquired 21.4 million shares
of restricted stock of GI in exchange for (i) certain of the assets of NDTC's
set-top authorization business, (ii) the license of certain related software to
GI, (iii) a $50 million promissory note from Liberty/Ventures Group to GI and
(iv) a nine year revenue guarantee from Liberty/Ventures Group in favor of GI.
In connection therewith, NDTC also entered into a service agreement pursuant to
which it will provide certain postcontract services to GI's set-top
authorization business. See note 12 to the accompanying combined financial
statements of Liberty/Ventures Group.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home has
issued warrants to purchase 17.9 million shares of @Home's Series A common
stock. Of these warrants 10.6 million of such shares were exercisable as of
September 30, 1998.
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During the period in which each of TCI, Cox, Comcast and CSC have
agreed (subject to certain exceptions and limitations) to use @Home as its
exclusive provider of high speed residential consumer Internet access services,
a stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996,
then Liberty/Ventures Group will be required to offer to sell a proportionate
amount of its equity in @Home to certain other stockholders of @Home at fair
market value. Since June 1996, TCI has sold or transferred certain cable systems
that reduce TCI's number of base homes passed. In addition, TCI has announced
the proposed sale or transfer of additional cable systems that would further
reduce TCI's number of base homes passed. In the event that such cable systems
continue to be exclusive to @Home, such cable systems and their homes passed
would continue to be included in TCI's homes passed for purposes of determining
whether or not Liberty/Ventures Group is obligated to offer a portion of its
equity interest in @Home to Cox, Comcast and CSC, even though such cable systems
are no longer owned or controlled by TCI. If TCI does not require that such
cable systems remain exclusive to @Home, Liberty/Ventures Group could be
required to sell shares to Cox, Comcast, CSC and certain other stockholders of
@Home, at fair market value. There can be no assurance that, if Liberty/Ventures
Group is required to sell shares of @Home, the price paid to Liberty/Ventures
Group would represent adequate consideration to Liberty/Ventures Group because
such fair market value may not adequately reflect Liberty/Ventures Group's
expectation of the long term value of such investments in @Home. In addition to
the exceptions to the general exclusivity obligations, Cox and Comcast have the
right to terminate the exclusivity provisions with respect to TCI, Cox, Comcast
and CSC in the event TCI does not attain certain customer penetration levels for
the @Home service relative to the customer penetration levels of Cox and
Comcast, as of June 4, 1999, and each anniversary thereafter until 2002. Such
termination could have a material adverse effect on @Home and the value of
Liberty/Ventures Group's interest in @Home.
In addition, although TCI, Cox, Comcast and CSC are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.
Because TINTA generally views its foreign operating subsidiaries and
affiliates as long-term investments, TINTA generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries. Although TINTA
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, TINTA believes that, given
the nature of its business, it is not possible or practical to eliminate TINTA's
exposure to unfavorable fluctuations in foreign currency exchange rates. As of
September 30, 1998, Liberty/Ventures Group was not exposed to material near-term
losses in future earnings, fair values or cash flows resulting from derivative
financial instruments.
Liberty/Ventures Group has guaranteed notes payable and other
obligations (the "Guaranteed Obligations") of certain affiliates. At September
30, 1998, the U.S. dollar equivalent of the amounts borrowed pursuant to the
Guaranteed Obligations aggregated approximately $123 million.
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TINTA has guaranteed the obligation of an affiliate ("The Premium Movie
Partnership") to pay fees for the license to exhibit certain films through 2000.
Although the aggregate amount of The Premium Movie Partnership's license fee
obligations is not currently estimable, TINTA believes that the aggregate
payments pursuant to such obligations could be significant. If TINTA were to
fail to fulfill its obligations under the guarantee, the beneficiaries have the
right to demand an aggregate payment from TINTA of approximately $32 million.
Although TINTA has not had to perform under such guarantee to date, TINTA cannot
be certain that it will not be required to perform under such guarantee in the
future.
Flextech has undertaken to finance the working capital requirements of
a joint venture, (the "Principal Joint Venture") formed with BBC Worldwide
Limited ("BBC Worldwide") and is obligated to provide the Principal Joint
Venture with a primary credit facility of (pound)88 million ($150 million) and
subject to certain restrictions, a standby credit facility of (pound)30 million
($51 million). As of September 30, 1998, the Principal Joint Venture had
borrowed (pound)13.6 million ($23 million) under the primary credit facility. If
Flextech defaults in its funding obligation to the Principal Joint Venture and
fails to cure within 42 days after receipt of notice from BBC Worldwide, BBC
Worldwide is entitled, within the following 90 days, to require that TINTA
assume all of Flextech's funding obligations to the Principal Joint Venture.
TINTA has formed strategic partnerships with News Corp., Organizacoes
Globo and Group Televisa S.A. to develop and operate a direct-to-home satellite
service for Latin America, Mexico, and various Central and South American
countries (collectively, the "DTH Ventures"). As of September 30, 1998, TINTA
had guaranteed approximately $174 million of the DTH Ventures' financial
obligations.
Liberty/Ventures Group intends to continue to develop its entertainment
and information programming services and has made certain financial commitments
related to the acquisition of programming. As of September 30, 1998, Encore
Media Group's future minimum obligation related to certain film licensing
agreements was $703 million. The amount of the total obligation is not currently
estimable because such amount is dependent upon the number of qualifying films
released theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying films.
Continued development may require additional financing and it cannot be
predicted whether Liberty/Ventures Group will obtain such financing. If
additional financing cannot be obtained, Liberty/Ventures Group could attempt to
sell assets but there can be no assurance that asset sales, if any, can be
consummated at a price and on terms acceptable to Liberty/Ventures Group.
Further, Liberty/Ventures Group and/or TCI could attempt to sell equity
securities but, again, there can be no certainty that such a sale could be
accomplished on acceptable terms.
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including the Puerto Rico
Subsidiary's cable television systems. The Puerto Rico Subsidiary has submitted
a claim to its insurance carrier for its damaged property and loss of revenue.
The Puerto Rico Subsidiary anticipates that its estimated loss of revenue will
exceed its business interruption insurance. Such uncovered losses could cause
the Puerto Rico Subsidiary to be in violation of certain financial covenants of
the Puerto Rico Bank Facility in the fourth quarter of 1998 and the first
quarter of 1999. Violations of certain financial covenants will prevent the
Puerto Rico Subsidiary from borrowing any unused borrowing commitments and could
result in the acceleration of amounts due under the Puerto Rico Bank Facility.
The Puerto Rico Subsidiary is in discussions with the lenders of the Puerto Rico
Bank Facility regarding possible remedies of any potential violations of
financial covenants.
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On November 9, 1998, Cablevision and the lenders under its $1.1 billion
loan facility agreed to an extension of $950 million of outstanding borrowings
under the facility until December 15, 1998. At that time, outstanding borrowings
are to be refinanced through (i) $550 million of indebtedness, which is expected
to be issued under Cablevision's medium term note program, and (ii) $400 million
of support from Cablevision's shareholder's, including TINTA. TINTA's portion of
such support aggregates approximately $84.8 million, and will be made through
(i) a $42.4 million capital contribution to Cablevision and (ii) the guarantee
of senior indebtedness of Cablevision and/or subordinated loans from TINTA to
Cablevision in the aggregate amount of $42.4 million.
During the fourth quarter of 1998, one of the Cablevision shareholders
exercised a put right that, under certain circumstances, could require TINTA to
purchase a portion of such shareholder's ownership interest for cash
consideration of up to $36 million, one-third of which would be paid on December
15, 1998 and the remaining amount would be paid in four semi-annual
installments. Additionally, the Cablevision shareholders' agreement contains a
buy-sell provision that, under certain circumstances, could require TINTA to
purchase other shareholders' ownership interests.
At September 30, 1998, availability under Liberty/Ventures Group's
credit facilities (excluding the Ventures Intergroup Credit Facility) aggregated
$3,065 million. Borrowings on such credit facilities at September 30, 1998
aggregated $2,001 million. If the available borrowings under Liberty/Ventures
Group's credit facilities are not sufficient to fund Liberty/Ventures Group's
capital requirements, no assurance can be given that Liberty/Ventures Group will
be able to obtain any required additional financing on terms acceptable to it,
or at all. Additional capital could be raised for Liberty/Ventures Group by,
among other things, engaging in public offerings or private placements of
Liberty/Ventures Group Stock or through issuance of debt securities or preferred
equity securities attributed to Liberty/Ventures Group. If Liberty/Ventures
Group is unable to obtain sufficient financing from outside sources,
Liberty/Ventures Group may be dependent upon funding from TCI Group.
Liberty/Ventures Group's failure to meet its contractual and other capital
requirements could have significant adverse consequences to a particular
operating company or affiliate and Liberty/Ventures Group.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998* 1997
------------- -----------
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ 320 244
Restricted cash (note 4) 375 40
Trade and other receivables, net 664 529
Prepaid program rights 128 104
Committed program rights 108 115
Investments in affiliates, accounted for under the equity
method, and related receivables (note 5) 4,547 3,063
Investment in Time Warner, Inc. ("Time Warner") (note 6) 5,021 3,555
Investment in AT&T Corp. ("AT&T") (note 7) 2,744 --
Property and equipment, at cost:
Land 67 96
Distribution systems 10,014 10,784
Support equipment and buildings 1,750 1,558
------- -------
11,831 12,438
Less accumulated depreciation 4,839 4,759
------- -------
6,992 7,679
------- -------
Franchise costs 15,327 17,910
Less accumulated amortization 2,622 2,763
------- -------
12,705 15,147
------- -------
Other assets, net of accumulated amortization (note 14) 2,969 2,001
------- -------
$36,573 32,477
======= =======
</TABLE>
* Restated - see note 18.
(continued)
224
<PAGE> 226
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998* 1997
------------ -----------
Liabilities and Stockholders' Equity amounts in millions
<S> <C> <C>
Accounts payable $ 149 169
Accrued interest 161 258
Accrued programming expense 412 399
Other accrued expenses 1,019 997
Deferred option premium (note 6) -- 306
Debt (note 9) 14,895 15,250
Deferred income taxes 7,871 6,104
Other liabilities (note 15) 1,369 664
-------- --------
Total liabilities 25,876 24,147
-------- --------
Minority interests in equity of consolidated subsidiaries 1,554 1,664
Redeemable securities:
Preferred stock (note 10) 299 655
Common stock 28 5
Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts ("Trust Preferred Securities") holding
solely subordinated debt securities of TCI Communications, Inc.
("TCIC")(note 11) 1,500 1,500
Stockholders' equity (note 12):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred
Stock, $.01 par value -- --
Common stock, $1 par value:
Series A TCI Group. Authorized 1,750,000,000 shares; issued
610,507,868 shares in 1998 and 605,616,143 shares in 1997 610 606
Series B TCI Group. Authorized 150,000,000 shares; issued
73,929,229 shares in 1998 and 78,203,044 shares in 1997 74 78
Series A Liberty Media Group. Authorized 750,000,000
shares; issued 357,722,948 shares in 1998 and 344,962,521
shares in 1997 358 345
Series B Liberty Media Group. Authorized 75,000,000
shares; issued 35,198,836 shares in 1998 and 35,180,385
shares in 1997 35 35
Series A TCI Ventures Group. Authorized 750,000,000 shares;
issued 377,126,966 shares in 1998 and 377,386,032
shares in 1997 377 377
Series B TCI Ventures Group. Authorized 75,000,000 shares;
issued 45,766,218 shares in 1998 and 32,532,800
shares in 1997 46 33
Additional paid-in capital 5,275 5,063
Accumulated other comprehensive earnings, net of taxes (note 1) 1,715 772
Retained earnings (accumulated deficit) 572 (812)
-------- --------
9,062 6,497
Treasury stock and common stock held by subsidiaries,
at cost (note 12) (1,746) (1,991)
-------- --------
Total stockholders' equity 7,316 4,506
-------- --------
Commitments and contingencies (notes 2, 5, 8, 15 and 16)
$ 36,573 32,477
======== ========
</TABLE>
* Restated - see note 18.
See accompanying notes to consolidated financial statements.
225
<PAGE> 227
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1998* 1997 1998* 1997
------- ------- ------- -------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue $ 1,825 1,934 5,510 5,637
Operating costs and expenses:
Operating 709 738 2,157 2,192
Selling, general and administrative 438 418 1,301 1,213
Year 2000 costs (note 16) 4 -- 6 --
AT&T merger costs (note 2) 1 -- 11 --
Stock compensation 11 160 423 231
Depreciation and amortization 421 396 1,289 1,177
------- ------- ------- -------
1,584 1,712 5,187 4,813
------- ------- ------- -------
Operating income 241 222 323 824
Other income (expense):
Interest expense (272) (300) (808) (883)
Interest and dividend income 33 25 72 64
Share of losses of affiliates, net (note 5) (397) (253) (986) (591)
Loss on early extinguishment of debt (note 9) (6) -- (44) (11)
Minority interests in earnings of consolidated
subsidiaries, net note 11) (30) (35) (95) (129)
Gain on issuance of equity interests by subsidiaries
(notes 8 and 14) 17 60 55 60
Gain on issuance of stock by equity investees (note 5) 58 -- 259 21
Gain on disposition of assets (notes 6, 7 and 8) 2,605 338 3,704 400
Other, net (6) (1) (25) (7)
------- ------- ------- -------
2,002 (166) 2,132 (1,076)
------- ------- ------- -------
Earnings (loss) before income taxes 2,243 56 2,455 (252)
Income tax benefit (expense) (903) (78) (1,068) 18
------- ------- ------- -------
Net earnings (loss) 1,340 (22) 1,387 (234)
Dividend requirements on preferred stocks (5) (10) (18) (31)
------- ------- ------- -------
Net earnings (loss) attributable to common stockholders $ 1,335 (32) 1,369 (265)
======= ======= ======= =======
Net earnings (loss) attributable to common stockholders:
TCI Group Series A and Series B common stock $ 47 (224) 130 (479)
Liberty Media Group Series A and Series B common stock (11) 162 227 184
TCI Ventures Group Series A and Series B common stock 1,299 30 1,012 30
------- ------- ------- -------
$ 1,335 (32) 1,369 (265)
======= ======= ======= =======
Basic earnings (loss) attributable to common stockholders
per common share (note 3):
TCI Group Series A and Series B common stock $ .09 (.34) .25 (.71)
======= ======= ======= =======
Liberty Media Group Series A and Series B common stock $ (.03) .44 .64 .50
======= ======= ======= =======
TCI Ventures Group Series A and Series B common stock $ 3.07 .07 2.40 .07
======= ======= ======= =======
Diluted earnings (loss) attributable to common stockholders
per common and potential common share (note 3):
TCI Group Series A and Series B common stock $ .08 (.34) .22 (.71)
======= ======= ======= =======
Liberty Media Group Series A and Series B common stock $ (.03) .40 .58 .45
======= ======= ======= =======
TCI Ventures Group Series A and Series B common stock $ 2.88 .07 2.24 .07
======= ======= ======= =======
Comprehensive earnings (loss) (note 1) $ 1,425 (38) 2,330 (248)
======= ======= ======= =======
</TABLE>
* Restated - see note 18
See accompanying notes to consolidated financial statements.
226
<PAGE> 228
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------------------
Class B TCI Group Liberty Media Group TCI Ventures Group
Preferred -------------------- ---------------------- --------------------
Stock Series A Series B Series A Series B Series A Series B
---------- ---------- -------- --------- --------- --------- ---------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ -- 606 78 345 35 377 33
Net earnings -- -- -- -- -- -- --
Exchange of common stock in connection with
the Magness Settlement (note 13) -- -- 11 -- -- -- 13
Issuance of common stock in connection with
settlement of litigation -- 1 1 -- -- -- --
Reclassification to redeemable securities
of redemption amount of common stock
subject to put obligation -- -- -- -- -- -- --
Premium received in connection with put
obligation -- -- -- -- -- -- --
Issuance of common stock for acquisitions
(note 8) -- 1 -- 7 -- 13 --
Repurchase of common stock to be held in
treasury (note 12) -- -- -- -- -- -- --
Repurchase and retirement of common stock
(note 12) -- -- -- -- -- -- --
Retirement of common stock held in treasury -- (12) (16) -- -- (13) --
Gain from issuance of equity by subsidiary
and equity investee, net of taxes (note 5) -- -- -- -- -- -- --
Issuance of common stock upon conversion of
notes and preferred stock (notes 9 and 10) -- 14 -- 6 -- -- --
Payments for call agreements (note 13) -- -- -- -- -- -- --
Recognition of fees related to the Equity
Swap Facility and the Exchange (notes 12
and 13) -- -- -- -- -- -- --
Reimbursement of fees related to Exchange
(note 13) -- -- -- -- -- -- --
Recognition of stock compensation related
to restricted stock awards -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements -- -- -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities, net of
taxes -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1998 $ -- 610 74 358 35 377 46
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Treasury
stock and
Accumulated common
other Retained stock
Additional comprehensive earnings held by Total
paid-in earnings, (accumulated subsidiaries, stockholders'
capital net of taxes deficit)* at cost equity*
----------- ------------ ----------- ----------- -----------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 5,063 772 (812) (1,991) 4,506
Net earnings -- -- 1,387 -- 1,387
Exchange of common stock in connection with
the Magness Settlement (note 13) 509 -- -- (533) --
Issuance of common stock in connection with
settlement of litigation 48 -- -- (3) 47
Reclassification to redeemable securities
of redemption amount of common stock
subject to put obligation (24) -- -- -- (24)
Premium received in connection with put
obligation 3 -- -- -- 3
Issuance of common stock for acquisitions
(note 8) 353 -- -- -- 374
Repurchase of common stock to be held in
treasury (note 12) -- -- -- (20) (20)
Repurchase and retirement of common stock
(note 12) (11) -- -- -- (11)
Retirement of common stock held in treasury (760) -- -- 801 --
Gain from issuance of equity by subsidiary
and equity investee, net of taxes (note 5) 67 -- -- -- 67
Issuance of common stock upon conversion of
notes and preferred stock (notes 9 and 10) 329 -- -- -- 349
Payments for call agreements (note 13) (274) -- -- -- (274)
Recognition of fees related to the Equity
Swap Facility and the Exchange (notes 12
and 13) (25) -- -- -- (25)
Reimbursement of fees related to Exchange
(note 13) 11 -- -- -- 11
Recognition of stock compensation related
to restricted stock awards 4 -- -- -- 4
Accreted dividends on all classes of
preferred stock (13) -- (5) -- (18)
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements 5 -- 2 -- 7
Payment of preferred stock dividends (10) -- -- -- (10)
Foreign currency translation adjustment -- 6 -- -- 6
Change in unrealized holding gains for
available-for-sale securities, net of
taxes -- 937 -- -- 937
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1998 5,275 1,715 572 (1,746) 7,316
=========== =========== =========== =========== ===========
</TABLE>
* Restated - see note 18.
See accompanying notes to consolidated financial statements.
227
<PAGE> 229
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998* 1997
------------ ------------
amounts in millions
(see note 4)
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss) $ 1,387 (234)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,289 1,177
Stock compensation 423 231
Payments of obligation relating to stock compensation (161) (26)
Share of losses of affiliates, net 986 591
Loss on early extinguishment of debt 44 11
Minority interests in earnings of consolidated subsidiaries, net 95 129
Gain on issuance of equity interests by subsidiaries (55) (60)
Gain on issuance of stock by equity investees (259) (21)
Gain on disposition of assets (3,704) (400)
Deferred income tax expense (benefit) 1,009 (125)
Payments of restructuring charges (5) (21)
Other noncash charges 2 13
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (157) (10)
Change in prepaids (17) (79)
Change in other accruals and payables (112) 38
------------ ------------
Net cash provided by operating activities 765 1,214
------------ ------------
Cash flows from investing activities:
Cash paid for acquisitions (211) (331)
Capital expended for property and equipment (1,123) (419)
Investments in and loans to affiliates (1,346) (392)
Collections of loans to affiliates 1,658 87
Proceeds from disposition of assets 712 352
Change in restricted cash (335) 39
Cash received in exchanges 45 18
Other investing activities (73) (11)
------------ ------------
Net cash used in investing activities (673) (657)
------------ ------------
Cash flows from financing activities:
Borrowings of debt 4,645 3,311
Repayments of debt (4,213) (4,125)
Prepayment penalties (39) (7)
Repurchase of common stock to be held in treasury (20) (18)
Repurchase and retirement of common stock (11) --
Repurchase of subsidiary common stock (15) (42)
Payment of preferred stock dividends (27) (37)
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (141) (130)
Payments for call agreements (274) --
Proceeds from issuance of subsidiary common stock and preferred stock 91 148
Proceeds from issuance of Trust Preferred Securities -- 490
Other financing activities (12) 3
------------ ------------
Net cash used in financing activities (16) (407)
------------ ------------
Net increase in cash and cash equivalents 76 150
Cash and cash equivalents at beginning of period 244 405
------------ ------------
Cash and cash equivalents at end of period $ 320 555
============ ============
</TABLE>
* Restated - see note 18.
See accompanying notes to consolidated financial statements.
228
<PAGE> 230
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(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"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of
operations for any interim period are not necessarily indicative of
results for the full year. These consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto contained in TCI's Annual Report on Form
10-K for the year ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). The Company has reclassified its
prior period consolidated balance sheet and consolidated statements of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
or losses be reported in a financial statement in the period in which
they are recognized. The Company has included cumulative foreign
currency translation adjustments and unrealized holding gains and
losses on available-for-sale securities in other comprehensive
earnings that are recorded directly in stockholders' equity. Pursuant
to SFAS 130, these items are reflected, net of related tax effects, as
components of comprehensive earnings in the Company's consolidated
statements of operations, and are included in accumulated other
comprehensive earnings in the Company's consolidated balance sheets
and statement of stockholders' equity.
(continued)
229
<PAGE> 231
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which is effective
for all fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their
fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those
instruments qualify as hedges of the (1) fair values of existing
assets, liabilities, or firm commitments, (2) variability of cash
flows of forecasted transactions, or (3) foreign currency exposures of
net investments in foreign operations. Although management of the
Company has not completed its assessment of the impact of SFAS 133 on
its consolidated results of operations and financial position,
management estimates that the impact of SFAS 133 will not be material.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
Targeted Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue two new series of stock,
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") and
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series B Stock," and
together with the Liberty Group Series A Stock, the "Liberty Group
Stock"). The Liberty Group Stock is intended to reflect the separate
performance of TCI's assets which produce and distribute programming
services ("Liberty Media Group"). Additionally, the stockholders, of
TCI approved the redesignation of the previously authorized Class A
and Class B common stock into Tele-Communications, Inc. Series A TCI
Group Common Stock, par value $1.00 per share (the "TCI Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock,
par value $1.00 per share (the "TCI Group Series B Stock", and
together with the TCI Group Series A Stock, the "TCI Group Stock"),
respectively. On August 10, 1995, TCI distributed, in the form of a
dividend, 2.25 shares of Liberty Group Stock for each four shares of
TCI Group Stock owned (the "Liberty Distribution").
On August 28, 1997, the stockholders of TCI authorized the Board to
issue the Tele-Communications, Inc. Series A TCI Ventures Group Common
Stock, par value $1.00 per share (the "TCI Ventures Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Ventures Group
Common Stock, par value $1.00 per share (the "TCI Ventures Group
Series B Stock," and together with TCI Ventures Group Series A Stock,
the "TCI Ventures Group Stock"). The TCI Ventures Group Stock is
intended to reflect the separate performance of the "TCI Ventures
Group," which is comprised of TCI's principal international assets and
businesses and substantially all of TCI's non-cable and
non-programming assets.
(continued)
230
<PAGE> 232
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In August 1997, TCI commenced offers (the "Exchange Offers") to
exchange shares of TCI Ventures Group Series A Stock and TCI Ventures
Group Series B Stock for up to 188,661,300 shares of TCI Group Series
A Stock and up to 16,266,400 shares of TCI Group Series B Stock,
respectively. The exchange ratio for the Exchange Offers was two
shares of the applicable series of TCI Ventures Group Stock for each
share of the corresponding series of TCI Group Stock properly tendered
up to the indicated maximum numbers. Upon the September 10, 1997
consummation of the Exchange Offers, 188,661,300 shares of TCI Group
Series A Stock and 16,266,400 shares of TCI Group Series B Stock were
exchanged for 377,322,600 shares of TCI Ventures Group Series A Stock
and 32,532,800 shares of TCI Ventures Group Series B Stock (the "TCI
Ventures Exchange").
The TCI Group Stock is intended to reflect the separate performance of
TCI and its subsidiaries and assets not attributed to Liberty Media
Group or TCI Ventures Group. Such subsidiaries and assets are referred
to as "TCI Group" and are comprised primarily of TCI's domestic cable
and communications business. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups"
and individually, may be referred to herein as a "Group." The TCI
Group Series A Stock, TCI Ventures Group Series A Stock and the
Liberty Group Series A Stock are sometimes collectively referred to
herein as the "Series A Stock," and the TCI Group Series B Stock, TCI
Ventures Group Series B Stock and Liberty Group Series B Stock are
sometimes collectively referred to herein as the "Series B Stock."
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, each such Group in the capital
structure of TCI, which encompasses the TCI Group Stock, Liberty Group
Stock and TCI Ventures Group Stock, does not affect the ownership or
the respective legal title to such assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its
subsidiaries each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock, Liberty Group Stock and TCI
Ventures Group Stock are common stockholders of TCI and are subject to
risks associated with an investment in TCI and all of its businesses,
assets and liabilities. The redesignation of TCI Group Stock and the
issuance of Liberty Group Stock and TCI Ventures Group Stock does not
affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of
the separate Groups and the market prices of shares of TCI Group
Stock, Liberty Group Stock and TCI Ventures Group Stock. In addition,
net losses of any portion of TCI, dividends or distributions on, or
repurchases of, any series of common stock, and dividends on, or
certain repurchases of preferred stock would reduce funds of TCI
legally available for dividends on all series of common stock.
Accordingly, financial information of any one Group should be read in
conjunction with the financial information of TCI and the other
Groups.
(continued)
231
<PAGE> 233
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The common stockholders' equity value of TCI Ventures Group or Liberty
Media Group that, at any relevant time, is attributed to TCI Group,
and accordingly not represented by outstanding TCI Ventures Group
Stock or Liberty Group Stock, respectively, is referred to as
"Inter-Group Interest." Prior to consummation of the Liberty
Distribution and TCI Ventures Exchange, TCI Group had a 100%
Inter-Group Interest in Liberty Media Group and TCI Ventures Group,
respectively. Following consummation of the Liberty Distribution and
TCI Ventures Exchange, TCI Group no longer has Inter-Group Interests
in Liberty Media Group and TCI Ventures Group, respectively. For
periods in which an Inter-Group Interest exists, TCI Group accounts
for its Inter-Group Interest in a manner similar to the equity method
of accounting. Following consummation of the Liberty Distribution and
the TCI Ventures Exchange, an Inter-Group Interest would be created
with respect to Liberty Media Group or TCI Ventures Group only if a
subsequent transfer of cash or other property from TCI Group to
Liberty Media Group or TCI Ventures Group is specifically designated
by the Board as being made to create an Inter-Group Interest or if
outstanding shares of Liberty Group Stock or TCI Ventures Stock,
respectively, are purchased with funds attributable to TCI Group.
Management of TCI believes that generally accepted accounting
principles require that Liberty Media Group or TCI Ventures Group be
consolidated with TCI Group for all periods in which TCI Group held an
Inter-Group Interest in Liberty Media Group or TCI Ventures Group,
respectively.
Dividends on TCI Group Stock, Liberty Group Stock or TCI Ventures
Group Stock are payable at the sole discretion of the Board out of the
lesser of assets of TCI legally available for dividends or the
available dividend amount with respect to each Group, as defined.
Determinations to pay dividends on TCI Group Stock, Liberty Group
Stock or TCI Ventures Group Stock are based primarily upon the
financial condition, results of operations and business requirements
of the applicable Group and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its
subsidiaries is (unless the Board otherwise provides) specifically
attributed to and reflected in the combined financial statements of
the Group that includes the entity which incurred the debt or issued
the preferred stock or, in case the entity incurring the debt or
issuing the preferred stock is Tele-Communications, Inc., the TCI
Group. The Board could, however, determine from time to time that debt
incurred or preferred stock issued by entities included in a Group
should be specifically attributed to and reflected in the combined
financial statements of one of the other Groups to the extent that the
debt is incurred or the preferred stock is issued for the benefit of
such other Group.
(continued)
232
<PAGE> 234
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstances, one of the
other Groups may transfer funds to such Group. Such transfers of funds
among the Groups will be reflected as borrowings or, if determined by
the Board, in the case of a transfer from TCI Group to either Liberty
Media Group or TCI Ventures Group, reflected as the creation of, or
increase in, TCI Group's Inter-Group Interest in such Group or, in the
case of a transfer from either Liberty Media Group or TCI Ventures
Group to TCI Group, reflected as a reduction in TCI Group's
Inter-Group Interest in such Group. There are no specific criteria for
determining when a transfer will be reflected as a borrowing or as an
increase or reduction in an Inter-Group Interest. The Board expects to
make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration
of such factors as it deems relevant, including, without limitation,
the needs of TCI, the financing needs and objectives of the Groups,
the investment objectives of the Groups, the availability, cost and
time associated with alternative financing sources, prevailing
interest rates and general economic conditions.
Loans from one Group to another Group generally will bear interest at
such rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures
established by, the Board. The Board expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs
of TCI, the use of proceeds by and creditworthiness of the recipient
Group, the capital expenditure plans of and investment opportunities
available to each Group and the availability, cost and time associated
with alternative financing sources.
The combined balance sheets of a Group reflect its net loans or
advances to or loans or advances from the other Groups. Similarly, the
respective combined statements of operations of the Groups reflect
interest income or expense, as the case may be, associated with such
loans or advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical combined financial statements,
net loans or advances between Groups have been and will continue to be
included as a component of each respective Group's combined equity.
Although any increase in TCI Group's Inter-Group Interest in Liberty
Media Group or TCI Ventures Group resulting from an equity
contribution by the TCI Group to Liberty Media Group or TCI Ventures
Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from Liberty Media Group or TCI Ventures Group to
TCI Group would be determined by reference to the market value of the
Liberty Group Series A Stock, or the TCI Ventures Group Series A
Stock, respectively, as of the date of such transfer, such an increase
could occur at a time when such shares could be considered undervalued
and such a decrease could occur at a time when such shares could be
considered overvalued.
(continued)
233
<PAGE> 235
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All financial impacts of issuances and purchases of shares of TCI
Group Stock, TCI Ventures Group Stock or Liberty Group Stock, which
are attributed to TCI Group, TCI Ventures Group or Liberty Media
Group, respectively, will be to such extent reflected in the combined
financial statements of TCI Group, TCI Ventures Group or Liberty Media
Group, respectively. All financial impacts of issuances of shares of
TCI Ventures Group Stock or Liberty Group Stock, the proceeds of which
are attributed to TCI Group in respect of a reduction in TCI Group's
Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
respectively, will be to such extent reflected in the combined
financial statements of TCI Group. Financial impacts of dividends or
other distributions on TCI Group Stock, TCI Ventures Group Stock or
Liberty Group Stock, will be attributed entirely to TCI Group, TCI
Ventures Group or Liberty Media Group, respectively, except that
dividends or other distributions on TCI Ventures Group Stock or
Liberty Group Stock will (if at the time there is an Inter-Group
Interest in TCI Ventures Group or Liberty Media Group, respectively)
result in TCI Group being credited, and TCI Ventures Group or Liberty
Media Group being charged (in addition to the charge for the dividend
or other distribution paid), with an amount equal to the product of
the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of TCI Ventures Group
Stock or Liberty Group Stock and a fraction of the numerator of which
is TCI Ventures Group or Liberty Media Group "Inter-Group Interest
Fraction" and the denominator of which is the TCI Ventures Group or
the Liberty Media Group "Outstanding Interest Fraction" (both as
defined). Financial impacts of repurchases of TCI Ventures Group Stock
or Liberty Group Stock, the consideration for which is charged to TCI
Group, will be to such extent reflected in the combined financial
statements of TCI Group and will result in an increase in TCI Group's
Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
respectively.
(continued)
234
<PAGE> 236
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Proposed Merger
TCI and AT&T have agreed to a merger (the "Merger") pursuant to, and
subject to the terms and conditions set forth in, the Agreement and
Plan of Restructuring and Merger, dated as of June 23, 1998 (the
"Merger Agreement"), among TCI, AT&T and an indirect wholly-owned
subsidiary of AT&T. In the Merger, TCI will become a wholly-owned
subsidiary of AT&T and (i) each share of TCI Group Series A Stock will
be converted into .7757 of a share of common stock, par value $1.00
per share, of AT&T ("AT&T Common Stock"), (ii) each share of TCI Group
Series B Stock will be converted into .8533 of a share of AT&T Common
Stock, (iii) each share of Liberty Group Series A Stock will be
converted into one share of a newly authorized class of AT&T common
stock to be designated as the Class A Liberty Group Common Stock, par
value $1.00 per share (the "AT&T Liberty Class A Tracking Stock") and
(iv) each share of Liberty Group Series B Stock will be converted into
one share of a newly authorized class of AT&T common stock to be
designated as the Class B Liberty 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"). In addition, TCI has announced its intention, subject to
stockholder approval, to combine the assets and businesses of Liberty
Media Group and TCI Ventures Group and reclassify each share of TCI
Ventures Group Series A Stock as .52 of a share of Liberty Group
Series A Stock and each share of TCI Ventures Group Series B Stock as
.52 of a share of Liberty Group Series B Stock. If such combination
and reclassification does not occur prior to the Merger, then in the
Merger each share of TCI Ventures Group Series A Stock and TCI
Ventures Group Series B Stock will be converted into .52 of a share of
the corresponding series of AT&T Liberty Tracking Stock. In general,
the holders of shares of AT&T Liberty Class A Tracking Stock and the
holders of shares of AT&T Liberty Class B Tracking Stock will vote
together as a single class with the holders of shares of AT&T Common
Stock on all matters presented to such stockholders, with the holders
being entitled to one-tenth (1/10th) of a vote for each share of AT&T
Liberty Class A Tracking Stock held, 1 vote per share of AT&T Liberty
Class B Tracking Stock held, and 1 vote per share of AT&T Common Stock
held.
In the Merger, (i) TCI's Class B 6% Cumulative Redeemable Exchangeable
Junior Preferred Stock will remain outstanding, (ii) TCI's Convertible
Preferred Stock, Series C-TCI Group will be converted into a number of
shares of AT&T Common Stock equal to .7757 times the current
conversion rate of such preferred stock (132.86 shares per preferred
share), (iii) TCI's Convertible Preferred Stock Series C-Liberty Media
Group will be converted into a number of shares of AT&T Liberty Class
A Tracking Stock equal to the current conversion rate of such
preferred stock (56.25 shares per preferred share), (iv) TCI's
Redeemable Convertible TCI Group Preferred Stock, Series G will be
converted into a number of shares of AT&T Common Stock equal to .7757
times the current conversion rate of such preferred stock (1.19 shares
per preferred share) and (v) TCI's Redeemable Convertible Liberty
Media Group Preferred Stock, Series H will be converted into a number
of shares of AT&T Liberty Class A Tracking Stock equal to the current
conversion rate of such preferred stock (0.590625 of a share per
preferred share).
(continued)
235
<PAGE> 237
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The shares of AT&T Liberty Tracking Stock to be issued in the Merger
will be a newly authorized class of common stock of AT&T which will be
intended to reflect the separate performance of the businesses and
assets attributed to the "Liberty/Ventures Group", which following the
Merger, will be made up of the businesses and assets which are
attributed to Liberty Media Group and TCI Ventures Group at the time
of the Merger. Pursuant to the Merger Agreement, immediately prior to
the Merger, certain assets currently 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.) will be transferred to TCI Group in
exchange for approximately $5.5 billion in cash. Also, upon
consummation of the Merger, through a new tax sharing agreement
between Liberty/Ventures Group and AT&T, Liberty/Ventures Group will
become entitled to the benefit of all of the net operating loss
carryforwards available to the entities included in TCI's consolidated
income tax return as of the date of the Merger. Additionally, certain
warrants currently attributed to TCI Group will be transferred to
Liberty/Ventures Group in exchange for up to $176 million in cash.
Certain agreements to be entered into at the time of the Merger as
contemplated by the Merger Agreement will, among other things, provide
preferred vendor status to Liberty/Ventures Group for digital basic
distribution on AT&T's systems of new programming services created by
Liberty/Ventures Group, provide for a renewal of existing affiliation
agreements and provide for the business of the Liberty/Ventures Group
to continue to be managed following the Merger by certain members of
TCI's management who currently manage the businesses of Liberty Media
Group and TCI Ventures Group.
If TCI terminates the Merger Agreement due to (i) the failure of
AT&T's stockholders to approve the Merger prior to March 31, 1999,
(ii) the withdrawal or modification by the AT&T Board of Directors of
its approval of the transaction, or (iii) the failure to obtain
necessary governmental and regulatory approvals by September 30, 1999,
which failure occurs as a result of the announcement by AT&T of a
significant transaction which delays receipt of such governmental
approvals, AT&T will pay to TCI the sum of $1.75 billion in cash. If
AT&T terminates the Merger Agreement, under certain circumstances,
including the failure of TCI stockholders to approve the transaction
prior to March 31, 1999 or the withdrawal or modification by the TCI
Board of Directors of its approval of the Merger, TCI will pay to AT&T
the sum of $1.75 billion in cash.
Consummation of the Merger is subject to the satisfaction or waiver of
customary conditions to closing, including but not limited to, the
separate approvals of the stockholders of AT&T and TCI, receipt of all
necessary governmental consents and approvals, and effectiveness of
the registration statement registering the AT&T Common Stock and AT&T
Liberty Tracking Stock to be issued to TCI stockholders in the Merger.
As a result, there can be no assurance that the Merger will be
consummated or, if the Merger is consummated, as to the date of such
consummation.
(continued)
236
<PAGE> 238
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
(a) TCI Group Stock
The basic earnings (loss) attributable to TCI Group common
stockholders per common share for the three and nine months
ended September 30, 1998 and 1997 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 earnings attributable to TCI Group common
stockholders per common share for the three and nine months
ended September 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 three and nine months ended
September 30, 1998 to net earnings, assuming conversion of TCI
Group convertible securities as of the beginning of the period
to the extent that the assumed conversion of such securities
would have been dilutive, by the weighted average number of
common shares and dilutive potential common shares outstanding
of TCI Group Stock during the period. Shares issuable upon
conversion of the Convertible Preferred Stock, Series C-TCI
Group ("Series C-TCI Group Preferred Stock"), Convertible
Preferred Stock, Series D ("Series D Preferred Stock"), the
Redeemable Convertible TCI Group Preferred Stock, Series G
("Series G Preferred Stock"), the Malone Right (as defined in
note 13), preferred stock of subsidiaries, convertible notes
payable and stock options and other performance awards have
been included in the diluted calculation of weighted average
shares to the extent that the assumed issuance of such shares
would have been dilutive, as illustrated below. All of the
outstanding shares of Series D Preferred Stock were redeemed
effective April 1, 1998 (see note 10).
The diluted loss attributable to TCI Group common
stockholders per common share for the three and nine months
ended September 30, 1997 was computed by dividing the 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.
(continued)
237
<PAGE> 239
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Except for the issuance of 8,718,770 shares of TCI Group Series B
Stock on October 14, 1998 and 5,792,800 shares of TCI Group Series B
Stock on October 16, 1998, pursuant to the exercise of certain rights
as described in note 13, no material changes in the weighted average
outstanding shares or potential common shares occurred after September
30, 1998.
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to TCI Group Stock is presented below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
amounts in millions, except per share amounts
<S> <C> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to
common stockholders $ 47 (224) 130 (479)
========== ========== ========== ==========
Weighted average common shares 523 656 521 670
========== ========== ========== ==========
Basic earnings (loss) per share
attributable to common
stockholders $ .09 (.34) .25 (.71)
========== ========== ========== ==========
Diluted EPS:
Earnings (loss) attributable to
common stockholders $ 47 (224) 130 (479)
Add preferred dividend
requirements -- -- -- --
Add interest expense 1 -- 2 --
---------- ---------- ---------- ----------
Adjusted earnings (loss)
attributable to common
stockholders assuming
conversion of preferred
shares and notes payable $ 48 (224) 132 (479)
========== ========== ========== ==========
Weighted average common shares 523 656 521 670
---------- ---------- ---------- ----------
Add dilutive potential common
shares:
Employee and director
options and other
performance awards 12 -- 10 --
Malone Right 1 -- -- --
Convertible notes payable 24 -- 24 --
Series C-TCI Group
Preferred Stock -- -- -- --
Series D Preferred Stock -- -- -- --
Series G Preferred Stock -- -- -- --
Preferred stock of
subsidiaries 45 -- 45 --
---------- ---------- ---------- ----------
Dilutive potential common
shares 82 -- 79 --
---------- ---------- ---------- ----------
Diluted weighted average common
shares 605 656 600 670
========== ========== ========== ==========
Diluted earnings (loss) per
share attributable to
common stockholders $ .08 (.34) .22 (.71)
========== ========== ========== ==========
</TABLE>
(continued)
238
<PAGE> 240
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Liberty Group Stock
The basic earnings (loss) attributable to Liberty Media Group
common stockholders per common share for the three and nine
months ended September 30, 1998 and 1997 was computed by
dividing net earnings attributable to Liberty Media Group
common stockholders by the weighted average number of common
shares outstanding of Liberty Group Stock during the period.
The diluted earnings attributable to Liberty Media Group
common stockholders per common and potential common share for
the nine months ended September 30, 1998 and the three and
nine months ended September 30, 1997 was computed by dividing
earnings attributable to Liberty Media Group common
stockholders by the weighted average number of common and
dilutive potential common shares outstanding of Liberty Group
Stock during the period. Shares issuable upon conversion of
the Convertible Preferred Stock, Series C-Liberty Media Group
("Series C-Liberty Media Group Preferred Stock"), the Series
D Preferred Stock, the Redeemable Convertible Liberty Media
Group Preferred Stock, Series H (the "Series H Preferred
Stock"), convertible notes payable and stock options and
other performance awards have been included in the diluted
calculation of weighted average shares to the extent that the
assumed issuance of such shares would have been dilutive, as
illustrated below. All of the outstanding shares of Series D
Preferred Stock were redeemed effective April 1, 1998 (see
note 10). Numerator adjustments for dividends and interest
associated with the convertible preferred shares and
convertible notes payable, respectively, were not made to the
computation of diluted earnings per share as such dividends
and interest are paid or payable by TCI Group.
The diluted loss attributable to Liberty Media Group common
stockholders per common share for the three months ended
September 30, 1998 was computed by dividing the net loss
attributable to Liberty Media 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 computation of weighted
average shares outstanding because their inclusion would be
anti-dilutive.
No material changes in the weighted average outstanding
shares or potential common shares occurred after September
30, 1998.
(continued)
239
<PAGE> 241
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to Liberty Group Stock is presented below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
amounts in millions, except per share amounts
<S> <C> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to
common stockholders $ (11) 162 227 184
========== ========== ========== ==========
Weighted average common shares 357 368 357 371
========== ========== ========== ==========
Basic earnings (loss) per share
attributable to common
stockholders $ (.03) .44 .64 .50
========== ========== ========== ==========
Diluted EPS:
Earnings (loss) attributable to
common stockholders $ (11) 162 227 184
========== ========== ========== ==========
Weighted average common shares 357 368 357 371
---------- ---------- ---------- ----------
Add dilutive potential common
shares:
Employee and director
options and other
performance awards -- 5 8 5
Convertible notes payable -- 19 19 19
Series C-Liberty Media
Group Preferred Stock -- 4 4 4
Series D Preferred Stock -- 6 -- 6
Series H Preferred Stock -- 4 4 4
---------- ---------- ---------- ----------
Dilutive potential common
shares -- 38 35 38
---------- ---------- ---------- ----------
Diluted weighted average common
shares 357 406 392 409
========== ========== ========== ==========
Diluted earnings (loss) per
share attributable to
common stockholders $ (.03) .40 .58 .45
========== ========== ========== ==========
</TABLE>
(c) TCI Ventures Group Stock
The basic earnings (loss) attributable to TCI Ventures Group
stockholders per common share for the three and nine months
ended September 30, 1998 and 1997 was computed by dividing
earnings (loss) attributable to TCI Ventures Group
stockholders by the weighted average number of common shares
outstanding of TCI Ventures Group Stock during the period.
(continued)
240
<PAGE> 242
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted earnings attributable to TCI Ventures Group
stockholders per common and potential common share for the
three and nine months ended September 30, 1998 and 1997 was
computed by dividing earnings attributable to TCI Ventures
Group stockholders by the weighted average number of common
and dilutive potential common shares outstanding of TCI
Ventures Group Stock during the period. Shares issuable upon
conversion of convertible notes payable and stock options and
other performance awards have been included in the diluted
calculation of weighted average shares to the extent that the
assumed issuance of such shares would have been dilutive, as
illustrated below. Numerator adjustments for interest
associated with convertible notes payable were not made to
the computation of diluted earnings per share as such
interest is paid or payable by TCI Group.
No material changes in the weighted average outstanding
shares or potential common shares occurred after September
30, 1998.
Information concerning the reconciliation of basic EPS to
dilutive EPS with respect to TCI Ventures Group Stock is
presented below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
amounts in millions, except per share amounts
<S> <C> <C> <C> <C>
Basic EPS:
Net earnings (loss) $ 1,299 (126) 1,012 (315)
Loss through the date of the
TCI Ventures Exchange
(note 1) -- 156 -- 345
---------- ---------- ---------- ----------
Earnings attributable to common
stockholders $ 1,299 30 1,012 30
========== ========== ========== ==========
Weighted average common shares 423 410 422 410
========== ========== ========== ==========
Basic earnings per share
attributable to common
stockholders $ 3.07 .07 2.40 .07
========== ========== ========== ==========
Diluted EPS:
Earnings attributable to common
stockholders $ 1,299 30 1,012 30
========== ========== ========== ==========
Weighted average common shares 423 410 422 410
---------- ---------- ---------- ----------
Add dilutive potential common
shares:
Employee and director
options and other
performance awards 7 4 9 4
Convertible notes payable 21 21 21 21
---------- ---------- ---------- ----------
Dilutive potential common
shares 28 25 30 25
---------- ---------- ---------- ----------
Diluted weighted average common
shares 451 435 452 435
========== ========== ========== ==========
Diluted earnings per share
attributable to common
stockholders $ 2.88 .07 2.24 .07
========== ========== ========== ==========
</TABLE>
(continued)
241
<PAGE> 243
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $905 million and $995 million for the nine
months ended September 30, 1998 and 1997, respectively. Cash paid for
income taxes was $39 million and $49 million for the nine months ended
September 30, 1998 and 1997, respectively. In addition, the Company
received income tax refunds of $76 million during the nine months
ended September 30, 1998.
Significant noncash investing and financing activities are reflected in
the following table.
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1998 1997
----------- -----------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Recorded value of assets acquired $ (906) (1,878)
Net liabilities assumed 79 720
Deferred tax liability recorded in acquisitions 105 187
Change in minority interests in equity of consolidated
subsidiaries (215) 64
Elimination of notes receivable from affiliates 350 --
TCI common stock and preferred stock held by acquired
company -- (484)
Common stock and preferred stock issued in acquisitions 376 1,060
----------- -----------
Cash paid for acquisitions $ (211) (331)
=========== ===========
Cash received in exchanges:
Recorded value of assets acquired $ (72) (392)
Historical cost of assets exchanged 87 399
Gain recorded on exchange of assets 30 11
----------- -----------
Cash received in exchanges $ 45 18
=========== ===========
Costs of distribution agreements $ 83 --
=========== ===========
</TABLE>
For a description of certain non-cash transactions, see note 8.
The Company's restricted cash is primarily comprised of proceeds
received in connection with certain asset dispositions. Such proceeds,
which aggregated $353 million and $34 million at September 30, 1998
and December 31, 1997, respectively, are designated to be reinvested
in certain identified assets for income tax purposes. The Company's
restricted cash also includes amounts held as collateral for interest
payment obligations pursuant to certain bank credit facilities. Such
amounts aggregated $17 million and $5 million at September 30, 1998
and December 31, 1997, respectively.
(continued)
242
<PAGE> 244
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments in Affiliates
The Company has various investments accounted for under the equity
method. The following table includes the Company's carrying value of
the Company's more significant investments:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- --------
amounts in millions
<S> <C> <C>
USA Networks, Inc. ("USAI") formerly HSN, Inc.
("HSNI") and related investments $ 1,024 347
Cablevision Systems Corporation ("CSC") 1,019 15
Telewest Communications plc ("Telewest") 432 324
Sprint Spectrum Holding Company, L.P.,
MinorCo, L.P. and PhillieCo, L.P. 258 607
Flextech p.l.c. ("Flextech") 256 261
Various foreign equity investments (other than
Telewest Communications plc, Flextech p.l.c. and
Cablevision S.A.) 252 251
Cablevision S.A. ("Cablevision") 225 239
InterMedia Capital Partners IV, L.P. and InterMedia
Capital Management IV, L.P. 224 262
Falcon Communications, L.P. 210 --
QVC, Inc. 172 134
Parnassos, L.P. 121 --
</TABLE>
Summarized unaudited combined results of operations for the Company's
affiliates for the periods in which the Company used the equity method
to account for such affiliates are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
--------------------------
1998 1997
----------- ------------
amounts in millions
<S> <C> <C>
Revenue $ 11,198 5,482
Operating expenses (10,179) (5,293)
Depreciation and amortization (2,177) (1,023)
----------- -----------
Operating loss (1,158) (834)
Interest expense (1,458) (595)
Other, net (33) (363)
----------- -----------
Net loss $ (2,649) (1,792)
=========== ===========
</TABLE>
(continued)
243
<PAGE> 245
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
(as adjusted for a two-for-one stock split) (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 nine months ended September 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. The Company has also entered
into letters of intent with CSC which provide for the Company to
acquire a cable system in Michigan and an additional 3% of CSC's Class
A common shares and for CSC to (i) acquire cable systems serving
approximately 250,000 customers in Connecticut and (ii) assume $110
million of the Company's debt. The ability of the Company to sell or
increase its investment in CSC is subject to certain restrictions and
limitations set forth in a stockholders agreement with CSC.
At September 30, 1998, the Company owned 49,982,572 shares of CSC
Class A common stock (as adjusted for a two-for-one stock split),
which had a closing market price of $43.19 per share on such date.
Such shares represented an approximate 33.2% 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. During the nine months
ended September 30, 1998, CSC accounted for $158 million of the
Company's share of affiliate losses.
The Company is a partner in a series of partnerships formed to engage
in the business of providing wireless communications services, using
the radio spectrum for broadband personal communications services
("PCS"), to residential and business customers nationwide, using the
"Sprint"(R) brand (a registered trademark of Sprint Communications
Company, L.P.) (the "PCS Ventures"). The PCS Ventures include Sprint
Spectrum Holding Company, L. P. ("Sprint Spectrum") and MinorCo, L.P.
(collectively, "Sprint PCS") and PhillieCo, L.P. ("PhillieCo"). The
partners of Sprint PCS are subsidiaries of Sprint Corporation
("Sprint"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and the Company. The partners of PhillieCo are subsidiaries of
Sprint, Cox and the Company. The Company has a 30% partnership
interest in Sprint PCS and a 35% partnership interest in PhillieCo.
During the nine months ended September 30, 1998 and 1997, the PCS
Ventures accounted for $510 million and $304 million, respectively, of
the Company's share of affiliate losses.
(continued)
244
<PAGE> 246
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
From inception through September 1998, the four partners have
contributed $4.6 billion to Sprint PCS (of which the Company
contributed an aggregate of $1.4 billion). Sprint PCS's business plan
will require additional capital financing prior to the end of 1998.
Sources of funding for Sprint PCS's capital requirements may include
vendor financing, public offerings or private placements of equity
and/or debt securities, commercial bank loans and/or capital
contributions from the Sprint PCS partners. However, there can be no
assurance that any additional financing can be obtained on a timely
basis, on terms acceptable to Sprint PCS or the Sprint PCS partners
and within the limitations contained in the agreements governing
Sprint PCS's existing debt.
Additionally, the proposed budget for 1998 has not yet been approved
by the Sprint PCS partnership board, although the board has authorized
management to operate Sprint PCS in accordance with such budget. The
Sprint PCS partners may mutually agree to make additional capital
contributions. However, the Sprint PCS partners have no such
obligation in the absence of an approved budget, and there can be no
assurance the Sprint PCS partners will reach such an agreement or
approve the 1998 proposed budget. In addition, the failure by the
Sprint PCS partners to approve a business plan may impair the ability
of Sprint PCS to obtain required financing. Failure to obtain any such
additional financing or capital contributions from the Sprint PCS
partners could result in the delay or abandonment of Sprint PCS's
development and expansion plans and expenditures, the failure to meet
regulatory requirements or other potential adverse consequences.
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership
board has resulted in the occurrence of a "Deadlock Event" under the
Sprint PCS partnership agreement as of January 1, 1998. Under the
Sprint PCS partnership agreement, if one of the Sprint PCS partners
refers the budget issue to the chief executive officers of the
corporate parents of the Sprint PCS partners for resolution pursuant
to specified procedures and the issue remains unresolved, buy/sell
provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other
Sprint PCS partners, or, in certain circumstances, liquidation of
Sprint PCS.
(continued)
245
<PAGE> 247
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In May 1998, the Sprint PCS partners entered into a series of
agreements pursuant to which the Company, Comcast and Cox would
exchange their respective interests in Sprint PCS and PhillieCo for
shares of a new class of tracking stock of Sprint which would track
the performance of Sprint's newly created PCS Group (which would
initially consist of Sprint PCS, PhillieCo and certain PCS licenses
which are separately owned by Sprint). The consummation of such
transactions is subject to a number of conditions, including the
approval of such transactions by the stockholders of Sprint. If such
transactions are consummated, the Company will initially hold shares
of Sprint PCS Group stock (as well as certain additional securities of
Sprint exercisable for or convertible into such securities)
representing approximately 24% of the equity value of Sprint
attributable to the PCS Group, subject to further dilution as a result
of additional expected issuances of shares of Sprint PCS stock
(including in connection with a proposed initial public offering of
shares of Sprint PCS stock that may be consummated in connection with
such transactions). In connection with the execution of such
agreements, the Sprint PCS partners agreed to make up to $400 million
in additional capital contributions (of which the Company's share is
$120 million) to Sprint PCS pending the closing of such transactions.
As of September 30, 1998, all of such additional capital contributions
had been made to Sprint PCS. If the above-described transactions are
consummated, the Company would begin to account for its investment in
the Sprint PCS stock as an available-for-sale security. No assurance
can be given that the above-described transactions will be
consummated.
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. See note 7. On April 22, 1998, TCG completed a merger
transaction with ACC Corp. ("ACC") in which ACC shares were exchanged
with shares of TCG in the ratio of .90909 of a share of TCG stock for
each share of ACC stock. The transaction was valued at approximately
$1.1 billion. As a result of ACC's merger with TCG, TCI's interest in
TCG was reduced to approximately 26%. In connection with the dilution
of TCI's interest in TCG, TCI recorded a non-cash gain of $201 million
(before deducting deferred income tax expense of $71 million).
During the nine months ended September 30, 1997, TCG issued 4,857,083
shares of its Class A common stock for certain acquisitions. The total
consideration paid by TCG through the issuance of common stock was
approximately $93 million. As a result of such share issuances, the
Company's ownership interest in TCG was reduced to approximately 30%.
Accordingly, the Company recognized a gain of $21 million (before
deducting deferred income tax expense of approximately $8 million) as
a result of such dilution.
(continued)
246
<PAGE> 248
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 1998, pursuant to an Investment Agreement among Universal
Studios, Inc. ("Universal"), HSNI, Home Shopping Network, Inc. ("HSN")
and Liberty Media Group, dated as of October 1997 and amended and
restated as of December 1997, HSNI consummated a transaction (the
"Universal Transaction") through which USA Networks Partners, Inc., a
subsidiary of Universal, sold its 50% interest in USAI, a New York
general partnership, to HSNI and Universal contributed the remaining
50% interest in USAI and its domestic television production and
distribution operations to HSNI. Subsequent to these transactions,
HSNI was renamed USAI. In connection with the Universal Transaction,
Universal, USAI, HSN and Liberty Media Group became parties to a
number of other agreements relating to, among other things, (i) the
management of USAI, (ii) the purchase and sale or other transfer of
voting securities of USAI, including securities convertible or
exchangeable for voting securities of USAI, and (iii) the voting of
such securities.
At the closing of the Universal Transaction, Universal was issued
approximately 6 million shares of USAI's Class B Common Stock,
approximately 7 million shares of USAI's Common Stock and
approximately 109 million common equity shares ("LLC Shares") of USANi
LLC, a limited liability company formed to hold all of the businesses
of USAI and its subsidiaries, except for its broadcasting business and
its equity interest in Ticketmaster Group, Inc. and received a cash
payment of $1.3 billion. Pursuant to an exchange agreement relating to
the LLC Shares (the "LLC Exchange Agreement"), approximately 74
million of the LLC Shares issued to Universal are each exchangeable
for one share of USAI's Class B Common Stock and the remainder of the
LLC Shares issued to Universal are each exchangeable for one share of
USAI's Common Stock.
At the closing of the Universal Transaction, Liberty Media Group was
issued approximately 1.2 million shares of USAI's Class B Common
Stock, representing all of the remaining shares of USAI's Class B
Common Stock issuable pursuant to Liberty Media Group's contractual
right to receive shares of Class B common stock of USAI upon the
occurrence of certain events. Of such shares, 800,000 shares of Class
B Common Stock were contributed to BDTV IV INC. (collectively with
BDTV INC., BDTV II INC. and BDTV III INC., "BDTV"), a newly-formed
entity having substantially the same terms as BDTV INC., BDTV II INC.
and BDTV III INC. (with the exception of certain transfer
restrictions) in which Liberty Media Group owns over 99% of the equity
and none of the voting power (except for protective rights with
respect to certain fundamental corporate actions) and Barry Diller
owns less than 1% of the equity and all of the voting power. Liberty
Media Group accounts for its investment in BDTV under the equity
method. In addition, Liberty Media Group purchased 10 LLC Shares at
the closing of the Universal Transaction for an aggregate purchase
price of $200.
(continued)
247
<PAGE> 249
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On June 24, 1998, USAI consummated the previously announced agreement
to acquire the remaining stock of Ticketmaster Group, Inc. which it
did not previously own through a tax-free merger (the "Ticketmaster
Transaction"). In connection with the dilution of Liberty Media
Group's ownership interest that resulted from the issuance of common
stock by USAI in the Universal Transaction and the Ticketmaster
Transaction, the Company recorded a $64 million increase to additional
paid-in capital (after deducting a deferred tax liability of $42
million) and an increase to investment in affiliates of $106 million.
No gain was recognized in the consolidated statements of operations
due primarily to Liberty Media Group's commitment to purchase
additional equity interests in USAI.
In connection with the Universal Transaction, each of Universal and
Liberty Media Group was granted a preemptive right with respect to
future issuances of USAI's capital stock, subject to certain
limitations, to maintain their respective percentage ownership
interests in USAI that they had prior to such issuances. In connection
with such right, on June 4, 1998, Liberty Media Group purchased
approximately 4.7 million shares of USAI's capital stock at $20 per
share as a result of the conversion by USAI of certain convertible
debentures whereby USAI common stock was issued to retire such
debentures. Additionally, on June 30 1998, Liberty Media Group
contributed $300 million in cash to USANi LLC in exchange for an
aggregate of 15 million LLC Shares. Liberty Media Group's cash
purchase price was increased at an annual interest rate of 7.5%
beginning from the date of the closing of the Universal Transaction
through the date of Liberty Media Group's purchase of such securities.
In addition, on July 27, 1998, Liberty Media Group purchased
approximately 7.9 million LLC Shares at $20 per share as a result of
the issuance of common stock by USAI in the Ticketmaster Transaction.
Pursuant to the LLC Exchange Agreement, each LLC Share issued or to be
issued to Liberty Media Group is exchangeable for one share of USAI's
Common Stock.
At September 30, 1998, Liberty Media Group held 24.4 million shares of
USAI's common stock through BDTV and 5.2 million shares of USAI's
common stock directly. Additionally, Liberty Media Group held 22.9
million LLC Shares at September 30, 1998 as well as shares of HSN's
common stock which are exchangeable for 16.6 million shares of USAI's
common stock. Liberty Media Group's direct ownership of USAI is
restricted by order of the Federal Communications Commission ("FCC").
Assuming Liberty Media Group had exchanged its shares in HSN and its
LLC Shares for USAI common stock, Liberty Media Group would have held
at September 30, 1998, 69.1 million shares or 21% of USAI, including
shares held through BDTV. USAI's common stock had a closing market
value of $19.438 per share on September 30, 1998.
At September 30, 1998 Tele-Communications International, Inc.
("TINTA"), a majority-owned subsidiary of the Company, indirectly
owned through its 50% ownership interest in TW Holdings, L.L.C.,
463,438,960 or 22% of the issued and outstanding Telewest ordinary
shares. The reported closing price on the London Stock Exchange of
Telewest ordinary shares was (pound)1.35 ($2.30) per share at
September 30, 1998. Telewest currently operates and constructs cable
television and telephone systems in the United Kingdom ("UK").
Telewest accounted for $90 million and $111 million of the Company's
share of its affiliates' losses during the nine months ended September
30, 1998 and 1997, respectively.
(continued)
248
<PAGE> 250
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which
holders of General Cable received 1.243 new Telewest shares and
(pound)0.65 ($1.11) in cash for each share of General Cable. In
addition, holders of American Depository shares of General Cable
("General Cable ADS") (each representing five General Cable shares)
received 6.215 new Telewest shares and (pound)3.25 ($5.53) in cash
for each share of General Cable ADS. Based upon Telewest's closing
share price of (pound)0.89 ($1.51) on April 14, 1998, the General
Cable Merger was valued at approximately (pound)649 million ($1.1
billion).
The cash portion of the General Cable Merger was financed through an
offer to qualifying Telewest shareholders for the purchase of
approximately 261 million new Telewest shares at a price of
(pound)0.925 ($1.57) per share (the "Telewest Offer"). TINTA
subscribed to 84,688,960 Telewest ordinary shares at an aggregate cost
of (pound)78 million ($133 million) in connection with the Telewest
Offer. Immediately following the Telewest Offer, TINTA owned 28% of
the issued and outstanding Telewest ordinary shares.
In connection with the General Cable Merger, TINTA also converted its
entire holdings of Telewest convertible preference shares (132,638,250
shares) into Telewest ordinary shares. As a result of the General
Cable Merger, TINTA's ownership interest in Telewest decreased to 22%.
In connection with such dilution, TINTA recognized a non-cash gain of
$58 million (excluding related tax expense of $20 million) during the
third quarter of 1998.
As a result of Telewest's issuance of U.S. dollar denominated
debentures (the "Telewest Debentures"), changes in the exchange rate
used to translate the U.S. dollar into the UK pound sterling will
cause Telewest to experience realized and unrealized foreign currency
transaction gains and losses throughout the term of the Telewest
Debentures, which mature in 2006 and 2007, if not redeemed earlier.
During the nine months ended September 30, 1998 and 1997, Telewest
experienced foreign currency transaction gains (losses) of (pound)11
million ($19 million using the applicable exchange rate) and
(pound)(33 million) ($55 million using the applicable exchange rate),
respectively, resulting from the translation of the Telewest
Debentures into UK pounds sterling and the adjustment of a related
foreign currency option contract to market value.
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision, a company engaged in the multi-channel video distribution
business in Buenos Aires, Argentina, to unaffiliated third parties
(the "Buyers") for cash proceeds of $120 million. In addition, on
October 9, 1997, Cablevision issued 3,541,829 shares of stock in the
aggregate to the Buyers for $320 million. The above transactions,
(collectively, the "Cablevision Sale") reduced TINTA's interest in
Cablevision to 26%. TINTA recognized a gain of $49 million on the
Cablevision Sale (excluding related tax expense of $17 million). TINTA
continues to manage Cablevision pursuant to a renewable five-year
management contract that was entered into in connection with the
Cablevision Sale, and certain material corporate transactions of
Cablevision will require TINTA's approval, so long as TINTA maintains
at least a 16% interest in Cablevision. As a result of the Cablevision
Sale, effective October 1, 1997, TINTA ceased to consolidate
Cablevision and began to account for Cablevision using the equity
method of accounting. Cablevision accounted for $14 million of the
Company's share of its affiliates' losses during the nine months ended
September 30, 1998.
On November 9, 1998, Cablevision and the lenders under its $1.1 billion
loan facility agreed to an extension of $950 million of outstanding
borrowings under the facility until December 15, 1998. At that time,
outstanding borrowings are to be refinanced through (i) $550 million of
indebtedness, which is expected to be issued under Cablevision's medium
term note program, and (ii) $400 million of support from Cablevision's
shareholder's, including TINTA. TINTA's portion of such support
aggregates approximately $85 million, and will be made through (i) a
$42 million capital contribution to Cablevision and (ii) the guarantee
of senior indebtedness of Cablevision and/or subordinated loans from
TINTA to Cablevision in the aggregate amount of $42 million.
During the fourth quarter of 1998, one of the Cablevision shareholders
exercised a put right that, under certain circumstances, could require
TINTA to purchase a portion of such shareholder's ownership interest
for cash consideration of up to $36 million, one-third of which would
be paid on December 15, 1998 and the remaining amount would be paid in
four semi-annual installments. Additionally, the Cablevision
shareholders' agreement contains a buy-sell provision that, under
certain circumstances, could require TINTA to purchase other
shareholders' ownership interests.
(continued)
249
<PAGE> 251
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition to Telewest and Cablevision, the Company has an equity
method investment in Flextech, an entity engaged in the distribution
and production of programming for multichannel video distribution
systems in the UK, and other less significant equity method
investments in video distribution and programming businesses located
in the UK, other parts of Europe, Asia, Latin America and certain
other foreign countries. In the aggregate, such other foreign equity
method investments accounted for $72 million and $73 million of the
Company's share of its affiliates' losses during the nine months ended
September 30, 1998 and 1997, respectively.
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general
partnership is, as such, liable as a matter of applicable partnership
law for all debts (other than non-recourse debts) of that partnership
in the event liabilities of that partnership were to exceed its
assets.
(6) Investment in Time Warner
Liberty Media Group holds 57 million shares of a separate series of
Time Warner common stock with limited voting rights (the "TW Exchange
Stock"). Holders of the TW Exchange Stock are entitled to one
one-hundredth (l/100th) of a vote for each share with respect to the
election of directors. Holders of the TW Exchange Stock will not have
any other voting rights, except as required by law or with respect to
limited matters, including amendments of the terms of the TW Exchange
Stock adverse to such holders. Subject to the federal communications
laws, each share of the TW Exchange Stock will be convertible at any
time at the option of the holder on a one-for-one basis for a share of
Time Warner common stock. Holders of TW Exchange Stock are entitled to
receive dividends ratably with the Time Warner common stock and to
share ratably with the holders of Time Warner common stock in assets
remaining for common stockholders upon dissolution, liquidation or
winding up of Time Warner. See note 9.
On June 24, 1997, Liberty Media Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern
Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
(together with Southern, the "Southern Business") through a purchase
of assets (the "Southern Option"). Liberty Media Group received 6.4
million shares of TW Exchange Stock valued at $306 million in
consideration for the grant. In September 1997, Time Warner exercised
the Southern Option. Pursuant to the Southern Option, Time Warner
acquired the Southern Business, effective January 1, 1998 for $213
million in cash. The Company recognized a $515 million pre-tax gain in
connection with such transactions in the first quarter of 1998.
(7) Investment in AT&T
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. As a result of such merger, TCI received in exchange
for its 26% interest in TCG, approximately 47 million shares of AT&T
Common Stock. TCI recognized a gain of $2.3 billion (excluding related
tax expense of $883 million) on such transaction based on the
difference between the carrying value of TCI's interest in TCG and the
fair value of the AT&T Common Stock received. See note 5. TCI accounts
for its ownership interest in AT&T Common Stock as an
available-for-sale security. See note 2.
(continued)
250
<PAGE> 252
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Acquisitions and Dispositions
In addition to the CSC Transaction described in note 5, the Company
completed, during the first nine months of 1998, six transactions
whereby the Company contributed cable television systems serving in
the aggregate approximately 1,224,000 customers to six separate joint
ventures (collectively, the "1998 Joint Ventures") in exchange for
non-controlling ownership interests in each of the 1998 Joint
Ventures, and the assumption and repayment by the 1998 Joint Ventures
of debt owed by the Company to external parties aggregating $323
million and intercompany debt owed to the Company aggregating $1,533
million. The Company has agreed to take certain steps to support
compliance by certain of the 1998 Joint Ventures with their payment
obligations under certain debt instruments, up to an aggregate
contingent commitment of $980 million. In light of such contingent
commitments, the Company has deferred any gains on the formation of
such 1998 Joint Ventures. Accordingly, the Company has recorded
deferred gains aggregating $163 million and recognized net gains
aggregating $263 million in connection with the formation of the 1998
Joint Ventures. The deferred gains will not be recognized until such
time as the Company's contingent commitments are eliminated. The
Company uses the equity method of accounting to account for its
investments in the 1998 Joint Ventures. The CSC Transaction (see note
5) and the formation of the 1998 Joint Ventures are collectively
referred to herein as the "1998 Contribution Transactions."
Including the 1998 Contribution Transactions, the Company, as of
September 30, 1998, has, since January 1, 1997, contributed, or signed
agreements or letters of intent to contribute within the next twelve
months, certain cable television systems (the "Contributed Cable
Systems") serving approximately 3.9 million basic customers to joint
ventures in which the Company will retain non-controlling ownership
interests (the "Contribution Transactions"). Following the completion
of the Contribution Transactions, the Company will no longer
consolidate the Contributed Cable Systems. Accordingly it is
anticipated that the completion of the Contribution Transactions, as
currently contemplated, will result in an aggregate estimated
reduction (based on actual amounts with respect to the 1998
Contribution Transactions and currently contemplated amounts with
respect to the pending Contribution Transactions) to the Company's
debt of $4.8 billion and aggregate estimated reductions (based on 1997
amounts) to the Company's annual revenue and annual operating income
before depreciation, amortization and other non-cash items and stock
compensation of $1.8 billion and $815 million, respectively. No
assurance can be given that any of the pending Contribution
Transactions will be consummated.
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail
C-band satellite business to Superstar/Netlink Group LLC ("SNG") in
exchange for an approximate 20% interest in SNG. As a result of this
transaction, the Company's ownership interest in SNG 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 SNG was accounted for as a purchase,
and the $61 million excess of the purchase price over the fair value
of the net tangible assets acquired was recorded as an intangible asset
and is being amortized over five years.
(continued)
251
<PAGE> 253
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On June 11, 1998, United Video Satellite Group, Inc. ("UVSG") and The
News Corporation Limited ("News Corp.") announced the signing of a
definitive agreement whereby News Corp.'s TV Guide properties will be
combined with UVSG to create a platform for offering television guide
services to consumers and advertising. As part of this combination, a
unit of News Corp. will receive consideration consisting of $800
million in cash and 60 million shares of UVSG's stock (as adjusted for
a two-for-one stock split), including 22,503,412 shares of its Class A
common stock and 37,496,588 shares of its Class B common stock (as
adjusted for a two-for-one stock split). As a result of this
transaction, and another pending transaction, News Corp., TCI and
UVSG's public stockholders will own on an economic basis approximately
40%, 44% (of which 34% will be attributable to TCI Ventures Group and
10% will be attributable to Liberty Media Group) and 16%, respectively,
of UVSG. Following the transaction, News Corp. and TCI will each have
approximately 48% of the voting power of UVSG's outstanding stock. TCI
will begin to account for its interest in UVSG under the equity method
of accounting following consummation of this transaction. Consummation
of this transaction is subject to UVSG shareholder approval and certain
regulatory approvals. Accordingly, no assurance can be given that this
transaction will be consummated.
On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
Liberty Media Group, which held non-voting class C common stock of
International Family Entertainment, Inc. ("IFE") ("Class C Stock") and
$23 million of IFE 6% convertible secured notes due 2004, convertible
into Class C Stock, ("Convertible Notes"), contributed its Class C
Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in
exchange for a new series of 30 year non-convertible 9% preferred
stock of FKW with a stated value of $345 million (the "FKW Preferred
Stock"). As a result of the exchange, Liberty Media Group recognized a
pre-tax gain of approximately $304 million during the third quarter of
1997.
(9) Debt
<TABLE>
<CAPTION>
Debt is summarized as follows:
September 30, December 31,
1998 1997
----------- ------------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 9,474 9,017
Bank credit facilities (b) 4,063 5,233
Commercial paper 830 533
Convertible notes (c) 40 40
Capital lease obligations and other debt 488 427
----------- -----------
$ 14,895 15,250
=========== ===========
</TABLE>
(a) During the nine months ended September 30, 1998, the Company
purchased certain notes payable which had an aggregate
principal balance of $352 million and fixed interest rates
ranging from 8.67% to 10.25% (the "1998 Purchases"). In
connection with the 1998 Purchases, the Company recognized a
loss on early extinguishment of debt of $44 million. Such
loss related to prepayment penalties amounting to $39 million
and the retirement of deferred loan costs.
(continued)
252
<PAGE> 254
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the nine months ended September 30, 1997, the Company
purchased certain notes payable which had an aggregate
principal balance of $190 million and fixed interest rates
ranging from 8.75% to 10.13% (the "1997 Purchases"). In
connection with the 1997 Purchases, the Company recognized a
loss on early extinguishment of debt of $11 million. Such
loss related to prepayment penalties amounting to $7 million
and the retirement of deferred loan costs.
(b) At September 30, 1998, subsidiaries of the Company had
approximately $3.1 billion in unused lines of credit,
excluding amounts related to lines of credit which provide
availability to support commercial paper.
As security for borrowings under one of the Company's credit
facilities, the Company has pledged a portion of its TW
Exchange Stock with an estimated market value at September
30, 1998 of $1.9 billion based upon the market value of the
marketable common stock into which it is convertible.
Additionally, as security for borrowings under another of its
credit facilities, the Company pledged its holdings in
Discovery Communications, Inc., QVC, Inc. and the FKW
Preferred Stock. At September 30, 1998, the carrying value of
such holdings aggregated $590 million.
Certain of TCI's subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of
outstanding commercial paper. Also, certain of TCI's
subsidiaries pay fees ranging to 1/2% per annum on the
average unborrowed portion of the total amount available for
borrowings under bank credit facilities.
(c) The convertible notes, which are stated net of unamortized
discount of $166 million at September 30, 1998 and December
31, 1997, mature on December 18, 2021. The notes require, so
long as conversion of the notes has not occurred, an annual
interest payment through 2003 equal to 1.85% of the face
amount of the notes. At September 30, 1998, the notes were
convertible, at the option of the holders, into an aggregate
of 24,163,259 shares of Series A TCI Group Stock, 19,416,910
shares of Series A Liberty Group Stock, 20,711,373 shares of
Series A TCI Ventures Group Stock and 3,451,897 shares of
Series A Common Stock, $1.00 par value per share, of TCI
Satellite Entertainment, Inc.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
The fair value of the debt of the Company's subsidiaries is estimated
based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same
remaining maturities. At September 30, 1998, the fair value of the
Company's debt was $17,906 million (including $2,039 million
attributable to the value of the common stock underlying the
convertible notes), as compared to a carrying value of $14,895 million
on such date.
(continued)
253
<PAGE> 255
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In order to achieve the desired balance between variable and fixed
rate indebtedness, the Company may enter into variable and fixed
interest rate exchange agreements ("Interest Rate Swaps") pursuant to
which it (i) pays fixed interest rates (the "Fixed Rate Agreements")
and receives variable interest rates and (ii) pays variable interest
rates (the "Variable Rate Agreements") and receives fixed interest
rates. During the nine months ended September 30, 1998 and 1997, the
Company's net payments pursuant to the Fixed Rate Agreements were less
than $1 million for each period; and the Company's net receipts
pursuant to the Variable Rate Agreements were $8 million and $1
million, respectively. At September 30, 1998, all of the Company's
Fixed Rate Agreements had expired.
Information concerning the Company's Variable Rate Agreements at
September 30, 1998 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to be
Expiration Interest rate Notional received upon
date to be received amount termination (a)
- ---------- -------------- -------- --------------
<S> <C> <C> <C>
April 1999 7.4% $ 50 $ 1
September 1999 6.4% 350 4
February 2000 5.8%-6.6% 300 5
March 2000 5.8%-6.0% 675 8
September 2000 5.1% 75 --
March 2027 9.7% 300 44
December 2036 9.7% 200 16
-------- -------------
$ 1,950 $ 78
======== =============
- --------------------
</TABLE>
(a) The estimated amount that the Company would receive to
terminate the agreements at September 30, 1998, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
In addition to the Variable Rate Agreements, the Company entered into
Interest Rate Swaps pursuant to which it pays a variable rate based on
the London Interbank Offered Rate ("LIBOR") (5.8% at September 30,
1998) and receives a variable rate based on the Constant Maturity
Treasury Index ("CMT") (4.7% at September 30, 1998) on a notional
amount of $400 million through September 2000; and pays a variable
rate based on the LIBOR (5.7% at September 30, 1998) and receives a
variable rate based on CMT (4.8% at September 30, 1998) on notional
amounts of $95 million through February 2000. During the nine months
ended September 30, 1998, the Company's net payments pursuant to such
agreements were $1 million. At September 30, 1998, the Company would
be required to pay an estimated $4 million to terminate such Interest
Rate Swaps.
The Company is exposed to credit losses for the periodic settlements
of amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties. Further, the Company does not anticipate material
near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of September 30,
1998.
(continued)
254
<PAGE> 256
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Redeemable Preferred Stock
On February 20, 1998, the Company issued a Notice of Redemption which
called for the redemption of all of its outstanding Series D Preferred
Stock for $304.0233 per share. Effective April 1, 1998, all of the
outstanding shares of Series D Preferred Stock were redeemed to the
extent not previously converted into shares of TCI Group Series A
Stock and Liberty Group Series A Stock.
(11) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
The Trust Preferred Securities are presented together in a separate
line item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities of TCI
Communications, Inc." Dividends accrued on the Trust Preferred
Securities aggregated $106 million and $96 million during the nine
months ended September 30, 1998 and 1997, respectively, and are
included in minority interests in earnings of consolidated
subsidiaries in the accompanying consolidated financial statements.
(12) Stockholders' Equity
Stock Repurchases
During the nine months ended September 30, 1998, pursuant to a stock
repurchase program, 66,041 shares of TCI Group Series A Stock, 145,450
shares of TCI Ventures Group Series A Stock, 94,000 shares of TCI
Ventures Group Series B Stock and 766,783 shares of Liberty Group
Series A Stock were repurchased at an aggregate cost of approximately
$31 million.
Treasury Stock and Common Stock Held by Subsidiaries, at Cost
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------- -----------------------------
Number of Number of
shares Cost basis shares Cost basis
-------------- -------------- -------------- ------------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
Treasury stock is summarized as follows:
TCI Group Series A Stock 11,362,365 $ 182 11,296,324 $ 180
TCI Group Series B Stock 14,842,472 250 30,876,766 518
Liberty Group Series A Stock 25,561,455 505 25,082,172 489
Liberty Group Series B Stock 82,074 2 82,074 2
TCI Ventures Group Series A Stock 61,450 1 -- --
TCI Ventures Group Series B Stock 432,196 5 338,196 4
Common stock held by subsidiaries is
summarized as follows:
TCI Group Series A Stock 125,728,816 466 125,645,656 464
TCI Group Series B Stock 9,154,134 161 9,112,500 160
Liberty Group Series A Stock 6,654,367 113 6,654,367 113
Liberty Group Series B Stock 3,417,187 61 3,417,187 61
-------------- --------------
$ 1,746 $ 1,991
============== ==============
</TABLE>
(continued)
255
<PAGE> 257
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Based Compensation
Certain key employees of the Company and members of the Board hold
options with tandem stock appreciation rights ("SARs") to acquire TCI
Group Series A Stock, Liberty Group Series A Stock and TCI Ventures
Group Series A Stock as well as restricted stock awards of TCI Group
Series A Stock, Liberty Group Series A Stock and TCI Ventures Group
Series A Stock. Estimated compensation relating to SARs has been
recorded through September 30, 1998, and is subject to future
adjustment based upon vesting and market values and, ultimately, on
the final determination of market values when such rights are
exercised.
Other
During the fourth quarter of 1997, the Company entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to
the Equity Swap Facility, the Company has the right to direct the
counterparty (the "Counterparty") to use the Equity Swap Facility to
purchase shares ("Equity Swap Shares") of TCI Group Series A Stock and
TCI Ventures Group Series A Stock with an aggregate purchase price of
up to $300 million. The Company has the right, but not the obligation,
to purchase Equity Swap Shares through the September 30, 2000
termination date of the Equity Swap Facility. During such period, the
Company is to settle periodically any increase or decrease in the
market value of the Equity Swap Shares. If the market value of the
Equity Swap Shares exceeds the Counterparty's cost, Equity Swap Shares
with a fair value equal to the difference between the market value and
cost will be segregated from the other Equity Swap Shares. If the
market value of Equity Swap Shares is less than the Counterparty's
cost, the Company, at its option, will settle such difference with
shares of TCI Group Series A Stock or TCI Ventures Group Series A
Stock or, subject to certain conditions, with cash or letters of
credit. In addition, the Company is required to periodically pay the
Counterparty a fee equal to a LIBOR-based rate on the Counterparty's
cost to acquire the Equity Swap Shares. Due to the Company's ability
to issue shares to settle periodic price fluctuations and fees under
the Equity Swap Facility, the Company records all amounts received or
paid under this arrangement as increases or decreases, respectively,
to equity. As of September 30, 1998, the Equity Swap Facility had
acquired 4,935,780 shares of TCI Group Series A Stock and 1,171,800
shares of TCI Ventures Group Series A Stock at an aggregate cost that
was approximately $49 million less than the fair value of such Equity
Swap Shares at September 30, 1998.
At September 30, 1998, there were 100,180,254 shares of TCI Group
Series A Stock, 14,511,570 shares of TCI Group Series B Stock,
38,765,713 shares of Liberty Group Series A Stock, 33,332,576 shares
of TCI Ventures Group Series A Stock and 2,800,000 shares of TCI
Ventures Group Series B Stock reserved for issuance under exercise
privileges related to options, convertible debt securities and
convertible preferred stock. Also, one share of Series A Stock is
reserved for each share of Series B Stock. Additionally, subsidiaries
of TCI own an aggregate of 278,307 shares of TCI Convertible
Redeemable Participating Preferred Stock, Series F ("Series F
Preferred Stock"). Each share of Series F Preferred Stock is
convertible into 1496.65 shares of TCI Group Series A Stock.
(continued)
256
<PAGE> 258
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Transactions with Officers and Directors
On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the
Estate of Bob Magness (the "Magness Estate"), the late founder and
former Chairman of the Board of TCI in exchange (the "Exchange") for an
equal number of shares of TCI Group Series B Stock (which shares are
entitled to ten votes per share) owned by the Magness Estate, (b) the
Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock
received in the Exchange, together with approximately 1.5 million
shares of TCI Group Series A Stock that the Magness Estate previously
owned (collectively, the "Option Shares"), to two investment banking
firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment
Bankers whereby TCI has the option, but not the obligation, to purchase
the Option Shares at any time on or before June 16, 1999 (the "Option
Period"). The preceding transactions are referred to collectively as
the "June 16 Stock Transaction". During the Option Period, the Company
and the Investment Bankers are to settle quarterly any increase or
decrease in the market value of the Option Shares. If the market value
of the Option Shares exceeds the Investment Bankers' cost, Option
Shares with a fair value equal to the difference between the market
value and cost will be segregated from the other Option Shares. If the
market value of the Option Shares is less than the Investment Bankers'
cost, the Company, at its option, will settle such difference with
shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock
or, subject to certain conditions, with cash or letters of credit. In
addition, the Company is required to pay the Investment Bankers a
quarterly fee equal to the LIBOR plus 1% on the Sale Price, as adjusted
for payments made by the Company pursuant to any quarterly settlement
with the Investment Bankers. Due to the Company's ability to settle
quarterly price fluctuations and fees with shares of TCI Group Series A
Stock or TCI Ventures Group Series A Stock, the Company records all
amounts received or paid under this arrangement as increases or
decreases, respectively, to equity. During the fourth quarter of 1997,
the Company repurchased 4,000,000 shares of TCI Group Series A Stock
from one of the Investment Bankers for an aggregate cash purchase price
of $66 million. Additionally, as a result of the Exchange Offers and
certain open market transactions that were completed to obtain the
desired weighting of TCI Group Series A Stock and TCI Ventures Group
Series A Stock, the Investment Bankers disposed of 4,210,308 shares of
TCI Group Series A Stock and acquired 23,407,118 shares of TCI Ventures
Group Series A Stock during the last half of 1997. As a result of the
foregoing transactions and certain transactions related to the January
5, 1998 settlement of litigation involving the Magness Estate, as
described below, the Option Shares were comprised of 6,201,042 shares
of TCI Group Series A Stock and 11,740,610 shares of TCI Ventures Group
Series A Stock at September 30, 1998. At September 30, 1998, the market
value of the Option Shares exceeded the Investment Bankers' cost by
$254 million. Pursuant to a certain Letter Agreement, dated June 16,
1997, between Dr. Malone, TCI's Chairman and Chief Executive Officer,
and the Magness Estate, Dr. Malone agreed to waive certain rights of
first refusal with respect to shares of Series B TCI Group Stock
beneficially owned by the Magness Estate. Such rights of first refusal
arise from a letter agreement, dated June 17, 1988, among Bob Magness,
Kearns-Tribune Corporation and Dr. Malone, pursuant to which Dr. Malone
was granted a right of first refusal to acquire any shares of TCI Group
Series B Stock which the other parties proposed to sell. As a result of
Dr. Malone's rights under such June 17, 1988 letter agreement, such
waiver was necessary in order for the Magness Estate to consummate the
Exchange and the Sale.
In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from
TCI up to 30,545,864 shares of the Series B TCI Group Stock acquired by
TCI from the Magness Estate pursuant to the Exchange. Such acquisition
may be made in exchange for either, or any combination of, shares of
Series A TCI Group Stock owned by Dr. Malone (exchanged on a one for
one basis), or cash in an amount equal to the average closing sale
price of the Series B TCI Group Stock for the five trading days
preceding the acquisition.
In connection with certain legal proceedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob
Magness' sons, Sharon Magness, Bob Magness' surviving second wife and
the original personal representatives of the Magness Estate advanced
various claims, causes of action, demands, complaints and requests
against one or more of the others. In addition, Kim Magness and Gary
Magness, in a Complaint And Request To Void Sale Of TCI Stock, And For
Damages And Surcharge, filed on October 29, 1997 (the "Voting Action"),
advanced various claims relating to the June 16 Stock Transaction
against TCI, Dr. Malone and the original personal representatives of
the Magness Estate. Among other matters, the Voiding Action challenged
the June 16 Stock Transaction on various fiduciary bases and requested
recision of such transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon
Magness, the Magness Estate, the Estate of Betsy Magness (the first
wife of Bob Magness) and Dr. Malone agreed to settle their respective
claims against each other relating to the Magness Estate and the June
16 Stock Transaction, in each case without any of those parties
admitting any of the claims or allegations against that party (the
"Magness Settlement").
(continued)
257
<PAGE> 259
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A
Stock and 11,666,506 shares of TCI Ventures Group Series A Stock were
returned to TCI as authorized but unissued shares, (ii) the Magness
Estate returned to the Investment Bankers the portion of the Sales
Price attributable to such returned shares and (iii) the Magness Estate
paid $11 million to TCI representing a reimbursement of the Exchange
fees incurred by TCI from June 16, 1997 through February 9, 1998 with
respect to such returned shares. TCI then issued to the Magness Estate
10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares of
TCI Ventures Group Series B Stock. In addition, as part of the Magness
Settlement, TCI issued 1,339,415 shares of TCI Group Series B Stock to
the Estate of Betsy Magness in exchange for an equal number of shares
of TCI Group Series A Stock and issued 1,531,834 shares of TCI Ventures
Group Series B Stock for an equal number of shares of TCI Ventures
Group Series A Stock.
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr.
Malone and Dr. Malone's wife (together with Dr. Malone, the "Malones"),
under which the Malones granted to TCI the right to acquire any shares
of TCI stock which are entitled to cast more than one vote per share
(the "High-Voting Shares") owned by the Malones, which currently
consist of an aggregate of approximately 60 million High-Voting Shares
upon Dr. Malone's death or upon a contemplated sale of the High-Voting
Shares (other than a minimal amount) to third persons. In either such
event, TCI has the right to acquire the shares at a maximum price equal
to the then relevant market price of shares of "low-voting" Series A
Stock plus a ten percent premium. The Malones also agreed that if TCI
were ever to be sold to another entity, then the maximum premium that
the Malones would receive on their High-Voting Shares would be no
greater than a ten percent premium over the price paid for the relevant
shares of Series A Stock. TCI paid $150 million to the Malones in
consideration of them entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually, and in certain
cases, on behalf of the Estate of Betsy Magness and the Magness Estate
(collectively, the "Magness Family") also entered into a call agreement
with TCI (with substantially the same terms as the one entered into by
the Malones, including a call on the shares owned by the Magness Family
upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness
Family's aggregate of approximately 49 million High-Voting Shares. The
Magness Family was paid $124 million by TCI in consideration of them
entering into the Magness Call Agreement.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement is reflected as a $274 million reduction of
additional paid-in capital in the accompanying consolidated financial
statements.
(continued)
258
<PAGE> 260
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Additionally, on February 9, 1998, the Magness Family entered into a
stockholders' agreement (the "Stockholders' Agreement") with the
Malones and TCI under which (i) the Magness Family and the Malones
agreed to consult with each other in connection with matters to be
brought to the vote of TCI's stockholders, subject to the proviso that
if they cannot mutually agree on how to vote the shares, Dr. Malone
has an irrevocable proxy to vote the High-Voting Shares owned by the
Magness Family, (ii) the Magness Family may designate a nominee for
the Board and Dr. Malone has agreed to vote his High-Voting Shares for
such nominee and (iii) certain "tag along rights" have been created in
favor of the Magness Family and certain "drag along rights" have been
created in favor of the Malones. In addition, the Malone Right granted
by TCI to Dr. Malone to acquire 30,545,864 shares of TCI Group Series
B Stock was reduced to an option to acquire 14,511,570 shares of TCI
Group Series B Stock. Pursuant to the terms of the Stockholders'
Agreement, the Magness Family has the right to participate in the
reduced Malone Right on a proportionate basis with respect to
12,406,238 shares of the 14,511,570 shares subject to the Malone
Right. On June 24, 1998, Dr. Malone delivered notice to the Company
exercising his right to purchase (subject to the Magness Family
proportionate right) up to 14,511,570 shares of TCI Group Series B
Stock at a per share price of $35.5875 pursuant to the Malone Right.
In addition, a representative of the Magness Family advised Dr. Malone
that the Magness Family would participate in such purchase up to the
Magness Family's proportionate right. On October 14, 1998, 8,718,770
shares of TCI Group Series B Stock were issued to Dr. Malone upon
payment of cash consideration totaling $310 million. On October 16,
1998, 5,792,800 shares of TCI Group Series B Stock were issued to the
Magness Family upon payment of cash consideration totaling $206
million. In connection with the acquisition of the TCI Group Series B
Stock by Dr. Malone, TCI executed certain waivers to the Stockholders'
Agreement and TCI and the Magness Family executed a waiver to the
Malone Call Agreement to, among other things, permit the pledge of TCI
Group Series B Stock owned by Dr. Malone as collateral to the lenders
who provided the proceeds for the purchase of the shares of TCI Group
Series B Stock.
On April 30, 1998, the Company acquired a limited partnership interest
from an individual who is an executive officer and a director of TCI
in exchange for 153,183 shares of Liberty Group Series B Stock valued
at $5 million and a limited partnership interest in another limited
partnership with a capital account of $1 million.
On August 5, 1998, a director of the Company paid $1.8 million to
purchase, at fair value, the Company's interest in General
Communication, Inc.
(14) At Home Corporation
During the third quarter of 1998, @Home, a subsidiary of the Company,
completed a public offering (the "@Home Offering"), in which 2.9
million shares of @Home common stock were sold for net cash proceeds
of approximately $125 million. In connection with the @Home Offering,
(i) the Company paid $37 million to purchase 800,000 shares of @Home
common stock and (ii) the Company's economic interest in @Home
decreased to 38.8%. In connection with the associated dilution of the
Company's ownership interest in @Home, the Company recognized a gain
of $17 million during the third quarter of 1998.
(continued)
259
<PAGE> 261
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs.
On July 11, 1997, @Home completed its initial public offering (the
"@Home IPO"), in which 10,350,000 shares of @Home common stock were
sold for net cash proceeds of approximately $100 million. As a result
of the @Home IPO, the Company's economic interest in @Home decreased
from 43% to 39%, which economic interest represents an approximate 72%
voting interest. In connection with the associated dilution of the
Company's ownership interest in @Home, the Company recognized a gain
of $60 million during the third quarter of 1997.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home
has issued warrants to such cable operators to purchase 17,946,956
shares of @Home's Series A common stock. Of these warrants, warrants
to purchase 10,581,298 shares were exercisable as of September 30,
1998. @Home may issue additional stock, or warrants in connection with
its efforts to expand its distribution of the @Home service to other
cable operators. The exercise of warrants or stock issued by @Home
will reduce the Company's equity interest and voting power in @Home.
See note 18.
Pursuant to a shareholders' agreement among certain shareholders of
@Home, under certain circumstances, TCI could be required to sell a
portion of its @Home common stock to such shareholders.
(15) Commitments and Contingencies
On October 5, 1992, the United States Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). In 1993 and 1994, the FCC adopted certain rate
regulations required by the 1992 Cable Act and imposed a moratorium on
certain rate increases. As a result of such actions, the Company's
basic and tier service rates and its equipment and installation
charges (the "Regulated Services") are subject to the jurisdiction of
local franchising authorities and the FCC. Basic and tier service
rates are evaluated against competitive benchmark rates as published
by the FCC, and equipment and installation charges are based on actual
costs. Any rates for Regulated Services that exceeded the benchmarks
were reduced as required by the 1993 and 1994 rate regulations. The
rate regulations do not apply to the relatively few systems which are
subject to "effective competition" or to services offered on an
individual service basis, such as premium movie and pay-per-view
services.
(continued)
260
<PAGE> 262
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company believes that it has complied in all material respects
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed by a
customer, or the appropriate franchise authority, if such authority
has been certified by the FCC to regulate rates. If, as a result of
the review process, a system cannot substantiate its rates, it could
be required to retroactively reduce its rates to the appropriate
benchmark and refund the excess portion of rates received. Any refunds
of the excess portion of tier service rates would be retroactive to
the date of complaint. Any refunds of the excess portion of all other
Regulated Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2017 (the "Film
Licensing Obligations"). Based on customer levels at September 30,
1998, these agreements require minimum payments aggregating
approximately $703 million. The aggregate amount of the Film Licensing
Obligations under these license agreements is not currently estimable
because such amount is dependent upon the number of qualifying films
released theatrically by certain motion picture studios as well as the
domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, it is anticipated that the required
aggregate payments under the Film Licensing Obligations will be
significant.
The Company is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, the Company is
committed to carry such suppliers' programming on its cable systems.
Additionally, certain of such agreements provide for penalties and
charges in the event the programming is not carried or not delivered
to a contractually specified number of customers.
The Company is committed to purchase billing services from an
unaffiliated third party pursuant to three successive five year
agreements. Pursuant to this arrangement the Company is obligated to
make minimum payments aggregating approximately $1.6 billion through
2012. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $666 million at September 30, 1998. With respect to the
Company's guarantees of $166 million of such obligations, TCI has been
indemnified for any loss, claim or liability that TCI may incur, by
reason of such guarantees. As described in note 8, the Company also
has provided certain credit enhancements with respect to obligations
of the 1998 Joint Ventures. The Company also has guaranteed the
performance of certain affiliates and other parties with respect to
such parties' contractual and other obligations. Although there can be
no assurance, management of the Company believes that it will not be
required to meet its obligations under such guarantees, or if it is
required to meet any of such obligations, that they will not be
material to the Company.
(continued)
261
<PAGE> 263
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TINTA has guaranteed the obligation of an affiliate ("The Premium
Movie Partnership") to pay fees for the license to exhibit certain
films through 2000. Although the aggregate amount of The Premium Movie
Partnership's license fee obligations is not currently estimable,
TINTA believes that the aggregate payments pursuant to such
obligations could be significant. If TINTA were to fail to fulfill its
obligations under the guarantee, the beneficiaries have the right to
demand an aggregate payment from TINTA of approximately $32 million.
Although TINTA has not had to perform under such guarantee to date,
TINTA cannot be certain that it will not be required to perform under
such guarantee in the future.
On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
(the "DMX Merger"). Assuming the conversion of TCI Music convertible
preferred stock, TCI, at September 30, 1998, owned TCI Music
securities representing 86.4% of TCI Music's common stock and 98.2% of
the voting power attributable to such TCI Music common stock. In
connection with the DMX Merger, the Company assumed a contingent
obligation pursuant to a Rights Agreement (the "Rights Agreement") to
purchase up to 14,896,648 shares (6,812,393 of which were owned by
subsidiaries of the Company) of TCI Music common stock at a price of
$8.00 per share. The Company had recorded its contingent obligation to
purchase such shares as a component of minority interest in equity of
consolidated subsidiaries in the accompanying consolidated financial
statements. Prior to the July 1998 expiration of the rights under the
Rights Agreement, TCI was notified of the tender by unaffiliated
holders of 4,892,077 shares and associated rights. On August 27, 1998,
TCI paid $39 million to satisfy its obligation to purchase such
tendered shares.
Effective as of December 16, 1997, NDTC, a subsidiary of TCI which is
attributed to the TCI Ventures Group, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital
Terminal Purchase Agreement") with General Instrument Corporation
("GI") to purchase advanced digital set-top devices. The hardware and
software incorporated into these devices will be designed and
manufactured to be compatible and interoperable with the OpenCable(TM)
architecture specifications adopted by CableLabs, the cable television
industry's research and development consortium, in November 1997. NDTC
has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices during calendar years 1998,
1999 and 2000 at an average price of $318 per set-top device. Through
September 30, 1998, approximately 1 million set-top devices had been
purchased pursuant to this commitment. GI agreed to provide NDTC and
its Approved Purchasers the most favorable prices, terms and
conditions made available by GI to any customer purchasing advanced
digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization,
which as of the effective date of the Digital Terminal Purchase
Agreement, would have represented at least a 10% equity interest in GI
(on a fully diluted basis). Such warrants vest as annual purchase
commitments are met. The value associated with such equity interest
will be attributed to TCI Group upon purchase and deployment of the
digital set-top devices. See note 2. 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)
262
<PAGE> 264
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 TCI Ventures
Group to GI, and (iv) a nine-year revenue guarantee from TCI Ventures
Group in favor of GI. In connection therewith, NDTC also entered into
a services agreement pursuant to which it will provide certain
postcontract services to GI's set-top authorization business. The 21.4
million shares of GI common stock are, in addition to other transfer
restrictions, restricted as to their sale by NDTC for a three year
period, and represent approximately 13% of the outstanding common
stock of GI at September 30, 1998. The Company recorded its investment
in such shares at fair value which included a discount attributable to
the above-described liquidity restriction. The Company will account
for its investment in such shares using the cost method of accounting.
The $346 million excess of the recorded value of GI common stock
received over (i) the book value of certain assets transferred from
NDTC to GI, and (ii) the $42 million present value of the promissory
note due from TCI Ventures Group to GI, has been deferred by the
Company in the accompanying September 30, 1998 consolidated balance
sheet. A portion of such excess equal to the $160 million present
value of the annual amounts specified by the revenue guarantee will be
amortized to revenue over nine years in proportion to such annual
guaranteed amounts. The remaining $186 million excess will be
amortized to revenue on a straight-line basis over the nine-year
period that NDTC is required to perform postcontract services.
On June 30, 1998, the Company entered into an Operating Lease
Agreement (the "Lease") with an unaffiliated third party (the
"Lessor"). Under the Lease, the Company agreed to sell to, and lease
back from, the Lessor advanced digital set-top devices with an initial
aggregate net cost of up to $200 million. The initial term of the
Lease is two years, and it provides for renewal, at the Company's
option, for up to five additional consecutive one-year terms. Rent
under the Lease is payable quarterly. At the end of the originally
scheduled or renewed lease term, the Company is required to either (i)
purchase the equipment at the Termination Value (as defined in the
Lease), or (ii) arrange for the sale of the leased equipment to a
third party and pay the Lessor the difference between the sale price
and a predetermined guaranteed value, which in all cases is less than
the Termination Value. As of September 30, 1998, the Company has sold
and leased back advanced digital set-top devices under the Lease with
an aggregate cost of $109 million. Current annual lease payments with
respect to such leased equipment are $16 million. The Company has
treated the Lease as an operating lease in the accompanying
consolidated financial statements.
The Company has contingent liabilities related to legal proceedings
and other matters arising in the ordinary course of business. Although
it is reasonably possible the Company may incur losses upon conclusion
of such matters, an estimate of any loss or range of loss cannot be
made. In the opinion of management, it is expected that amounts, if
any, which may be required to satisfy such contingencies will not be
material in relation to the accompanying consolidated financial
statements.
(continued)
263
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Estimates of compensation relating to phantom stock appreciation
rights granted to employees of a subsidiary of TCI have been recorded
in the accompanying consolidated financial statements, but are subject
to future adjustment based upon a valuation model derived from such
subsidiary's cash flow, working capital and debt.
(16) Year 2000
During the three months ended September 30, 1998, the Company
continued its enterprise-wide, comprehensive efforts to assess and
remediate its computer systems and related software and equipment to
ensure such systems, software and equipment recognize, process and
store information in the year 2000 and thereafter. The Company's year
2000 remediation efforts include an assessment of its most critical
systems, such as customer service and billing systems, headends and
other cable plant, systems that support the Company's programming
services, business support operations, and other equipment and
facilities. The Company also continued its efforts to verify the year
2000 readiness of its significant suppliers and vendors and continued
to communicate with significant business partners and affiliates to
assess such partners and affiliates' year 2000 status.
The Company formed 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. It is comprised of a 90
member full-time staff and is 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 systems, software and
equipment. Phase 1, Assessment, involves the inventory of all 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 equipment and systems. Phase 3,
Testing, involves testing the Company's 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.
(continued)
264
<PAGE> 266
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At September 30, 1998, the Company's overall progress by phase was as
follows:
<TABLE>
<CAPTION>
Percentage of all
Equipment/Systems
Phase In Phase *
- ----------------- -----------------
<S> <C>
Phase 1-Assessment 92%
Phase 2-Remediation 54%
Phase 3-Testing 10%
Phase 4-Implementation 5%
</TABLE>
- --------------------
*The percentages set forth above do not total 100% because many
projects have elements in more than one phase. For purposes of this
table, such projects have been attributed to each applicable phase. In
addition, the percentages set forth above are based on the number of
projects in each phase compared to the total number of year 2000
projects.
The Company is completing an inventory of its important systems with
embedded technologies and is currently determining the correct
remediation approach. During the three months ended September 30,
1998, the Company continued its survey of significant third-party
vendors and suppliers whose systems, services or products are
important to the Company's operations (e.g., suppliers of addressable
controllers and set-top boxes, and the provider of the Company's
billing services). The year 2000 readiness of such providers is
critical to continued provision of the Company's cable service. The
Company has received information that the most critical systems,
services or products supplied to the Company by third parties are
either year 2000 ready or are expected to be year 2000 ready by
mid-1999. The Company is currently developing contingency plans for
systems provided by vendors who have not responded to the Company's
surveys.
In addition to the survey process described above, management of the
Company has identified its most critical supplier/vendor relationships
and has instituted a verification process to determine the vendor's
year 2000 readiness. Such verification includes, as deemed necessary,
reviewing vendors' test and other data and engaging in regular
conferences with vendors' year 2000 teams. The Company is also
requiring testing to validate the year 2000 compliance of certain
critical products and services and is contracting with independent
consultants to conduct such testing.
Significant market value is associated with the Company's investments
in certain public and private corporations, partnerships and other
businesses. Accordingly, the Company is monitoring the public
disclosure of such publicly-held business entities to determine their
year 2000 readiness. In addition, the Company has surveyed and
monitored the year 2000 status of certain privately-held business
entities in which the Company has significant investments.
(continued)
265
<PAGE> 267
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year 2000 expenses and capital expenditures incurred in the three
months ended September 30, 1998 were $4 million and less than $1
million, respectively. Expenses and capital expenditures incurred in
the nine months ended September 30, 1998 were $6 million and less than
$1 million, respectively. Management of the Company currently
estimates the remaining costs to be not less than $71 million,
bringing the total estimated cost associated with the Company's year
2000 remediation efforts to be not less than $77 million (including $32
million for replacement of noncompliant information technology ("IT")
systems). Also included in this estimate is $9 million in future
payments to be made pursuant to unfulfilled executory contracts or
commitments with vendors for year 2000 remediation services.
The Company is a widely distributed enterprise in which allocation of
certain resources, including IT support, is decentralized.
Accordingly, the Company does not consolidate an IT budget. Therefore,
total estimated year 2000 costs as a percentage of an IT budget are
not available. There are currently no planned IT projects being
deferred due to year 2000 costs.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations.
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.
(17) Information about the Company's Segments
The Company has two reportable segments: domestic cable and
communications services and domestic programming services. Domestic
cable and communications services receive video, audio and data
signals from various sources, and amplify and distribute the signals
by coaxial cable and optical fiber to the premises of customers who
pay a fee for the service. Domestic programming services produces,
acquires, and distributes, through all available formats and media,
branded entertainment and informational programming and software,
including multimedia products, delivered in both analog and digital
form. The Company's domestic cable and communications services
business and assets are included in TCI Group, and the Company's
domestic programming business and assets are included in Liberty Media
Group. The Company's principal international businesses and assets and
the Company's remaining non-cable and non-programming domestic
businesses and assets are included in TCI Ventures Group.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance based on a measure of operating cash flow
(defined as operating income before depreciation, amortization, other
non-cash items, year 2000 costs, AT&T merger costs, and stock
compensation). 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.
(continued)
266
<PAGE> 268
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 Domestic
& communications programming All
services services other Total
---------------- ----------- ----- -----
amounts in millions
<S> <C> <C> <C> <C>
Nine months ended September 30, 1998:
Revenue from external customers
including intersegment
revenue $ 4,560 498 685 5,743
Intersegment revenue $ (13) 210 36 233
Segment operating cash flow $ 1,889 75 88 2,052
Nine months ended September 30, 1997:
Revenue from external customers
including intersegment
revenue $ 4,779 244 758 5,781
Intersegment revenue $ 2 105 37 144
Segment operating cash flow $ 2,035 62 135 2,232
</TABLE>
A reconciliation of reportable segment operating cash flow to the Company's
consolidated earnings (loss) before income tax is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1998* 1997
---------- ----------
amounts in millions
<S> <C> <C>
Total operating cash flow for reportable segments $ 1,964 2,097
Other operating cash flow 88 135
Other items excluded from operating cash flow:
Depreciation and amortization (1,289) (1,177)
Year 2000 costs (6) --
AT&T merger costs (11) --
Stock compensation (423) (231)
Interest expense (808) (883)
Interest and dividend income 72 64
Share of losses of affiliates, net (986) (591)
Loss on early extinguishment of debt (44) (11)
Minority interest in earnings of consolidated
subsidiaries, net (95) (129)
Gain on issuance of equity interests by subsidiaries 55 60
Gain on issuance of stock by equity investees 259 21
Gain on disposition of assets 3,704 400
Other, net (25) (7)
---------- ----------
Earnings (loss) before income taxes $ 2,455 (252)
========== ==========
</TABLE>
* Restated - see note 18.
(18) Restatement of Costs Associated with Distribution Agreements
The Company has restated its consolidated financial statements to record
non-cash costs of certain distribution agreements as assets to be amortized over
the exclusivity periods set forth in the respective distribution agreements.
Such non-cash costs had originally been expensed in the period that the
underlying warrants had become exercisable. This restatement resulted in a $208
million increase to other assets and a $126 million increase to minority
interests of consolidated subsidiaries at September 30, 1998. In addition, the
restatement resulted in a $17 million increase to net earnings and a $.04
increase to basic and diluted net earnings attributable to common stockholders
per share of TCI Ventures Group Stock for the nine months ended September 30,
1998. See note 14.
267
<PAGE> 269
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998* 1997
------------- ------------
<S> <C> <C>
Assets amounts in millions
- ------
Cash and cash equivalents $ 403 224
Trade and other receivables, net 176 127
Prepaid program rights 128 104
Committed program rights 108 117
Investments in affiliates, accounted for under the equity method,
and related receivables (note 4) 2,832 2,654
Investment in Time Warner, Inc. ("Time Warner") (note 5)
4,996 3,538
Investment in AT&T Corp. ("AT&T") (note 6) 2,744 --
Other investments and related receivables (note 7) 1,192 695
Property and equipment, at cost:
Land 8 8
Distribution systems 720 856
Support equipment and buildings 173 153
------------ ------------
901 1,017
Less accumulated depreciation 329 280
------------ ------------
572 737
------------ ------------
Intangible assets:
Excess cost over acquired net assets 940 429
Franchise costs 109 108
------------ ------------
1,049 537
Less accumulated amortization 136 86
------------ ------------
913 451
------------ ------------
Other assets, at cost, net of accumulated amortization (note 9) 311 280
------------ ------------
$ 14,375 8,927
============ ============
</TABLE>
* Restated - see note 14.
(continued)
268
<PAGE> 270
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998* 1997
------------- ------------
<S> <C> <C>
Liabilities and Combined Equity amounts in millions
- -------------------------------
Accounts payable $ 54 40
Accrued liabilities 177 168
Program rights payable 152 156
Customer prepayments 138 137
Deferred revenue (note 12) 340 --
Deferred option premium (note 5) -- 306
Capital lease obligations 192 387
Debt (note 10) 2,454 757
Deferred income taxes 2,391 957
Other liabilities 114 90
------------ ------------
Total liabilities 6,012 2,998
------------ ------------
Minority interests in equity of attributed subsidiaries
645 620
Obligation to redeem common
stock (note 11) 19 --
Combined equity (note 11):
Combined equity 5,545 4,011
Accumulated other comprehensive
earnings, net of taxes 1,662 768
------------ ------------
7,207 4,779
Due to related parties 492 530
------------ ------------
Total combined equity 7,699 5,309
------------ ------------
Commitments and contingencies (notes 2, 12 and 13)
$ 14,375 8,927
============ ============
</TABLE>
* Restated - see note 14.
See accompanying notes to combined financial statements.
269
<PAGE> 271
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998* 1997
------------ ------------
<S> <C> <C>
Revenue:
Unaffiliated parties $ 938 859
Related parties (note 11) 199 113
------------ ------------
1,137 972
------------ ------------
Operating costs and expenses:
Operating 651 488
Selling, general and administrative 302 254
Charges from related parties (note 11) 21 33
Year 2000 costs (note 13) 1 --
Stock compensation (note 11) 263 132
Depreciation and amortization 173 145
------------ ------------
1,411 1,052
------------ ------------
Operating loss (274) (80)
Other income (expense):
Interest expense (note 11) (81) (50)
Dividend and interest income (note 11) 66 43
Share of losses of affiliates, net (note 4) (861) (545)
Minority interests in losses of attributed subsidiaries 42 --
Gain on dispositions, net (notes 5, 6 and 7) 2,862 409
Gain on sale of stock by attributed subsidiaries (notes 8 and 9) 55 60
Gain on issuance of stock by affiliates (notes 4 and 6) 259 21
Other, net (2) 4
------------ ------------
2,340 (58)
------------ ------------
Earnings (loss) before income taxes 2,066 (138)
Income tax benefit (expense) (828) 8
------------ ------------
Net earnings (loss) $ 1,238 (130)
============ ============
Comprehensive earnings (loss) $ 2,132 (152)
============ ============
</TABLE>
* Restated - see note 14.
See accompanying notes to combined financial statements.
270
<PAGE> 272
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
comprehensive Due to Total
Combined earnings, related combined
equity* net of tax parties equity*
---------- ---------- ---------- ----------
amounts in millions
<S> <C> <C> <C> <C>
Balance at December 31, 1997 4,011 768 530 5,309
Net earnings 1,238 -- -- 1,238
Foreign currency translation adjustment -- 7 -- 7
Change in unrealized holding gains on
available-for-sale securities -- 887 -- 887
Payments for call agreements (140) -- -- (140)
Repurchase of common stock (30) -- -- (30)
Premium received in connection with put
obligation 2 -- -- 2
Reclassification of redemption amount of
common stock subject to put obligation (19) -- -- (19)
Gain in connection with issuance of stock of
affiliate (note 4) 64 -- -- 64
Gain in connection with issuance of stock by
attributed subsidiary (note 8) 2 -- -- 2
Issuance of common stock (note 8) 351 -- (5) 346
Transfer of net liabilities to related party 50 -- -- 50
Assignment of option contract from related
party 16 -- (16) --
Other transfers to related parties, net -- -- (17) (17)
---------- ---------- ---------- ----------
Balance at September 30, 1998 $ 5,545 1,662 492 7,699
========== ========== ========== ==========
</TABLE>
* Restated - see note 14.
See accompanying notes to combined financial statements.
271
<PAGE> 273
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1998* 1997
------------ ------------
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,238 (130)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 173 145
Stock compensation 263 132
Payments of stock compensation (76) (10)
Share of losses of affiliates, net 861 545
Deferred income tax benefit 804 122
Intergroup tax allocation 1 (135)
Minority interests in losses of attributed subsidiaries (42) --
Gain on issuance of stock by affiliates (259) (21)
Gain on sale of stock by attributed subsidiaries (55) (60)
Gain on disposition of assets, net (2,862) (409)
Other noncash charges 4 10
Changes in operating assets and liabilities, net of the effect of
acquisitions and dispositions:
Change in receivables (32) 4
Change in prepaid expenses and committed program rights (14) (7)
Change in payables, accruals, deferred revenue and customer
prepayments (1) 33
------------ ------------
Net cash provided by operating activities 3 219
------------ ------------
Cash flows from investing activities:
Cash paid for acquisitions (83) (39)
Capital expended for property and equipment (105) (147)
Cash balances of deconsolidated subsidiary -- (38)
Investments in and loans to affiliates and others (1,263) (398)
Return of capital from affiliates 3 4
Collections on loans to affiliates and others 20 73
Cash proceeds from dispositions 343 201
Other, net (12) 12
------------ ------------
Net cash used by investing activities (1,097) (332)
------------ ------------
</TABLE>
(continued)
272
<PAGE> 274
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1998* 1997
------------ ------------
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from financing activities:
Borrowings of debt 2,061 254
Repayments of debt and capital lease obligations (488) (265)
Payments for call agreements (140) --
Contribution for issuance of common stock -- 2
Cash transfers (to) from related parties (191) 322
Repurchase of common stock (30) (186)
Repurchase of common stock by attributed subsidiary (15) (42)
Net proceeds from issuance of stock by attributed subsidiaries 92 148
Other, net (16) (9)
------------ ------------
Net cash provided by financing activities 1,273 224
------------ ------------
Net increase in cash and cash equivalents 179 111
Cash and cash equivalents at beginning of period 224 444
------------ ------------
Cash and cash equivalents at end of period $ 403 555
============ ============
</TABLE>
* Restated - see note 14.
See accompanying notes to combined financial statements.
273
<PAGE> 275
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1998
(unaudited)
(1) Basis of Presentation
The accompanying combined financial statements include the accounts of
the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that
are attributed to Liberty/Ventures Group, as defined below. All
significant intercompany accounts and transactions have been
eliminated. The combined financial statements of Liberty/Ventures Group
are presented for purposes of additional analysis of the consolidated
financial statements of TCI and subsidiaries and should be read in
conjunction with such consolidated financial statements.
On June 24, 1998, the Board of Directors of TCI (the "Board") announced
its intention, subject to shareholder approval, to combine "Liberty
Media Group," a group of TCI's assets which produce and distribute
programming services, and "TCI Ventures Group," a group of assets
comprised of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets
(collectively, "Liberty/Ventures Group"). Under the terms of the
proposed combination (the "Liberty/Ventures Combination"), each
outstanding share of Tele-Communications, Inc. Series A TCI Ventures
Group Common Stock, par value $1.00 per share (the "TCI Ventures Group
Series A Stock") will be reclassified as .52 of a share of
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share (the "Liberty Group Series A Stock" and
following the Liberty/Ventures Combination, the "Liberty/Ventures Group
Series A Stock") and each outstanding share of Tele-Communications,
Inc. Series B TCI Ventures Group Common Stock, par value $1.00 per
share (the "TCI Ventures Group Series B Stock," and together with the
TCI Ventures Group Series A Stock, the "TCI Ventures Group Stock") will
be reclassified as .52 of a share of Tele-Communications, Inc. Series B
Liberty Media Group Common Stock, par value $1.00 per share (the
"Liberty Group Series B Stock," and following the Liberty/Ventures
Combination, the "Liberty/Ventures Group Series B Stock" and together
with the Liberty Group Series A Stock, the "Liberty Group Stock").
Following the Liberty/Ventures Combination, the Liberty Group Series A
Stock and the Liberty/Ventures Group Series B Stock (collectively, the
"Liberty/Ventures Group Stock") will represent one hundred percent of
the equity value attributable to Liberty/Ventures Group. The
Liberty/Ventures Combination will not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights
of creditors of TCI or of holders of TCI's or any of its subsidiaries'
debt.
(continued)
274
<PAGE> 276
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At September 30, 1998, Liberty/Ventures Group consisted principally of
the following assets and their related liabilities: (i) TCI's
businesses which provide programming services including production,
acquisition and distribution through all available formats and media of
branded entertainment, educational and informational programming and
software, including multimedia products, (ii) TCI's businesses engaged
in electronic retailing, direct marketing, advertising sales relating
to programming services, infomercials and transaction processing, (iii)
TCI's businesses engaged in international cable, telephony and
programming businesses (Tele-Communications International, Inc.
"TINTA") (iv) TCI's principal interests in the telephony business
consisting primarily of TCI's investment in a series of partnerships
formed to engage in the business of providing wireless communications
services, using the radio spectrum for broadband personal
communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), TCI's equity
interest in AT&T and Western Tele-Communications, Inc. ("WTCI"), a
wholly-owned subsidiary of TCI that provides long distance transport of
video, voice and data traffic and other telecommunications services to
interexchange carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (v)
TCI's businesses engaged in high speed multimedia Internet services,
including TCI's interest in At Home Corporation ("@Home") and (vi)
other assets, including National Digital Television Center, Inc.
("NDTC"), which provides digital compression and authorization services
to programming suppliers and to video distribution outlets.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements and notes thereto of
Liberty/Ventures Group for the year ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(continued)
275
<PAGE> 277
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("Statement 133"), which is
effective for all fiscal years beginning after June 15, 1999. Statement
133 establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their
fair values. Under Statement 133, changes in the fair values of
derivative instruments are recognized immediately in earnings unless
those instruments qualify as hedges of the (1) fair values of existing
assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures of net
investments in foreign operations. Although management of
Liberty/Ventures Group has not completed its assessment of the impact
of Statement 133 on its combined results of operations and financial
position, management estimates that the impact of Statement 133 will
not be material.
Targeted Stock
On August 3, 1995, the stockholders of TCI authorized the Board to
issue the Liberty Group Stock which was intended to reflect the
separate performance of Liberty Media Group, and on August 10, 1995,
TCI distributed, in the form of a dividend, the Liberty Group Stock.
Additionally, the stockholders of TCI approved the redesignation of the
previously authorized Class A and Class B common stock into
Tele-Communications, Inc. Series A TCI Group Common Stock, par value
$1.00 per share (the "TCI Group Series A Stock") and
Tele-Communications, Inc. Series B TCI Group Common Stock, par value
$1.00 per share (the "TCI Group Series B Stock", and together with the
TCI Group Series A Stock, the "TCI Group Stock"), respectively. On
August 28, 1997, the stockholders of TCI authorized the Board to issue
the TCI Ventures Group Stock which was intended to reflect the separate
performance of TCI Ventures Group and on September 10, 1997, upon the
consummation of offers commenced by TCI to exchange shares of TCI Group
Stock for TCI Ventures Group Stock (the "Exchange Offers"), TCI
exchanged TCI Group Stock for TCI Ventures Group Stock in the maximum
amount set forth in the Exchange Offers.
TCI Group Stock is intended to reflect the separate performance of TCI
and its subsidiaries and assets not attributed to Liberty/Ventures
Group. Such subsidiaries and assets, which are comprised primarily of
TCI's domestic cable and communications businesses, are collectively
referred to as "TCI Group". Collectively, Liberty/Ventures Group and
TCI Group are referred to as the "Groups" and individually are referred
to as a "Group". The TCI Group Series A Stock, Liberty Group Series A
Stock and TCI Ventures Group Series A Stock are sometimes collectively
referred to herein as the "Series A Stock," and the TCI Group Series B
Stock, Liberty Group Series B Stock and TCI Ventures Group Series B
Stock are sometimes collectively referred to herein as the "Series B
Stock."
(continued)
276
<PAGE> 278
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group and Liberty/Ventures Group
for the purpose of preparing their respective combined financial
statements, the change in the capital structure of TCI resulting from
the redesignation of TCI Group Stock and issuance of Liberty Group
Stock and TCI Ventures Group Stock, as well as the Liberty/Ventures
Group Stock resulting from the Liberty/Ventures Combination, does not
affect the ownership or the respective legal title to assets or
responsibility for liabilities of TCI or any of its subsidiaries. TCI
and its subsidiaries each continue to be responsible for their
respective liabilities. Holders of Liberty/Ventures Group Stock will be
common stockholders of TCI and are subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of
Liberty/Ventures Group and the market price of shares of
Liberty/Ventures Group Stock. In addition, net losses of any portion of
TCI, dividends and distributions on, or repurchases of, any series of
common stock, and dividends on, or certain repurchases of preferred
stock would reduce funds of TCI legally available for dividends on all
series of common stock. Accordingly, financial information of
Liberty/Ventures Group should be read in conjunction with the financial
information of TCI and TCI Group.
After the Liberty/Ventures Combination, existing debt securities of TCI
that are convertible into or exchangeable for shares of TCI Ventures
Group Stock will, as a result of the operation of antidilution
provisions, be adjusted so that there will be delivered upon their
conversion or exchange the number of shares of Liberty/Ventures Group
Stock that would have been issuable in the Liberty/Ventures Combination
with respect to the TCI Ventures Group Stock issuable upon conversion
or exchange had such conversion or exchange occurred prior to the
record date for the Liberty/Ventures Combination. Options to purchase
TCI Ventures Group Stock outstanding at the time of the
Liberty/Ventures Combination will be adjusted such that the holders of
such options will have options to purchase that number of shares of
Liberty/Ventures Group Stock which the holder would have been entitled
to receive had the holder exercised such option to purchase TCI
Ventures Group Stock prior to the record date for the Liberty/Ventures
Combination. The aggregate exercise price of the previously outstanding
options to purchase TCI Ventures Group Stock is not effected by the
Liberty/Ventures Combination.
(continued)
277
<PAGE> 279
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
After the Liberty/Ventures Combination, existing preferred stock and
debt securities of TCI that are convertible into or exchangeable for
shares of Liberty Group Stock will not result in any changes. Such
securities will continue to be convertible or exchangeable into the
same number of shares of Liberty/Ventures Group Stock. Similarly,
options to purchase Liberty Group Stock outstanding at the time of the
Liberty/Ventures Combination will not result in any changes. Such
options will remain options to purchase that number of shares of
Liberty/Ventures Group Stock having the same exercise price of the
previously outstanding options to purchase Liberty Group Stock.
The issuance of shares of Liberty/Ventures Group Stock upon such
conversion, exchange or exercise of such convertible securities will
not result in any transfer of funds or other assets from TCI Group to
Liberty/Ventures Group in consideration of such issuance. In the case
of the exercise of such options to purchase Liberty/Ventures Group
Stock, the proceeds received upon the exercise of such options will be
attributed to Liberty/Ventures Group.
The common stockholders' equity value of Liberty/Ventures Group that,
at any relevant time, is attributed to TCI Group, and accordingly not
represented by outstanding Liberty/Ventures Group Stock is referred to
as "Inter-Group Interest." Following consummation of the
Liberty/Ventures Combination an Inter-Group Interest would be created
with respect to Liberty/Ventures Group only if a subsequent transfer of
cash or other property from TCI Group to Liberty/Ventures Group is
specifically designated by the Board as being made to create an
Inter-Group Interest or if outstanding shares of Liberty/Ventures Group
Stock are purchased with funds attributable to TCI Group.
Dividends on Liberty/Ventures Group Stock are payable at the sole
discretion of the Board out of the lesser of assets of TCI legally
available for dividends or the available dividend amount with respect
to Liberty/Ventures Group, as defined. Determinations to pay dividends
on Liberty/Ventures Group Stock are based primarily upon the financial
condition, results of operations and business requirements of
Liberty/Ventures Group and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
is (unless the Board otherwise provides) specifically attributed to and
reflected in the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred
stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., TCI Group. The Board
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected in the combined financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
(continued)
278
<PAGE> 280
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstance, the other Group
may transfer funds to such Group. Such transfers of funds among the
Groups will be reflected as borrowings or, if determined by the Board,
in the case of a transfer from TCI Group to Liberty/Ventures Group,
reflected as the creation of, or increase in, TCI Group's Inter-Group
Interest in Liberty/Ventures Group or, in the case of a transfer from
Liberty/Ventures Group to TCI Group, reflected as a reduction in TCI
Group's Inter-Group Interest in Liberty/Ventures Group. There are no
specific criteria for determining when a transfer will be reflected as
a borrowing or as an increase or reduction in an Inter-Group Interest.
The Board expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the financing needs
and objectives of the Groups, the investment objectives of the Groups,
the availability, cost and time associated with alternative financing
sources, prevailing interest rates and general economic conditions.
Loans from one Group to another Group generally will bear interest at
such rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures established
by, the Board. The Board expects to make such determinations, either in
specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the use of proceeds by
and creditworthiness of the recipient Group, the capital expenditure
plans of and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group reflect its net loans or
advances to or borrowings from the other Group. Similarly, the
respective combined statements of operations of the Groups reflect
interest income or expense, as the case may be, associated with such
loans or advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical combined financial statements,
net loans or advances between Groups have been and will continue to be
included as a component of each respective Group's combined equity.
Although any increase in TCI Group's Inter-Group Interest in
Liberty/Ventures Group resulting from an equity contribution by TCI
Group to Liberty/Ventures Group or any decrease in such Inter-Group
Interest resulting from a transfer of funds from Liberty/Ventures Group
to TCI Group would be determined by reference to the market value of
the Liberty/Ventures Group Stock, as of the date of such transfer, such
an increase could occur at a time when such shares could be considered
undervalued and such a decrease could occur at a time when such shares
could be considered overvalued.
(continued)
279
<PAGE> 281
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
All financial impacts of issuances and purchases of shares of TCI Group
Stock or Liberty/Ventures Group Stock, the proceeds of which are
attributed to TCI Group or Liberty/Ventures Group, respectively, will
be to such extent reflected in the combined financial statements of TCI
Group or Liberty/Ventures Group, respectively. All financial impacts of
issuances of shares of Liberty/Ventures Group Stock, the proceeds of
which are attributed to TCI Group in respect of a reduction in TCI
Group's Inter-Group Interest in Liberty/Ventures Group, will be to such
extent reflected in the combined financial statements of TCI Group.
Financial impacts of dividends or other distributions on TCI Group
Stock or Liberty/Ventures Group Stock, will be attributed entirely to
TCI Group or Liberty/Ventures Group, respectively, except that
dividends or other distributions on Liberty/Ventures Group Stock will
(if at the time there is an Inter-Group Interest in Liberty/Ventures
Group) result in TCI Group being credited, and Liberty/Ventures Group
being charged (in addition to the charge for the dividend or other
distribution paid), with an amount equal to the product of the
aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Liberty/Ventures Group
Stock and a fraction of the numerator of which is the Liberty/Ventures
Group "Inter-Group Interest Fraction" and the denominator of which is
the Liberty/Ventures Group "Outstanding Interest Fraction" (both as
defined). Financial impacts of repurchases of Liberty/Ventures Group
Stock, the consideration for which is charged to TCI Group, will be to
such extent reflected in the combined financial statements of TCI Group
and will result in an increase in TCI Group's Inter-Group Interest in
Liberty/Ventures Group.
(2) Proposed Merger
TCI and AT&T have agreed to a merger (the "AT&T/TCI Merger") pursuant
to, and subject to the terms and conditions set forth in the Agreement
and Plan of Restructuring and Merger, dated as of June 23, 1998 (the
"Merger Agreement"), among TCI, AT&T and an indirect wholly-owned
subsidiary of AT&T. In the Merger, TCI will become a wholly-owned
subsidiary of AT&T and each share of TCI Group Series A Stock will be
converted into .7757 of a share of common stock, par value $1.00 per
share, of AT&T ("AT&T Common Stock") and each share of TCI Group Series
B Stock will be converted into .8533 of a share of AT&T Common Stock.
The Liberty/Ventures Combination is not conditioned upon the AT&T/TCI
Merger, however, upon closing of the AT&T/TCI Merger, the shareholders
of Liberty/Ventures Group will be issued separate shares of a new
targeted stock of AT&T in exchange for the shares of Liberty/Ventures
Group Stock held. If the Liberty/Ventures Combination does not occur
prior to the AT&T/TCI Merger, then in the AT&T/TCI Merger, each share
of TCI Ventures Group Series A Stock and TCI Ventures Group Series B
Stock will be converted into .52 of a share of the new targeted stock
of AT&T into which the Liberty Group Series A Stock will be exchanged
("New Liberty Media Group Class A Tracking Stock") and the Liberty
Group Series B Stock will be exchanged ("New Liberty Media Group Class
B Tracking Stock" and together with the New Liberty Media Group Class A
Tracking Stock "New Liberty Media Group Tracking Stock"), respectively.
(continued)
280
<PAGE> 282
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective with the AT&T/TCI Merger, TCI's Convertible Preferred Stock
Series C-Liberty Media Group will be converted into a number of shares
of New Liberty Media Group Class A Tracking Stock equal to the current
conversion rate of such preferred stock (56.25 shares per preferred
share) and TCI's Redeemable Convertible Liberty Media Group Preferred
Stock, Series H will be converted into a number of shares of New
Liberty Media Group Class A Tracking Stock equal to the current
conversion rate of such preferred stock (0.590625 share per preferred
share).
The shares of New Liberty Media Group Tracking Stock to be issued in
the AT&T/TCI Merger will be a newly authorized class of common stock of
AT&T which will be intended to reflect the separate performance of the
businesses and assets attributed to Liberty/Ventures Group. Pursuant to
the Merger Agreement, immediately prior to the AT&T/TCI Merger, certain
assets attributed to Liberty/Ventures Group (including, among others,
the shares of AT&T Common Stock received in the merger of AT&T and
Teleport Communications Group, Inc. ("TCG") (see note 6), the stock of
@Home held by Liberty/Ventures Group, the assets and business of the
NDTC and Liberty/Ventures Group's equity interest in WTCI) will be
transferred to TCI Group in exchange for approximately $5.5 billion in
cash. Also, upon consummation of the AT&T/TCI Merger, through a new tax
sharing agreement between Liberty/Ventures Group and AT&T,
Liberty/Ventures Group will become entitled to the benefit of all of
the net operating loss carryforwards available to the entities included
in TCI's consolidated income tax return as of the date of the AT&T/TCI
Merger. Additionally, certain warrants currently attributed to TCI
Group will be transferred to Liberty/Ventures Group in exchange for up
to $176 million in cash (see note 12). Certain agreements to be entered
into at the time of the AT&T/TCI Merger as contemplated by the Merger
Agreement will, among other things, provide preferred vendor status to
Liberty/Ventures Group for digital basic distribution on AT&T's systems
of new programming services created by Liberty/Ventures Group and its
affiliates, provide for a renewal of existing affiliation agreements
and provide for the business of Liberty/Ventures Group to continue to
be managed following the AT&T/TCI Merger by certain members of TCI's
management who manage the businesses of Liberty/Ventures Group.
If TCI terminates the Merger Agreement due to (i) the failure of AT&T's
stockholders to approve the AT&T/TCI Merger prior to March 31, 1999,
(ii) the withdrawal or modification by the AT&T Board of Directors of
its approval of the transaction, or (iii) the failure to obtain
necessary governmental and regulatory approvals by September 30, 1999,
which failure occurs as a result of the announcement by AT&T of a
significant transaction which delays receipt of such governmental
approvals, AT&T will pay to TCI the sum of $1.75 billion in cash. If
AT&T terminates the Merger Agreement, under certain circumstances,
including the failure of TCI stockholders to approve the transaction
prior to March 31, 1999 or the withdrawal or modification by the Board
of its approval of the Merger, TCI will pay to AT&T the sum of $1.75
billion in cash.
(continued)
281
<PAGE> 283
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Consummation of the AT&T/TCI Merger is subject to the satisfaction or
waiver of customary conditions to closing, including but not limited
to, the separate approvals of the stockholders of AT&T and TCI, receipt
of all necessary governmental consents and approvals, and effectiveness
of the registration statement registering the AT&T Common Stock and New
Liberty Media Group Tracking Stock to be issued to TCI stockholders in
the AT&T/TCI Merger. As a result, there can be no assurance that the
AT&T/TCI Merger will be consummated or, if the AT&T/TCI Merger is
consummated, as to the date of such consummation.
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $79 million and $46 million for the nine
months ended September 30, 1998 and 1997, respectively. Cash paid for
income taxes during the nine months ended September 30, 1998 and 1997
was $19 million and $28 million, respectively.
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 136 403
Net liabilities assumed (25) (193)
Debt issued (65) --
Debt issued to related parties -- (430)
Deferred tax asset recorded in acquisition
-- 117
Minority interest in equity of acquired attributed
subsidiaries 39 (72)
Excess consideration paid over carryover basis of net
assets acquired from related party
-- 244
Liberty Group Stock issued -- (30)
Gain in connection with the issuance of shares by
attributed subsidiary (2) --
------------ ------------
Cash paid for acquisitions $ 83 39
============ ============
</TABLE>
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Costs of distribution agreements $ 83 --
============ ============
Common stock received in exchange for option (note 5)
$ -- 306
============ ============
Preferred stock received in exchange for common stock and note
receivable (note 7)
$ -- 371
============ ============
Property and equipment purchased under capital leases
$ -- 168
============ ============
</TABLE>
(continued)
282
<PAGE> 284
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Liberty/Ventures Group ceased to include Flextech p.l.c. ("Flextech")
in its combined financial results and began to account for Flextech
using the equity method of accounting, effective January 1, 1997. The
effects of changing the method of accounting for Liberty/Ventures
Group's ownership interest in Flextech as of September 30, 1997 from
the consolidation method to the equity method are summarized below
(amounts in millions):
<TABLE>
<S> <C>
Assets (other than cash and cash equivalents) reclassified
to investments in affiliates $ (177)
Liabilities reclassified to investments in affiliates 72
Minority interests in equity of attributed subsidiaries
reclassified to investments in affiliates 143
-----------
Decrease in cash and cash equivalents $ 38
===========
</TABLE>
(4) Investments in Affiliates
Liberty/Ventures Group has various investments accounted for under the
equity method. The following table includes Liberty/Ventures Group's
carrying amount of the more significant investments:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
USA Networks, Inc. ("USAI") and related investments $ 1,024 348
PCS Ventures 258 607
Telewest Communications plc ("Telewest") 432 324
Flextech 256 261
Cablevision S.A. ("Cablevision") 225 239
Various foreign equity investments (other than
Telewest, Flextech and Cablevision) 209 209
QVC, Inc. ("QVC") 172 134
TCG -- 295
Other 256 237
------------ ------------
$ 2,832 2,654
============ ============
</TABLE>
(continued)
283
<PAGE> 285
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Liberty/Ventures Group's affiliates for the periods in which
Liberty/Ventures Group used the equity method to account for such
affiliates are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1998 1997
------------ ------------
Combined Operations amounts in millions
<S> <C> <C>
Revenue $ 10,103 4,602
Operating expenses (9,548) (4,913)
Depreciation and amortization (1,891) (755)
------------ ------------
Operating loss (1,336) (1,066)
Interest expense (1,278) (423)
Other, net (83) (328)
------------ ------------
Net loss $ (2,697) (1,817)
============ ============
</TABLE>
In February 1998, pursuant to an Investment Agreement among Universal
Studios, Inc. ("Universal"), HSN, Inc. ("HSNI"), Home Shopping Network,
Inc. ("HSN") and Liberty/Ventures Group, dated as of October 1997 and
amended and restated as of December 1997, HSNI consummated a
transaction (the "Universal Transaction") through which USA Networks
Partners, Inc., a subsidiary of Universal, sold its 50% interest in
USAI, a New York general partnership, to HSNI and Universal contributed
the remaining 50% interest in USAI and its domestic television
production and distribution operations to HSNI. Subsequent to these
transactions, HSNI was renamed USAI. In connection with the Universal
Transaction, Universal, USAI, HSN and Liberty/Ventures Group became
parties to a number of other agreements relating to, among other
things, (i) the management of USAI, (ii) the purchase and sale or other
transfer of voting securities of USAI, including securities convertible
or exchangeable for voting securities of USAI, and (iii) the voting of
such securities.
At the closing of the Universal Transaction, Universal (i) was issued 6
million shares of USAI's Class B common stock, 7 million shares of
USAI's common stock and 109 million common equity shares ("LLC Shares")
of USANi LLC, a limited liability company formed to hold all of the
businesses of USAI and its subsidiaries, except for its broadcasting
business and its equity interest in Ticketmaster Group, Inc. and (ii)
received a cash payment of $1.3 billion. Pursuant to an Exchange
Agreement relating to the LLC Shares (the "LLC Exchange Agreement"),
approximately 74 million of the LLC Shares issued to Universal are each
exchangeable for one share of USAI's Class B common stock and the
remainder of the LLC Shares issued to Universal are each exchangeable
for one share of USAI's common stock.
(continued)
284
<PAGE> 286
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At the closing of the Universal Transaction, Liberty/Ventures Group was
issued 1.2 million shares of USAI's Class B common stock. Of such
shares, 800,000 shares of Class B common stock were contributed to BDTV
IV INC. (collectively with BDTV INC., BDTV II INC. and BDTV III INC.,
"BDTV"), a newly-formed entity having substantially the same terms as
BDTV INC., BDTV II INC. and BDTV III INC. (with the exception of
certain transfer restrictions) in which Liberty/Ventures Group owns
over 99% of the equity and none of the voting power (except for
protective rights with respect to certain fundamental corporate
actions) and Barry Diller owns less than 1% of the equity and all of
the voting power. Liberty/Ventures Group accounts for its investment in
BDTV under the equity method. In addition, Liberty/Ventures Group
purchased 10 LLC Shares at the closing of the Universal Transaction for
an aggregate purchase price of $200.
On June 24, 1998, USAI consummated the previously announced agreement
to acquire the remaining stock of Ticketmaster Group, Inc. which it did
not previously own through a tax-free merger (the "Ticketmaster
Transaction"). In connection with the increases in USAI's equity, net
of the dilution of Liberty/Ventures Group's ownership interest, that
resulted from the issuance of common stock by USAI in the Universal
Transaction and the Ticketmaster Transaction, Liberty/Ventures Group
recorded a $64 million increase to combined equity (after deducting a
deferred tax liability of $42 million) and an increase to investment in
affiliates of $106 million. No gain was recognized in the combined
statements of operations due primarily to Liberty/Ventures Group's
commitment to purchase additional equity interests in USAI.
In connection with the Universal Transaction, each of Universal and
Liberty/Ventures Group was granted a preemptive right with respect to
future issuances of USAI's common stock, subject to certain
limitations, to maintain their respective percentage ownership
interests in USAI that they had prior to such issuances. In connection
with such right, on June 4, 1998, Liberty/Ventures Group purchased
approximately 4.7 million shares of USAI's capital stock at $20 per
share as a result of the conversion by USAI of certain convertible
debentures whereby USAI common stock was issued to retire such
debentures. Additionally, on June 30 1998, Liberty/Ventures Group
contributed $300 million in cash to USANi LLC in exchange for an
aggregate of approximately 15 million LLC Shares. Liberty/Ventures
Group's cash purchase price was increased at an annual interest rate of
7.5% beginning from the date of the closing of the Universal
Transaction through the date of Liberty/Ventures Group's purchase of
such securities. In addition, on July 27, 1998, Liberty/Ventures Group
purchased approximately 7.9 million LLC Shares at $20 per share as a
result of the issuance of common stock by USAI in the Ticketmaster
Transaction. Pursuant to the LLC Exchange Agreement, each LLC Share
issued or to be issued to Liberty/Ventures Group is exchangeable for
one share of USAI's common stock.
(continued)
285
<PAGE> 287
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At September 30, 1998, Liberty/Ventures Group held 24.4 million shares
of USAI's common stock through BDTV and 5.2 million shares of USAI's
common stock directly. Additionally, Liberty/Ventures Group held 22.9
million LLC Shares at September 30, 1998 as well as shares of HSN's
common stock which are exchangeable for 16.6 million shares of USAI's
common stock. Liberty/Ventures Group's direct ownership of USAI is
restricted by order of the Federal Communications Commission ("FCC").
Assuming Liberty/Ventures Group had exchanged its shares in HSN and its
LLC Shares for USAI common stock, Liberty/Ventures Group would have
held at September 30, 1998, 69.1 million shares or 21% of USAI,
including shares held through BDTV. USAI's common stock had a closing
market value of $19.438 per share on September 30, 1998.
The PCS Ventures include Sprint Spectrum Holding Company, L. P.
("Sprint Spectrum") and MinorCo, L.P. (collectively, "Sprint PCS") and
PhillieCo Partnership I, L.P. ("PhillieCo"). The partners of each of
the Sprint PCS Partnerships are subsidiaries of Sprint Corporation
("Sprint"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and Liberty/Ventures Group. The partners of PhillieCo are
subsidiaries of Sprint, Cox and Liberty/Ventures Group.
Liberty/Ventures Group has a 30% partnership interest in each of the
Sprint PCS Partnerships and a 35% partnership interest in PhillieCo.
During the nine months ended September 30, 1998 and 1997, the PCS
Ventures accounted for $510 million and $304 million, respectively, of
Liberty/Ventures Group's share of affiliates' losses.
From inception through September 1998, the four partners have
contributed approximately $4.6 billion to Sprint PCS (of which
Liberty/Ventures Group contributed an aggregate of approximately $1.4
billion). Sprint PCS's business plan will require additional capital
financing prior to the end of 1998. Sources of funding for Sprint PCS's
capital requirements may include vendor financing, public offerings or
private placements of equity and/or debt securities, commercial bank
loans and/or capital contributions from the Sprint PCS partners.
However, there can be no assurance that any additional financing can be
obtained on a timely basis, on terms acceptable to Sprint PCS or the
Sprint PCS partners and within the limitations contained in the
agreements governing Sprint PCS's existing debt.
Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized
management to operate Sprint PCS in accordance with such budget. The
Sprint PCS partners may mutually agree to make additional capital
contributions. However, the Sprint PCS partners have no such obligation
in the absence of an approved budget, and there can be no assurance the
Sprint PCS partners will reach such an agreement or approve the 1998
proposed budget. In addition, the failure by the Sprint PCS partners to
approve a business plan may impair the ability of Sprint PCS to obtain
required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS partners could result in the
delay or abandonment of Sprint PCS's development and expansion plans
and expenditures, the failure to meet regulatory requirements or other
potential adverse consequences.
(continued)
286
<PAGE> 288
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership
board has resulted in the occurrence of a "Deadlock Event" under the
Sprint PCS partnership agreement as of January 1, 1998. Under the
Sprint PCS partnership agreement, if one of the Sprint PCS partners
refers the budget issue to the chief executive officers of the
corporate parents of the Sprint PCS partners for resolution pursuant to
specified procedures and the issue remains unresolved, buy/sell
provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other Sprint
PCS partners, or, in certain circumstances, liquidation of Sprint PCS.
In May 1998 the Sprint PCS partners entered into a series of agreements
pursuant to which Liberty/Ventures Group, Comcast and Cox would
exchange their respective interests in Sprint PCS and PhillieCo for
shares of a new class of tracking stock of Sprint which would track the
performance of Sprint's newly created "PCS Group" (which would
initially consist of Sprint PCS, PhillieCo and certain PCS licenses
which are separately owned by Sprint). The consummation of such
transactions is subject to a number of conditions, including the
approval of such transactions by the stockholders of Sprint. If such
transactions are consummated, Liberty/Ventures Group will initially
hold shares of Sprint PCS Group stock (as well as certain additional
securities of Sprint exercisable for or convertible into such
securities) representing approximately 24% of the equity value of
Sprint attributable to the PCS Group, subject to further dilution as a
result of additional expected issuances of shares of Sprint PCS stock
(including in connection with a proposed initial public offering of
shares of Sprint PCS stock that may be consummated in connection with
such transactions). In connection with the execution of such
agreements, the Sprint PCS partners agreed to make up to $400 million
in additional capital contributions (of which Liberty/Ventures Group's
share is $120 million) to Sprint PCS pending the closing of such
transactions. As of September 30, 1998, all of such additional capital
contributions had been made to Sprint PCS. If the above-described
transactions are consummated, Liberty/Ventures Group would begin to
account for its investment in the Sprint PCS stock as an
available-for-sale security. No assurance can be given that the
above-described transactions will be consummated.
Telewest currently operates and constructs cable television and
telephone systems in the United Kingdom ("UK"). Telewest accounted for
$90 million and $111 million of Liberty/Ventures Group's share of its
affiliates' losses during the nine months ended September 30, 1998 and
1997, respectively.
At September 30, 1998 Liberty/Ventures Group indirectly owned 463
million or 22% of the issued and outstanding Telewest ordinary shares.
The reported closing price on the London Stock Exchange of Telewest
ordinary shares was (pound)1.35 ($2.30) per share at September 30,
1998.
(continued)
287
<PAGE> 289
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which
holders of General Cable received 1.243 new Telewest shares and
(pound)0.65 ($1.11) in cash for each share of General Cable. In
addition, holders of American Depository shares of General Cable
("General Cable ADS") (each representing five General Cable shares)
received 6.215 new Telewest shares and (pound)3.25 ($5.53) in cash for
each share of General Cable ADS. Based upon Telewest's closing share
price of (pound)0.89 ($1.51) on April 14, 1998, the General Cable
Merger was valued at approximately (pound)649 million ($1.1 billion).
The cash portion of the General Cable Merger was financed through an
offer to qualifying Telewest shareholders for the purchase of
approximately 261 million new Telewest shares at a price of
(pound)0.925 ($1.57) per share (the "Telewest Offer"). Liberty/Ventures
Group subscribed to 85 million Telewest ordinary shares at an aggregate
cost of (pound)78 million ($133 million) in connection with the
Telewest Offer. Immediately following the Telewest Offer,
Liberty/Ventures Group held 28% of the issued and outstanding Telewest
ordinary shares.
In connection with the General Cable Merger, Liberty/Ventures Group
converted its entire holdings of Telewest convertible preference shares
(133 million shares) into Telewest ordinary shares. As a result of the
General Cable Merger, Liberty/Ventures Group's ownership interest in
Telewest decreased to 22%. In connection with the increase in
Telewest's equity, net of the dilution of Liberty/Ventures Group's
interest in Telewest, that resulted from the General Cable Merger,
Liberty/Ventures Group recorded a non-cash gain of $58 million (before
deducting deferred income tax expense of $20 million) during the third
quarter of 1998.
Based on the (pound)5.73 ($9.74) per share closing price of the
Flextech ordinary shares on the London Stock Exchange, the 58 million
Flextech ordinary shares owned by Liberty/Ventures Group had an
aggregate market value of (pound)332 million ($564 million) at
September 30, 1998.
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision to unaffiliated third parties. As a result, effective
October 1, 1997, TINTA ceased to consolidate Cablevision and began to
account for Cablevision using the equity method of accounting.
Cablevision accounted for $14 million of Liberty/Ventures Group's share
of its affiliates' losses during the nine months ended September 30,
1998.
Liberty/Ventures Group has an equity method investment in Fox/Liberty
Networks LLC ("Fox Sports") with The News Corporation Limited ("News
Corp"). Prior to the first quarter of 1998, Liberty/Ventures Group had
no obligation, nor intention, to fund Fox Sports. During 1998,
Liberty/Ventures Group made the determination to provide funding to Fox
Sports based on specific transactions consummated by Fox Sports.
Consequently, Liberty/Ventures Group's share of losses of Fox Sports of
$76 million for the nine months ended September 30, 1998 includes
previously unrecognized losses of Fox Sports of approximately $64
million. Losses for Fox Sports were not recognized in prior periods due
to the fact that Liberty/Ventures Group's investment in Fox Sports was
less than zero.
(continued)
288
<PAGE> 290
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Liberty/Ventures Group has another equity method investment in a sports
venture ("Fox Sports International") with News Corp which accounted for
$26 million and $11 million of Liberty/Ventures Group's share of its
affiliates' losses during the nine months ended September 30, 1998 and
1997, respectively. Additionally, Liberty/Ventures Group has an equity
method investment in Flextech, an entity engaged in the video
distribution systems in the UK, and other less significant investments
in affiliates in video distribution and programming businesses located
in the UK, other parts of Europe, Asia, Latin America and certain other
foreign countries. In the aggregate, such other foreign investments in
affiliates other than Telewest, Fox Sports International and
Cablevision, accounted for $64 million and $55 million of
Liberty/Ventures Group's share of its affiliates' losses during the
nine months ended September 30, 1998 and 1997, respectively.
TCG accounted for $32 million and $43 million of Liberty/Ventures
Group's share of its affiliates' losses during the nine months ended
September 30, 1998 and 1997, respectively.
Certain of Liberty/Ventures Group's affiliates are general partnerships
and any subsidiary of TCI which is attributed to Liberty/Ventures Group
that is a general partner in a general partnership is, as such, liable
as a matter of partnership law for all debts (other than non-recourse
debts) of that partnership in the event liabilities of that partnership
were to exceed its assets.
(5) Investment in Time Warner
Liberty/Ventures Group holds 57 million shares of a separate series of
Time Warner common stock with limited voting rights (the "TW Exchange
Stock"). Holders of the TW Exchange Stock are entitled to one
one-hundredth (l/100th) of a vote for each share with respect to the
election of directors. Holders of the TW Exchange Stock will not have
any other voting rights, except as required by law or with respect to
limited matters, including amendments of the terms of the TW Exchange
Stock adverse to such holders. Subject to the federal communications
laws, each share of the TW Exchange Stock will be convertible at any
time at the option of the holder on a one-for-one basis for a share of
Time Warner common stock. Holders of TW Exchange Stock are entitled to
receive dividends ratably with the Time Warner common stock and to
share ratably with the holders of Time Warner common stock in assets
remaining for common stockholders upon dissolution, liquidation or
winding up of Time Warner.
As security for borrowings under one of its credit facilities,
Liberty/Ventures Group has pledged a portion of its TW Exchange Stock.
At September 30, 1998 such pledged portion had an aggregate fair value
of approximately $1.9 billion.
(continued)
289
<PAGE> 291
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On June 24, 1997 Liberty/Ventures Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern
Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
(together with Southern, the "Southern Business") through a purchase of
assets (the "Southern Option"). Liberty/Ventures Group received 6.4
million shares of TW Exchange Stock valued at $306 million in
consideration for the grant. In September 1997, Time Warner exercised
the Southern Option. Pursuant to the Southern Option, Time Warner
acquired the Southern Business, effective January 1, 1998, for $213
million in cash. Liberty/Ventures Group recognized a $515 million
pre-tax gain in connection with such transactions in the first quarter
of 1998.
(6) Investment in AT&T
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. As a result of such merger, Liberty/Ventures Group
received in exchange for all of its interest in TCG, approximately 47
million shares of AT&T Common Stock. Liberty/Ventures Group recognized
a $2.3 billion gain (excluding related tax expense of $883 million) on
such transaction during the third quarter of 1998 based on the
difference between the carrying value of Liberty/Ventures Group's
interest in TCG and the fair value of the AT&T Common Stock received.
Liberty/Ventures Group accounts for its equity interest in AT&T as an
available-for-sale security.
On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG in the
ratio of .90909 of a share of TCG stock for each share of ACC stock. As
a result of such merger transaction, Liberty/Ventures Group's interest
in TCG was reduced to approximately 26%. In connection with the
increase in TCG's equity, net of the dilution of Liberty/Ventures
Group's interest in TCG, that resulted from such merger,
Liberty/Ventures Group recorded a non-cash gain of $201 million (before
deducting deferred income tax expense of $71 million).
During the nine months ended September 30, 1997, TCG issued 4.9 million
shares of its Class A common stock for certain acquisitions. The total
consideration paid by TCG through the issuance of common stock was
approximately $93 million. As a result of such share issuances, TCI
Ventures Group's ownership interest in TCG was reduced to approximately
30%. Accordingly, as a result of the increase in TCG's equity, net of
the dilution of Liberty/Ventures Group's ownership interest in TCG,
Liberty/Ventures Group recognized a gain of $21 million (excluding
related tax expense of $8 million).
(continued)
290
<PAGE> 292
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(7) Other Investments
Other investments and related receivables are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Marketable equity securities, at fair value $ 241 248
Investment in preferred stock, at cost, including premium
371 371
Investment in General Instrument Corporation ("GI") (note 12) 396 --
Other investments, at cost, and related receivables
184 76
---------- ----------
$ 1,192 695
========== ==========
</TABLE>
On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
Liberty Media Group, which held non-voting Class C common stock of
International Family Entertainment, Inc. ("IFE") ("Class C Stock") and
$23 million of IFE 6% convertible secured notes due 2004, convertible
into Class C Stock, ("Convertible Notes"), contributed its Class C
Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in
exchange for a new series of 30 year non-convertible 9% preferred stock
of FKW with a stated value of $345 million (the "FKW Preferred Stock").
As a result of the exchange, Liberty Media Group recognized a pre-tax
gain of approximately $304 million during the third quarter of 1997.
Management of Liberty/Ventures Group estimates the market value,
calculated using a variety of approaches including, multiple of cash
flow, per subscriber value, a value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty/Ventures
Group's other investments aggregated $1,321 million and $766 million at
September 30, 1998 and December 31, 1997, respectively. No independent
appraisals were conducted for those assets.
(8) Acquisitions and Dispositions
On January 12, 1998, Liberty/Ventures Group acquired from a minority
shareholder of United Video Satellite Group, Inc. ("UVSG") 24.8 million
shares of UVSG Class A common stock (as adjusted for a two-for-one
stock split) in exchange for 12.7 million shares of TCI Ventures Group
Series A Stock and 7.3 million shares of Liberty Group Series A Stock.
The aggregate value assigned to the shares issued by TCI was based upon
the market value of such shares at the time the transaction was
announced. As a result of such transaction Liberty/Ventures Group
increased its ownership in the equity of UVSG to approximately 73% and
the voting power increased to 93%. In connection with the issuance of
common stock in such transaction, during the first quarter of 1998,
Liberty/Ventures Group recorded a $346 million increase to combined
equity.
(continued)
291
<PAGE> 293
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("SNG") in exchange
for an approximate 20% interest in SNG. As a result of such
transaction, Liberty/Ventures Group's ownership interest in SNG
decreased to approximately 80%. In connection with the increase in
SNG's equity, net of the dilution of Liberty/Ventures Group's ownership
interest in SNG, that resulted from such transaction, Liberty/Ventures
Group recognized a gain of $38 million (before deducting deferred
income tax expense of $15 million). Turner Vision's contribution to SNG
was accounted for as a purchase and the $61 million excess of the
purchase price over the fair value of the net assets acquired was
recorded as excess cost and is being amortized over five years.
During the first quarter of 1998, TCI Music, Inc. ("TCI Music") issued
approximately 382,000 shares of its Series A Common Stock in connection
with certain acquisitions. In connection with the issuance of such
shares, Liberty/Ventures Group's ownership interest was diluted to
80.7% and Liberty/Ventures Group recorded a $2 million increase to
combined equity. No gain was recognized in the combined statements of
operations due primarily to Liberty/Ventures Group's contingent
obligation to purchase certain shares from shareholders of TCI Music
(see note 11).
On June 11, 1998, UVSG and News Corp. announced the signing of a
definitive agreement whereby News Corp.'s TV Guide properties will be
combined with UVSG to create a platform for offering television guide
services to consumers and advertising. As part of this combination, a
unit of News Corp. will receive consideration consisting of $800
million in cash and 60 million shares of UVSG's stock (as adjusted for
a two-for-one stock split), including 22.5 million shares of its Class
A common stock and 37.5 million shares of its Class B common stock (as
adjusted for a two-for-one stock split). As a result of the
transaction, and another pending transaction, News Corp.,
Liberty/Ventures Group and UVSG's public stockholders will own on an
economic basis approximately 40%, 44% and 16%, respectively, of UVSG.
Following such transactions, News Corp. and Liberty/Ventures Group will
each have approximately 48% of the voting power of UVSG's outstanding
stock. Consummation of this transaction is subject to UVSG shareholder
approval and certain regulatory approvals. Upon consummation,
Liberty/Ventures Group will account for its interest in UVSG under the
equity method of accounting. No assurance can be given that such
transaction will be consummated.
On August 24, 1998, Liberty/Ventures Group purchased 100% of the issued
and outstanding common stock of Pramer S.A. ("Pramer"), an Argentine
programming company, for $32 million in cash and the issuance of notes
payable in the amount of $65 million (the "Pramer Notes"). The $101
million excess cost over acquired net assets is being amortized over
ten years. See note 10.
(continued)
292
<PAGE> 294
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(9) At Home Corporation
During the third quarter of 1998, @Home completed a public offering
(the "@Home Offering") in which 2.9 million shares of @Home common
stock were sold for net cash proceeds of approximately $125 million. In
connection with the @Home Offering, (i) Liberty/Ventures Group paid $37
million to purchase 800,000 shares of @Home common stock and (ii)
Liberty/Ventures Group's economic interest in @Home decreased to 38.8%.
In connection with the increase in @Home's equity net of the dilution
of Liberty/Ventures Group's ownership interest in @Home,
Liberty/Ventures Group recognized a gain of $17 million during the
third quarter of 1998.
In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs.
On July 11, 1997, @Home completed its initial public offering (the
"@Home IPO"), in which 10.4 million shares of @Home common stock were
sold for net cash proceeds of approximately $100 million. As a result
of the @Home IPO, Liberty/Ventures Group's economic interest in @Home
decreased from 43% to 39%, which economic interest represents an
approximate 72% voting interest. In connection with the increase in
@Home's equity, net of the dilution of Liberty/Ventures Group's
ownership interest in @Home, Liberty/Ventures Group recognized a gain
of $60 million during the third quarter of 1997.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home
has issued warrants to such cable operators to purchase 17.9 million
shares of @Home's Series A common stock. Of these warrants, warrants to
purchase 10.6 million shares were exercisable as of September 30, 1998.
@Home may issue additional stock, or warrants in connection with its
efforts to expand its distribution of the @Home service to other cable
operators. The exercise of warrants or stock issued by @Home will
reduce Liberty/Ventures Group's equity interest and voting power in
@Home. See note 14.
Pursuant to a shareholders' agreement among certain shareholders of
@Home, under certain circumstances, Liberty/Ventures Group could be
required to sell a portion of its common stock of @Home to such
shareholders.
(continued)
293
<PAGE> 295
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(10) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
amounts in millions
<S> <C> <C>
Bank credit facilities:
Communications Capital Corp $ 432 292
LMC Capital LLC (a) 620 --
Encore Media Group LLC (b) 300 --
TCI Ventures Group LLC (c) 400 --
Liberty/Ventures Facility (d) 70 --
TCI Music 89 53
TINTA's Puerto Rico subsidiary (e) 90 45
4-1/2% Convertible Subordinated Debentures 345 345
The Pramer Notes (f) 66 --
Other 42 22
-------------- --------------
$ 2,454 757
============== ==============
</TABLE>
(a) Payable by LMC Capital LLC ("LMC Capital")
This revolving credit agreement, dated June 4, 1998, provides
for borrowings up to $640 million through June 2003. Interest
on borrowings under the agreement is tied to, at LMC Capital's
option, the bank's prime rate or London Interbank Offered Rate
("LIBOR") plus an applicable margin. LMC Capital must pay an
annual commitment fee of .2% of the unfunded portion of the
commitment. The banks lend against collateral designated by
LMC Capital ("Designated Assets"). The components of the
Designated Assets may be changed from time to time. The
aggregate market value of the Designated Assets, as determined
by certain criteria in the LMC Capital agreement, must at all
times exceed an amount equal to three times the total
outstandings under the facility. The Designated Assets at
September 30, 1998 were Liberty/Ventures Group's holdings in
Discovery Communications, Inc., QVC and the FKW Preferred
Stock. The carrying value of the Designated Assets as of
September 30, 1998 was $590 million. Recourse to the banks for
payment of LMC Capital's obligations is limited solely to the
Designated Assets.
(b) Payable by Encore Media Group LLC ("Encore Media Group")
On July 7, 1997, Encore Media Group obtained a $625 million
senior, secured facility in the form of a $225 million
reducing revolving line of credit and a $400 million, 364-day
revolving credit facility convertible to a term loan. In June,
1998, Encore Media Group converted the 364-day facility to a
$300 million term loan.
(continued)
294
<PAGE> 296
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) Payable by TCI Ventures Group LLC
On March 10, 1998, TCI Ventures Group LLC entered into a bank
credit facility with a term of one year which provides for
aggregate borrowings of up to $400 million (the "Ventures
Group Bank Facility"). Borrowings under the Ventures Group
Bank Facility bear interest at variable rates. TCI Ventures
Group LLC is required to pay a commitment fee equal to 0.15%
on the average daily unused portion of the maximum borrowing
commitments. The Ventures Group Bank Facility contains
restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and includes
limitations on indebtedness, liens and encumbrances,
acquisitions, dispositions and dividends.
(d) Payable by Liberty/Ventures Group
Effective September 30, 1998, Liberty/Ventures Group entered
into a revolving credit agreement which provides for
borrowings up to $800 million (the "Liberty/Ventures
Facility") through September 29, 1999. Interest on borrowings
under the Liberty/Ventures Facility is tied to, at
Liberty/Ventures Group's option, the bank's prime rate or
LIBOR plus an applicable margin. Liberty/ Ventures Group must
pay an annual commitment fee of .2% of the unfunded portion of
the commitment. The Liberty/Ventures Facility contains certain
provisions which limit Liberty/Ventures Group as to additional
indebtedness, sale of assets, liens, guarantees and
distributions.
(e) Payable by Puerto Rico Subsidiary
TINTA's Puerto Rico subsidiary (the "Puerto Rico Subsidiary")
has a reducing revolving bank facility which is unsecured and
provides for maximum borrowing commitments of $100 million
(the "Puerto Rico Bank Facility"). On September 21, 1998,
Hurricane Georges struck Puerto Rico and caused considerable
property damage to the area in general, including the Puerto
Rico Subsidiary's cable television systems. The Puerto Rico
Subsidiary has submitted a claim to its insurance carrier for
its damaged property and loss of revenue. The Puerto Rico
Subsidiary anticipates that its estimated loss of revenue will
exceed its business interruption insurance. Such uncovered
losses could cause the Puerto Rico Subsidiary to be in
violation of certain financial covenants of the Puerto Rico
Bank Facility in the fourth quarter of 1998 and the first
quarter of 1999. Violations of certain financial covenants
will prevent the Puerto Rico Subsidiary from borrowing any
unused borrowing commitments and could result in the
acceleration of amounts due under the Puerto Rico Bank
Facility. The Puerto Rico Subsidiary is in discussions with
the lenders of the Puerto Rico Bank Facility regarding
possible remedies of any potential violations of financial
covenants. See note 12.
(continued)
295
<PAGE> 297
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(f) The Pramer Notes
In connection with Liberty/Ventures Group's acquisition of
Pramer, Liberty/Ventures Group issued $65 million principal
amount of secured promissory notes. Interest of $731,000 on
such notes has been included in the principal amount at
September 30, 1998. Liberty/Ventures Group made an $11 million
payment on the Pramer Notes on October 1, 1998 and the
remainder of the Pramer Notes are due in 20 equal monthly
installments beginning October 15, 1998 and accrue interest at
9.25%.
With the exception of the 4-1/2% Convertible Subordinated Debentures,
which had a fair value of $336 million at September 30, 1998,
Liberty/Ventures Group believes that the carrying value of
Liberty/Ventures Group's debt approximated its fair value at September
30, 1998.
(11) Combined Equity
In conjunction with a stock repurchase program or similar transaction,
TCI may elect to sell put options on its own common stock. Proceeds
from any sales of puts with respect to TCI Ventures Group Stock and
Liberty Group Stock are reflected by Liberty/Ventures Group as an
increase to combined equity, and an amount equal to the maximum
redemption amount under unexpired put options with respect to TCI
Ventures Group Stock and Liberty Group Stock is reflected as an
"obligation to redeem common stock" in the accompanying combined
balance sheets.
During the nine months ended September 30, 1998, pursuant to the stock
repurchase program, 239,450 shares of TCI Ventures Group Stock and
766,783 shares of Liberty Group Stock were repurchased at an aggregate
cost of approximately $30 million. Such amount is reflected as a
decrease to combined equity in the accompanying combined financial
statements.
On July 13, 1998, Liberty/Ventures Group announced that it had made a
proposal to TINTA concerning the acquisition by Liberty/Ventures Group
of all of the outstanding shares of common stock of TINTA not
beneficially owned by Liberty/Ventures Group. Under the proposal,
Liberty/Ventures Group would exchange, in a merger transaction, 0.58 of
a share of Liberty/Ventures Group Series A Stock (or Liberty Group
Series A Stock if prior to the Liberty/Ventures Combination) for each
share of Tele-Communications International, Inc. Series A Common Stock
acquired by Liberty/Ventures Group in the merger. Liberty/Ventures
Group's proposal, and a proposed merger agreement, has been approved by
TINTA's board of directors. The merger agreement provides that if the
.58 exchange ratio would yield a value to TINTA stockholders (other
than Liberty/Ventures Group) of less than $22.00 per TINTA share, then
Liberty/Ventures Group would be required to either increase the
exchange ratio to an amount that would yield a value of $22.00 per
share or terminate the merger agreement. Such value will be based upon
the average closing sales price of a share of Liberty/Ventures Group
Series A Stock (or Liberty Group Series A Stock if prior to the
Liberty/Ventures Combination) before the closing date of the merger.
Consummation of the merger is expected to occur in the fourth quarter
of 1998.
(continued)
296
<PAGE> 298
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the fourth quarter of 1997, TCI entered into a Total Return
Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the
Equity Swap Facility, TCI has the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares
("Equity Swap Shares") of TCI Group Series A Stock and TCI Ventures
Group Series A Stock with an aggregate purchase price of up to $300
million. TCI has the right, but not the obligation, to purchase Equity
Swap Shares through the September 30, 2000 termination date of the
Equity Swap Facility. During such period, TCI is to settle periodically
any increase or decrease in the market value of the Equity Swap Shares.
If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from
the other Equity Swap Shares. If the market value of Equity Swap Shares
is less than the Counterparty's cost, TCI, at its option, will settle
such difference with shares of TCI Group Series A Stock or TCI Ventures
Group Series A Stock or, subject to certain conditions, with cash or
letters of credit. In addition, TCI is required to periodically pay the
Counterparty a fee equal to a LIBOR-based rate on the Counterparty's
cost to acquire the Equity Swap Shares. Due to TCI's ability to issue
shares to settle periodic price fluctuation and fees under the Equity
Swap Facility, TCI records all amounts received or paid under this
arrangement as increases or decreases, respectively, to equity. As of
September 30, 1998, the Equity Swap Facility had acquired 4.9 million
shares of TCI Group Series A Stock and 1.2 million shares of TCI
Ventures Group Series A Stock at an aggregate cost that was
approximately $49 million less than the fair value of such Equity Swap
Shares at September 30, 1998. The costs and benefits associated with
the TCI Ventures Group Series A Stock held by the Equity Swap Facility
are attributed to Liberty/Ventures Group.
Stock Options and Stock Appreciation Rights
Liberty/Ventures Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights on
certain TCI common stock (collectively, "Awards") granted by TCI to
certain TCI employees and/or directors who are involved with
Liberty/Ventures Group. Estimated compensation relating to stock
appreciation rights ("SARs") has been recorded through September 30,
1998, and is subject to future adjustment based upon vesting and market
value, and ultimately, on the final determination of market value when
such rights are exercised. As allowed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), Liberty/Ventures Group continues to account for
stock based compensation pursuant to Accounting Principles Board
Opinion No. 25, which Liberty/Ventures Group estimates that
compensation expense would not be materially different under Statement
123. The estimated compensation adjustment with respect to TCI SARs
resulted in increases to Liberty/Ventures Group's share of TCI's stock
compensation liability of $238 million and $68 million for the nine
months ended September 30, 1998 and 1997, respectively. In addition,
for the nine months ended September 30, 1998, Liberty/Ventures Group
made cash payments relating to its share of TCI's stock compensation
obligations of $75 million. The payable or receivable arising from the
compensation related to the Awards is included in the amount due to
related parties.
(continued)
297
<PAGE> 299
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Transactions with Officers and Directors
On January 5, 1998, TCI announced that a settlement (the "Magness
Settlement") had been reached in the litigation brought against it and
other parties in connection with the administration of the Estate of
Bob Magness (the "Magness Estate"), the late founder and former
Chairman of the Board of TCI.
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr.
John C. Malone, and Dr. Malone's wife (together with Dr. Malone, the
"Malones"), under which the Malones granted to TCI the right to acquire
any shares of TCI stock which are entitled to cast more than one vote
per share (the "High-Voting Shares") owned by the Malones, which
currently consist of an aggregate of approximately 60 million
High-Voting shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third
persons. In either such event, TCI has the right to acquire the shares
at a maximum price equal to the then relevant market price of shares of
Series A Stock plus a ten percent premium. The Malones also agreed that
if TCI were ever to be sold to another entity, then the maximum premium
that the Malones would receive on their High-Voting Shares would be no
greater than a ten percent premium over the price paid for the relevant
shares of Series A Stock. TCI paid $150 million to the Malones in
consideration of them entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness (the first wife of Bob
Magness) and the Magness Estate (collectively, the "Magness Family")
also entered into a call agreement with TCI (with substantially the
same terms as the one entered into by the Malones, including a call on
the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of
approximately 49 million High-Voting Shares. The Magness Family was
paid $124 million by TCI in consideration of them entering into the
Magness Call Agreement. Additionally, on February 9, 1998, the Magness
Family entered into a stockholders' agreement with the Malones and TCI
under which (i) the Magness Family and the Malones agreed to consult
with each other in connection with matters to be brought to the vote of
TCI's stockholders, subject to the proviso that if they cannot mutually
agree on how to vote the shares, Dr. Malone has an irrevocable proxy to
vote the High-Voting Shares owned by the Magness Family, (ii) the
Magness Family may designate a nominee for the Board and Dr. Malone has
agreed to vote his High Voting Shares for such nominee and (iii)
certain "tag along rights" have been created in favor of the Magness
Family and certain "drag along rights" have been created in favor of
the Malones.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was
allocated to each of the Groups. Liberty/Ventures Group's share of the
Call Payments of $140 million was paid during the first quarter of 1998
and is reflected as a reduction of combined equity.
(continued)
298
<PAGE> 300
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Transactions with TCI and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty/Ventures Group at rates set at the beginning of the year based
on projected utilization for that year. During the nine months ended
September 30, 1998 and 1997 Liberty/Ventures Group was allocated $12
million and $8 million, respectively, in corporate general and
administrative costs by TCI Group.
Certain subsidiaries attributed to Liberty/Ventures Group produce
and/or distribute sports and other programming and other services to
cable television operators (including TCI Group) and others. Charges to
TCI Group are based upon customary rates charged to others.
A subsidiary that was a member of Liberty/Ventures Group, leases
certain equipment under a capital lease. During 1997, such equipment
was subleased to TCI Group under an operating lease. In January 1998,
TCI Group paid $7 million to Liberty/Ventures Group in exchange for
Liberty/Ventures Group's assignment of its ownership interest in such
attributed subsidiary to TCI Group. Due to the related party nature of
the transaction, the $50 million total of the cash payment and the
historical cost of the net liabilities assumed by TCI Group (including
capital lease obligations aggregating $176 million) has been reflected
as an increase to combined equity.
The Puerto Rico Subsidiary purchases programming services from TCI
Group. The charges, which approximate TCI Group's cost and are based on
the aggregate number of subscribers served by the Puerto Rico
Subsidiary, aggregated $4 million and $5 million during the nine months
ended September 30, 1998 and 1997, respectively.
In 1996, a subsidiary attributed to Liberty/Ventures Group (i) issued
preferred stock in connection with a previous acquisition, which is
convertible at the option of the holders into 1,084,056 of TCI Group
Series A Common Stock beginning in April 1999 or sooner in the event of
a change in control of TCI and (ii) acquired an option contract from
TCI Group in exchange for a $14 million increase in the intercompany
amount due to TCI Group. Such option contract provided Liberty/Ventures
Group with the right to acquire 1,084,056 shares of TCI Group Series A
Stock at a price equivalent to the fair value at the time of exercise
less $14.625 per share. During September 1998, TCI Group assigned its
obligation under the option contract to Liberty/Ventures Group. As a
result of such assignment, Liberty/Ventures Group recorded a $16
million reduction to the intercompany amount due to TCI Group and a
corresponding increase to combined equity. In July 1998,
Liberty/Ventures Group entered into an equity swap transaction with a
commercial bank, which provides Liberty/Ventures Group with the right
but not the obligation to acquire 1,084,056 shares of TCI Group Series
A Stock for approximately $45 million on or before April 19, 1999. In
the event Liberty/Ventures Group does not exercise its right to acquire
such shares, any difference between the counterparty's cost and the
market value of the shares on the settlement date will be settled in
cash or shares of Liberty/Ventures Group Series A Stock (or TCI
Ventures Group Series A Stock if prior to the Liberty/Ventures
Combination) at Liberty/Ventures Group's option. Such shares could be
used to satisfy the exchange requirements of the aforementioned
preferred stock.
(continued)
299
<PAGE> 301
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Cablevision purchases programming services from certain affiliates. The
related charges generally are based upon the number of Cablevision's
subscribers that receive the respective services. During the nine
months ended September 30, 1997, such charges aggregated $12 million.
Additionally, certain of Cablevision's general and administrative
functions are provided by affiliates. The related charges, which
generally are based upon the respective affiliate's cost of providing
such functions, aggregated $2 million during the nine months ended
September 30, 1997. The above-described programming and general and
administrative charges are included in operating costs in the
accompanying combined statements of operations.
On July 11, 1997, TCI Music merged with DMX, Inc. (the "DMX Merger").
In connection with the DMX Merger, TCI assumed a contingent obligation
to purchase from all holders who tender shares and rights in accordance
with the terms of a Rights Agreement (the "Rights Agreement") up to 15
million shares (7 million of which are owned by Liberty/Ventures Group)
of TCI Music common stock at a price of $8.00 per share. Simultaneously
with the DMX Merger, Liberty/Ventures Group acquired all of the
TCI-owned common stock of TCI Music by agreeing to reimburse TCI for
any amounts required to be paid by TCI pursuant to TCI's contingent
obligation under the Rights Agreement and issuing an $80 million
promissory note (the "Music Note") to TCI. Liberty/Ventures Group has
recorded its contingent obligation to purchase such shares as a
component of minority interest in equity of attributed subsidiaries in
the accompanying combined financial statements. Prior to the July 1998
expiration of the rights under the Right Agreement, Liberty/Ventures
Group was notified of the tender of 4.9 million shares and associated
rights. On August 27, 1998, Liberty/Ventures Group paid $39 million to
satisfy TCI's obligation under the Rights Agreement.
Due to Related Parties
The components of "Due to related parties" are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
amounts in millions
<S> <C> <C>
Note receivable from TCI Group $ -- (88)
Notes payable to TCI Group, including accrued interest
122 378
Intercompany account 370 240
-------------- --------------
$ 492 530
============== ==============
</TABLE>
Amounts outstanding under note receivable from TCI Group were repaid in
their entirety during the third quarter of 1998. Included in "dividend
and interest income" in the combined statements of operations is
interest income from TCI Group amounting to $2 million and $4 million
for the nine months ended September 30, 1998 and 1997, respectively.
(continued)
300
<PAGE> 302
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Amounts outstanding at September 30, 1998 under the notes payable to
TCI Group bear interest at varying rates. Interest expense to TCI Group
for the nine months ended September 30, 1998 and 1997 amounted to $8
million and $7 million, respectively, and is included in "interest
expense" in the combined statements of operations. During the second
quarter of 1998, TCI issued 153,183 shares of Liberty Group Series B
Stock valued at $5 million to an individual who is an officer and
director of TCI for the benefit of entities attributed to TCI Group,
accordingly, the Music Note was reduced by such amount.
TCI Group has provided a revolving loan facility (the "Ventures
Intergroup Credit Facility") to Liberty/Ventures Group for a five-year
period commencing on September 10, 1997. Borrowings under the Ventures
Intergroup Credit Facility are included in Notes Payable to TCI Group
in the table above. Such facility permits aggregate outstanding
borrowings at any one time of up to $500 million (subject to reduction
as provided below), which borrowings bear interest at a rate per annum
equal to The Bank of New York's prime rate (as in effect from time to
time) plus 1% per annum, payable quarterly. A commitment fee equal to
3/8% per annum of the average unborrowed availability under the
Ventures Intergroup Credit Facility is payable by Liberty/Ventures
Group to TCI Group on a quarterly basis. Such commitment fee aggregated
$1 million for the nine months ended September 30, 1998.
The non-interest bearing intercompany account includes certain income
tax and stock compensation allocations that are to be settled at some
future date. All other amounts included in the intercompany account are
to be settled within thirty days following notification.
(12) Commitments and Contingencies
Encore Media Group is obligated to pay fees for the rights to exhibit
certain films that are released by various producers through 2017 (the
"Film Licensing Obligations"). Based on customer levels at September
30, 1998, these agreements require minimum payments aggregating
approximately $703 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.
On November 9, 1998, Cablevision and the lenders under its $1.1 billion
loan facility agreed to an extension of $950 million of outstanding
borrowings under the facility until December 15, 1998. At that time,
outstanding borrowings are to be refinanced through (i) $550 million of
indebtedness, which is expected to be issued under Cablevision's medium
term note program, and (ii) $400 million of support from Cablevision's
shareholder's, including TINTA. TINTA's portion of such support
aggregates approximately $85 million, and will be made through (i) a
$42 million capital contribution to Cablevision and (ii) the guarantee
of senior indebtedness of Cablevision and/or subordinated loans from
TINTA to Cablevision in the aggregate amount of $42 million.
(continued)
301
<PAGE> 303
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the fourth quarter of 1998, one of the Cablevision shareholders
exercised a put right that, under certain circumstances, could require
TINTA to purchase a portion of such shareholder's ownership interest
for cash consideration of up to $36 million, one-third of which would
be paid on December 15, 1998 and the remaining amount would be paid in
four semi-annual installments. Additionally, the Cablevision
shareholders' agreement contains a buy-sell provision that, under
certain circumstances, could require TINTA to purchase other
shareholders' ownership interests.
TINTA has guaranteed the obligation of an affiliate ("The Premium Movie
Partnership") to pay fees for the license to exhibit certain films
through 2000. Although the aggregate amount of The Premium Movie
Partnership's license fee obligations is not currently estimable, TINTA
believes that the aggregate payments pursuant to such obligations could
be significant. If TINTA were to fail to fulfill its obligations under
the guarantee, the beneficiaries have the right to demand an aggregate
payment from TINTA of approximately $32 million. Although TINTA has not
had to perform under such guarantee to date, TINTA cannot be certain
that it will not be required to perform under such guarantee in the
future.
Flextech has undertaken to finance the working capital requirements of
a joint venture, (the "Principal Joint Venture") formed with BBC
Worldwide Limited ("BBC Worldwide") and is obligated to provide the
Principal Joint Venture with a primary credit facility of (pound)88
million ($150 million) and subject to certain restrictions, a standby
credit facility of (pound)30 million ($51 million). As of September 30,
1998, the Principal Joint Venture had borrowed (pound)13.6 million
($23.1 million) under the primary credit facility. If Flextech defaults
in its funding obligation to the Principal Joint Venture and fails to
cure within 42 days after receipt of notice from BBC Worldwide, BBC
Worldwide is entitled, within the following 90 days, to require that
TINTA assume all of Flextech's funding obligations to the Principal
Joint Venture.
TINTA has formed strategic partnerships with News Corp., Organizacoes
Globo and Group Televisa S.A. to develop and operate a direct-to-home
satellite service for Latin America, Mexico, and various Central and
South American countries (collectively, the "DTH Ventures"). As of
September 30, 1998, TINTA had guaranteed approximately $174 million of
the DTH Ventures' financial obligations.
Liberty/Ventures Group has guaranteed notes payable and other
obligations (the "Guaranteed Obligations") of certain affiliates. At
September 30, 1998, the U.S. dollar equivalent of the amounts borrowed
pursuant to the Guaranteed Obligations aggregated approximately $123
million.
Liberty/Ventures Group leases business offices, has entered into pole
rental and transponder lease agreements and uses certain equipment
under lease arrangements.
(continued)
302
<PAGE> 304
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective as of December 16, 1997, NDTC, on behalf of TCI
Communications, Inc. 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 will be designed and manufactured to be
compatible and interoperable with the OpenCable(TM) architecture
specifications adopted by CableLabs, the cable television industry's
research and development consortium, in November 1997. NDTC has agreed
that Approved Purchasers will purchase, in the aggregate, a minimum of
6.5 million set-top devices during the calendar years 1998, 1999 and
2000 at an average price of $318 per set-top device. Through September
30, 1998, approximately 1 million set-top devices had been purchased
pursuant to this commitment. GI agreed to provide NDTC and its Approved
Purchasers the most favorable prices, terms and conditions made
available by GI to any customer purchasing advanced digital set-top
devices. In connection with NDTC's purchase commitment, GI agreed to
grant warrants to purchase its common stock proportional to the number
of devices ordered by each organization, which as of the effective date
of the Digital Terminal Purchase Agreement, would have represented at
least a 10% equity interest in GI (on a fully diluted basis). Such
warrants vest as annual purchase commitments are met. The value
associated with such equity interest will be attributed to TCI Group
upon purchase and deployment of the digital set-top devices. See note
2. 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, Liberty/Ventures Group acquired 21.4 million shares
of restricted stock of GI in exchange for (i) certain of the assets of
NDTC's set-top authorization business, (ii) the license of certain
related software to GI, (iii) a $50 million promissory note from
Liberty/Ventures Group to GI and (iv) a nine year revenue guarantee
from Liberty/Ventures Group in favor of GI. In connection therewith,
NDTC also entered into a service agreement pursuant to which it will
provide certain postcontract services to GI's set-top authorization
business. The 21.4 million shares of GI common stock are, in addition
to other transfer restrictions, restricted as to their sale by NDTC for
a three year period, and represent approximately 13% of the outstanding
common stock of GI at September 30, 1998. Liberty/Ventures Group
recorded its investment in such shares at fair value which included a
discount attributable to the above-described liquidity restriction.
Liberty/Ventures Group will account for its investment in such shares
using the cost method of accounting. The $346 million excess of the
recorded value of GI common stock received over (i) the book value of
certain assets transferred from NDTC to GI, and (ii) the $42 million
present value of the promissory note due from Liberty/Ventures Group to
GI, has been deferred by Liberty/Ventures Group in the accompanying
September 30, 1998 combined balance sheet. A portion of such excess
equal to the $160 million present value of the annual amounts specified
by the revenue guarantee will be amortized to revenue over nine years
in proportion to such annual guaranteed amounts. The remaining $186
million excess will be amortized to revenue on a straight-line basis
over the nine-year period that NDTC is required to perform postcontract
services.
(continued)
303
<PAGE> 305
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including the
Puerto Rico Subsidiary's cable television systems. The Puerto Rico
Subsidiary's cable television systems represent $36 million of
Liberty/Ventures Group's revenue for the nine months ended September
30, 1998. The Puerto Rico Subsidiary has property and business
interruption insurance aggregating $15 million that is subject to a
deductible of $1 million. The Puerto Rico Subsidiary has submitted a
property damage claim to its insurance carrier for approximately $12
million which represents the estimated replacement cost of its damaged
property. As a result of the damage caused by Hurricane Georges, the
Puerto Rico Subsidiary, at September 30, 1998, recorded an impairment
to reduce the net book value of the damaged property and equipment by
$8 million and recorded a receivable in the same amount for a portion
of the estimated proceeds under its property insurance coverage.
Subsequent to September 30, 1998, the Puerto Rico Subsidiary received a
$2 million advance on its insurance coverage from the insurance
carrier. Liberty/Ventures Group has applied $1 million of such advance
to property losses and $1 million to business interruption losses. The
balance of the receivable is deemed probable of collection.
Although there can be no assurance, the Puerto Rico Subsidiary
currently estimates that 85% of its cable distribution systems and
related support equipment will be restored by the end of 1998 and fully
restored by the end of the first quarter of 1999. In addition to
property damage caused by Hurricane Georges, the Puerto Rico Subsidiary
will also suffer a loss in revenue from its pre-hurricane customers. As
of September 30, 1998, approximately 23% of the Puerto Rico
Subsidiary's pre-hurricane basic customers were receiving cable
television services. Although there can be no assurance, the Puerto
Rico Subsidiary estimates that it will regain 80% and 100% of its
pre-hurricane customer base by December 31, 1998 and June 30, 1999,
respectively. The loss of revenue from September 21, 1998 through
December 31, 1998 has been preliminarily estimated at $7 million, of
which $1 million relates to the period from September 21, 1998 through
September 30, 1998. In addition, the estimated loss of revenue for the
first quarter of 1999 is approximately $3 million. The Puerto Rico
Subsidiary's business interruption insurance will cover the first $3
million in lost revenue. The Puerto Rico Subsidiary currently estimates
that lost revenue of approximately $7 million will not be covered under
its business interruption insurance. However, no assurance can be given
that the Puerto Rico Subsidiary will not incur losses in excess of
current estimates. In addition, all insurance claims are subject to
approval by the Puerto Rico Subsidiary's insurance carrier.
Accordingly, no assurance can be given that amounts claimed under the
Puerto Rico Subsidiary's insurance coverage will be paid in their
entirety.
Liberty/Ventures Group has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. Although it is reasonably possible Liberty/Ventures Group may
incur losses upon conclusion of such matters, an estimate of any loss
or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the accompanying
combined financial statements.
(continued)
304
<PAGE> 306
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(13) Year 2000
During the three months ended September 30, 1998, TCI continued its
enterprise-wide, comprehensive efforts to assess and remediate its
computer systems and related software and equipment to ensure such
systems, software and equipment recognize, process and store
information in the year 2000 and thereafter. TCI's year 2000
remediation efforts include an assessment of Liberty Media Group's most
critical systems, equipment, and facilities. TCI also continued its
efforts to verify the year 2000 readiness of Liberty/Ventures Group's
significant suppliers and vendors and continued to communicate with
significant business partners and affiliates to assess such partners
and affiliates' year 2000 status.
TCI formed a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 remediation efforts. The PMO is
responsible for overseeing, coordinating and reporting on
Liberty/Ventures Group's year 2000 remediation efforts. It is comprised
of a 90-member full-time staff and is accountable to executive
management of Liberty/Ventures Group.
The PMO has defined a four-phase approach to determining the year 2000
readiness of Liberty/Ventures Group's systems, software and equipment.
Such approach is intended to provide a detailed method for tracking the
evaluation, repair and testing of Liberty/Ventures Group's systems,
software and equipment. Phase 1, Assessment, involves the inventory of
all systems, software and equipment and the identification of any year
2000 issues. Phase 1 also includes the preparation of the work plans
needed for remediation. Phase 2, Remediation, involves repairing,
upgrading and/or replacing any non-compliant equipment and systems.
Phase 3, Testing, involves testing Liberty/Ventures Group's systems,
software, and equipment for year 2000 readiness, or in certain cases,
relying on test results provided to Liberty/Ventures Group. Phase 4,
Implementation, involves placing compliant systems, software and
equipment into production or service.
At September 30, 1998, Liberty/Ventures Group's overall progress by
phase was as follows:
<TABLE>
<CAPTION>
Percentage of all
Equipment/Systems
Phase In Phase*
----- -----------------
<S> <C> <C>
Phase 1-Assessment 94%
Phase 2-Remediation 63%
Phase 3-Testing 12%
Phase 4-Implementation 2%
</TABLE>
---------------------
*The percentages set forth above do not total 100% because many
projects have elements in more than one phase. For purposes of this
table, such projects have been attributed to each applicable phase. In
addition, the percentages set forth above are based on the number of
projects in each phase compared to the total number of Year 2000
projects.
(continued)
305
<PAGE> 307
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Liberty/Ventures Group is completing an inventory of its important
systems with embedded technologies and is currently determining the
correct remediation approach. During the three months ended September
30, 1998, Liberty/Ventures Group continued its survey of significant
third-party vendors and suppliers whose systems, services or products
are important to Liberty/Ventures Group's operations. The year 2000
readiness of such providers is critical to continued provision of
Liberty/Ventures Group's cable and programming services.
Liberty/Ventures Group has received information that the most critical
systems, services or products supplied to Liberty/Ventures Group by
third parties are either year 2000 ready or are expected to be year
2000 ready by mid-1999. Liberty/Ventures Group is currently developing
contingency plans for systems provided by vendors who have not
responded to Liberty/Ventures Group's surveys.
In addition to the survey process described above, management of
Liberty/Ventures Group has identified its most critical supplier/vendor
relationships and has instituted a verification process to determine
the vendor's year 2000 readiness. Such verification includes, as deemed
necessary, reviewing vendors' test and other data and engaging in
regular conferences with vendors' year 2000 teams. Liberty/Ventures
Group is also requiring testing to validate the year 2000 compliance of
certain critical products and services and is contracting with
independent consultants to conduct such testing.
Significant market value is associated with Liberty/Ventures Group's
investments in certain public and private corporations, partnerships
and other businesses. Accordingly, Liberty/Ventures Group is monitoring
the public disclosure of such publicly-held business entities to
determine their year 2000 readiness. In addition, Liberty/Ventures
Group has surveyed and monitored the year 2000 status of certain
privately-held business entities in which Liberty/Ventures Group has
significant investments.
Year 2000 expenses and capital expenditures incurred in the nine months
ended September 30, 1998 were $639,000 and zero, respectively.
Management of Liberty/Ventures Group currently estimates the remaining
costs to be not less than $12.5 million, bringing the total estimated
cost associated with Liberty/Ventures Group's year 2000 remediation
efforts to be not less than $13 million, including Liberty Media
Group's pro rata share of the $32 million cost for replacement of
noncompliant information technology ("IT") systems. Also included in
this estimate is Liberty/Ventures Group's pro rata share of the $9
million in future payments to be made by the PMO pursuant to
unfulfilled executory contracts or commitments with vendors for year
2000 remediation services.
TCI is a widely distributed enterprise in which allocation of certain
resources, including IT support, is decentralized. Accordingly, neither
TCI nor Liberty/Ventures Group consolidates 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.
(continued)
306
<PAGE> 308
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There
can be no assurance that Liberty/Ventures Group's systems or the
systems of other companies on which Liberty/Ventures Group relies will
be converted in time or that any such failure to convert by
Liberty/Ventures Group or other companies will not have a material
adverse effect on its financial position, results of operations or cash
flows.
(14) Restatement of Costs Associated with Distribution Agreements
Liberty/Ventures Group has restated its combined financial statements
to record non-cash costs of certain distribution agreements as assets
to be amortized over the exclusivity periods set forth in the
respective distribution agreements. Such non-cash costs had originally
been expensed in the period that the underlying warrants had become
exercisable. This restatement resulted in a $208.0 million increase to
other assets and a $126.0 million increase to minority interests of
attributed subsidiaries at September 30, 1998. In addition, the
restatement resulted in a $17.3 million increase to net earnings for
the nine months ended September 30, 1998. See note 9.
307