<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q/A
(Amendment #1)
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ -------
Commission File Number 0-20421
TELE-COMMUNICATIONS, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1260157
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Tele-Communications, Inc.'s common
stock (net of treasury shares and shares held by subsidiaries) as of October
31, 1998, was:
Tele-Communications, Inc. Series A TCI Group
common stock - 473,516,647 shares,
Tele-Communications, Inc. Series B TCI Group
common stock - 64,444,193 shares,
Tele-Communications, Inc. Series A Liberty Media Group
common stock - 325,547,288 shares,
Tele-Communications, Inc. Series B Liberty Media Group
common stock - 31,699,575 shares,
Tele-Communications, Inc. Series A TCI Ventures Group
common stock - 377,109,356 shares,
and
Tele-Communications, Inc. Series B TCI Ventures Group
common stock - 45,333,022 shares.
<PAGE> 2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELE-COMMUNICATIONS, INC.
Date: January 11, 1999 By: /s/ Stephen M. Brett
----------------------------
Stephen M. Brett
Executive Vice President
General Counsel and
Secretary
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
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)
I-1
<PAGE> 4
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.
I-2
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
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.
I-3
<PAGE> 6
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.
I-4
<PAGE> 7
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.
I-5
<PAGE> 8
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)
I-6
<PAGE> 9
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)
I-7
<PAGE> 10
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)
I-8
<PAGE> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The common stockholders' equity value of TCI Ventures Group or Liberty
Media Group that, at any relevant time, is attributed to TCI Group,
and accordingly not represented by outstanding TCI Ventures Group
Stock or Liberty Group Stock, respectively, is referred to as
"Inter-Group Interest." Prior to consummation of the Liberty
Distribution and TCI Ventures Exchange, TCI Group had a 100%
Inter-Group Interest in Liberty Media Group and TCI Ventures Group,
respectively. Following consummation of the Liberty Distribution and
TCI Ventures Exchange, TCI Group no longer has Inter-Group Interests
in Liberty Media Group and TCI Ventures Group, respectively. For
periods in which an Inter-Group Interest exists, TCI Group accounts
for its Inter-Group Interest in a manner similar to the equity method
of accounting. Following consummation of the Liberty Distribution and
the TCI Ventures Exchange, an Inter-Group Interest would be created
with respect to Liberty Media Group or TCI Ventures Group only if a
subsequent transfer of cash or other property from TCI Group to
Liberty Media Group or TCI Ventures Group is specifically designated
by the Board as being made to create an Inter-Group Interest or if
outstanding shares of Liberty Group Stock or TCI Ventures Stock,
respectively, are purchased with funds attributable to TCI Group.
Management of TCI believes that generally accepted accounting
principles require that Liberty Media Group or TCI Ventures Group be
consolidated with TCI Group for all periods in which TCI Group held an
Inter-Group Interest in Liberty Media Group or TCI Ventures Group,
respectively.
Dividends on TCI Group Stock, Liberty Group Stock or TCI Ventures
Group Stock are payable at the sole discretion of the Board out of the
lesser of assets of TCI legally available for dividends or the
available dividend amount with respect to each Group, as defined.
Determinations to pay dividends on TCI Group Stock, Liberty Group
Stock or TCI Ventures Group Stock are based primarily upon the
financial condition, results of operations and business requirements
of the applicable Group and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its
subsidiaries is (unless the Board otherwise provides) specifically
attributed to and reflected in the combined financial statements of
the Group that includes the entity which incurred the debt or issued
the preferred stock or, in case the entity incurring the debt or
issuing the preferred stock is Tele-Communications, Inc., the TCI
Group. The Board could, however, determine from time to time that debt
incurred or preferred stock issued by entities included in a Group
should be specifically attributed to and reflected in the combined
financial statements of one of the other Groups to the extent that the
debt is incurred or the preferred stock is issued for the benefit of
such other Group.
(continued)
I-9
<PAGE> 12
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstances, one of the
other Groups may transfer funds to such Group. Such transfers of funds
among the Groups will be reflected as borrowings or, if determined by
the Board, in the case of a transfer from TCI Group to either Liberty
Media Group or TCI Ventures Group, reflected as the creation of, or
increase in, TCI Group's Inter-Group Interest in such Group or, in the
case of a transfer from either Liberty Media Group or TCI Ventures
Group to TCI Group, reflected as a reduction in TCI Group's
Inter-Group Interest in such Group. There are no specific criteria for
determining when a transfer will be reflected as a borrowing or as an
increase or reduction in an Inter-Group Interest. The Board expects to
make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration
of such factors as it deems relevant, including, without limitation,
the needs of TCI, the financing needs and objectives of the Groups,
the investment objectives of the Groups, the availability, cost and
time associated with alternative financing sources, prevailing
interest rates and general economic conditions.
Loans from one Group to another Group generally will bear interest at
such rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures
established by, the Board. The Board expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs
of TCI, the use of proceeds by and creditworthiness of the recipient
Group, the capital expenditure plans of and investment opportunities
available to each Group and the availability, cost and time associated
with alternative financing sources.
The combined balance sheets of a Group reflect its net loans or
advances to or loans or advances from the other Groups. Similarly, the
respective combined statements of operations of the Groups reflect
interest income or expense, as the case may be, associated with such
loans or advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical combined financial statements,
net loans or advances between Groups have been and will continue to be
included as a component of each respective Group's combined equity.
Although any increase in TCI Group's Inter-Group Interest in Liberty
Media Group or TCI Ventures Group resulting from an equity
contribution by the TCI Group to Liberty Media Group or TCI Ventures
Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from Liberty Media Group or TCI Ventures Group to
TCI Group would be determined by reference to the market value of the
Liberty Group Series A Stock, or the TCI Ventures Group Series A
Stock, respectively, as of the date of such transfer, such an increase
could occur at a time when such shares could be considered undervalued
and such a decrease could occur at a time when such shares could be
considered overvalued.
(continued)
I-10
<PAGE> 13
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All financial impacts of issuances and purchases of shares of TCI
Group Stock, TCI Ventures Group Stock or Liberty Group Stock, 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)
I-11
<PAGE> 14
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)
I-12
<PAGE> 15
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)
I-13
<PAGE> 16
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)
I-14
<PAGE> 17
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)
I-15
<PAGE> 18
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)
I-16
<PAGE> 19
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)
I-17
<PAGE> 20
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>
* Restated - see note 18.
(continued)
I-18
<PAGE> 21
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>
* Restated -- see note 18.
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)
I-19
<PAGE> 22
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)
I-20
<PAGE> 23
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)
I-21
<PAGE> 24
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)
I-22
<PAGE> 25
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)
I-23
<PAGE> 26
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)
I-24
<PAGE> 27
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)
I-25
<PAGE> 28
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)
I-26
<PAGE> 29
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)
I-27
<PAGE> 30
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)
I-28
<PAGE> 31
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)
I-29
<PAGE> 32
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)
I-30
<PAGE> 33
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)
I-31
<PAGE> 34
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)
I-32
<PAGE> 35
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)
I-33
<PAGE> 36
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)
I-34
<PAGE> 37
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)
I-35
<PAGE> 38
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)
I-36
<PAGE> 39
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)
I-37
<PAGE> 40
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)
I-38
<PAGE> 41
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)
I-39
<PAGE> 42
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)
I-40
<PAGE> 43
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)
I-41
<PAGE> 44
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)
I-42
<PAGE> 45
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)
I-43
<PAGE> 46
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.
I-44
<PAGE> 47
"TCI 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 $ -- 21
Restricted cash (note 4) 358 35
Trade and other receivables, net 488 394
Investment in Cablevision Systems Corporation
("CSC"), accounted for under the equity method
(note 5) 1,006 --
Investments in other affiliates, accounted for
under the equity method, and related
receivables (note 6) 711 414
Property and equipment, at cost:
Land 59 77
Distribution systems 9,487 9,933
Support equipment and buildings 1,384 1,411
------- -------
10,930 11,421
Less accumulated depreciation 4,510 4,479
------- -------
6,420 6,942
------- -------
Franchise costs 15,218 17,802
Less accumulated amortization 2,582 2,725
------- -------
12,636 15,077
------- -------
Other assets, net of accumulated amortization 667 695
------- -------
$22,286 23,578
======= =======
</TABLE>
(continued)
I-45
<PAGE> 48
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
Liabilities and Combined Deficit amounts in millions
<S> <C> <C>
Accounts payable $ 184 137
Accrued interest 155 250
Accrued programming expenses 258 243
Other accrued expenses 724 726
Debt (note 8) 12,250 14,106
Deferred income taxes 5,480 5,147
Other liabilities 895 563
-------- --------
Total liabilities 19,946 21,172
-------- --------
Minority interests in equity of attributed subsidiaries 914 1,048
Redeemable securities:
Preferred stock (note 9) 299 655
Common stock 9 5
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Trust
Preferred Securities") holding solely
subordinated debt securities of TCI
Communications, Inc. ("TCIC") (note 10) 1,500 1,500
Combined deficit (note 11):
Combined equity (deficit), including preferred
stocks of Tele-Communications, Inc. ("TCI") 57 (276)
Accumulated other comprehensive earnings, net
of taxes (note 1) 53 4
-------- --------
110 (272)
Due from related parties (note 12) (492) (530)
-------- --------
Total combined deficit (382) (802)
-------- --------
Commitments and contingencies
(notes 2, 7, 15 and 16)
$ 22,286 23,578
======== ========
</TABLE>
See accompanying notes to combined financial statements.
I-46
<PAGE> 49
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue (note 12) $ 1,479 1,618 4,560 4,779
Operating costs and expenses:
Operating:
Related party (note 12) 60 52 178 104
Other 486 528 1,507 1,688
Selling, general and administrative (note 12) 329 330 986 952
Year 2000 costs (note 16) 3 -- 5 --
AT&T Corp. ("AT&T") merger costs (note 2) 1 -- 11 --
Stock compensation (note 11) 13 61 160 99
Depreciation and amortization 362 338 1,111 1,032
------- ------- ------- -------
1,254 1,309 3,958 3,875
------- ------- ------- -------
Operating income 225 309 602 904
Other income (expense):
Interest expense (236) (292) (736) (843)
Interest income 1 13 8 28
Intercompany interest, net 2 7 8 3
Share of losses of CSC (note 5) (76) -- (156) --
Share of earnings (losses) of other affiliates, net
(note 6) (17) (16) 30 (50)
Loss on early extinguishment of debt (note 8) (6) -- (44) (11)
Minority interests in earnings of attributed
subsidiaries, net (note 10) (48) (42) (143) (125)
Gain (loss) on disposition of assets (notes 5 and 7) 301 (44) 842 (9)
Other, net (6) 3 (24) (11)
------- ------- ------- -------
(85) (371) (215) (1,018)
------- ------- ------- -------
Earnings (loss) before income taxes 140 (62) 387 (114)
Income tax benefit (expense) (88) 4 (239) 11
------- ------- ------- -------
Earnings (loss) before loss of TCI Ventures Group
(note 1) 52 (58) 148 (103)
Loss of TCI Ventures Group through the date of the TCI
Ventures Exchange (note 1) -- (156) -- (345)
------- ------- ------- -------
Net earnings (loss) 52 (214) 148 (448)
Dividend requirements on preferred stocks (5) (10) (18) (31)
------- ------- ------- -------
Net earnings (loss) attributable to common
stockholders $ 47 (224) 130 (479)
======= ======= ======= =======
Basic earnings (loss) attributable to common stockholders per
common share (note 3) $ .09 (.34) .25 (.71)
======= ======= ======= =======
Diluted earnings (loss) attributable to common stockholders
per common share (note 3) $ .08 (.34) .22 (.71)
======= ======= ======= =======
Comprehensive earnings (loss) (note 1) $ 94 (213) 197 (440)
======= ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
I-47
<PAGE> 50
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Deficit
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Combined
equity
(deficit), Accumulated
including other Due
preferred comprehensive from Total
stocks of earnings, related combined
TCI net of taxes parties deficit
---------- ------------- ------- --------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $(276) 4 (530) (802)
Net earnings 148 -- -- 148
Change in due from related parties -- -- 38 38
Reclassification to redeemable securities of redemption
amount of TCI Group Stock subject to put obligations (4) -- -- (4)
Premium received in connection with put obligation 2 -- -- 2
Transfer of net liabilities from related party (note 12) (50) -- -- (50)
Assignment of option contract to related party (note 12) (16) -- -- (16)
Recognition of stock compensation related to restricted
stock awards 4 -- -- 4
Change in unrealized gains on available-for-sale
securities, net of taxes -- 49 -- 49
Accreted dividends on all classes of TCI preferred stock (18) -- -- (18)
Accreted dividends on all classes of TCI preferred stock
not subject to mandatory redemption requirements 7 -- -- 7
Payment of TCI preferred stock dividends (10) -- -- (10)
Payments for call agreements (note 13) (134) -- -- (134)
Recognition of fees related to the Equity Swap Facility and
the Exchange (notes 11 and 13) (25) -- -- (25)
Reimbursement of fees related to Exchange (note 13) 11 -- -- 11
Repurchase of TCI Group Stock (2) -- -- (2)
Issuance of TCI Group Stock in connection with settlement
of litigation 47 -- -- 47
Issuance of TCI Group Stock for acquisitions (note 4) 24 -- -- 24
Issuance of TCI Group Stock and Liberty Group Stock upon
conversion of notes and preferred stock 349 -- -- 349
----- ----- ----- -----
Balance at September 30, 1998 $ 57 53 (492) (382)
===== ===== ===== =====
</TABLE>
See accompanying notes to combined financial statements.
I-48
<PAGE> 51
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
--------- ---------
amounts in millions
<S> <C> <C>
Cash flows from operating activities: (see note 4)
Earnings (loss) before loss of TCI Ventures Group* $ 148 (103)
Adjustments to reconcile earnings (loss) before loss of TCI
Ventures Group to net cash provided by operating activities:
Depreciation and amortization 1,111 1,032
Stock compensation 160 99
Payments of obligation relating to stock
compensation (85) (21)
Share of losses of CSC 156 --
Share of losses (earnings) of other affiliates, net (30) 50
Loss on early extinguishment of debt 44 11
Minority interests in earnings of attributed
subsidiaries, net 143 125
Loss (gain) on disposition of assets (842) 9
Intergroup tax allocation (1) 135
Deferred income tax expense (benefit) 205 (239)
Payments of restructuring charges (5) (21)
Other noncash charges (credits) 3 (1)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables (126) (44)
Change in accruals and payables (88) 15
--------- ---------
Net cash provided by operating activities 793 1,047
--------- ---------
Cash flows from investing activities:
Cash paid for acquisitions (128) (274)
Capital expended for property and equipment (1,017) (273)
Investments in and loans to affiliates (175) (56)
Collections of loans to affiliates 1,644 16
Proceeds from disposition of assets 397 171
Change in restricted cash (323) 39
Cash received in exchanges 45 18
Other investing activities 39 (67)
--------- ---------
Net cash provided by (used in) investing
activities 482 (426)
--------- ---------
Cash flows from financing activities:
Borrowings of debt 2,583 3,059
Repayments of debt (3,725) (3,860)
Payment of preferred stock dividends (27) (37)
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (141) (126)
Payments for call agreements (134) --
Change in amounts due from related parties 221 (137)
Prepayment penalties (39) (7)
Proceeds from issuance of TCI Group Stock -- 3
Proceeds from issuance of Trust Preferred Securities -- 490
Cost associated with TCI Ventures Exchange -- (5)
Other financing activities (34) --
--------- ---------
Net cash used in financing activities (1,296) (620)
--------- ---------
Net increase (decrease) in cash and cash equivalents (21) 1
Cash and cash equivalents at beginning of period 21 --
--------- ---------
Cash and cash equivalents at end of period $ -- 1
========= =========
</TABLE>
* Loss of TCI Ventures Group does not use funds.
See accompanying notes to combined financial statements.
I-49
<PAGE> 52
"TCI 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 TCI that are attributed to TCI Group, as
defined below. The combined financial statements of TCI Group are
presented for purposes of additional analysis of the consolidated
financial statements of TCI and subsidiaries, and should be read in
conjunction with such consolidated financial statements.
All significant intercompany accounts and transactions have been
eliminated. Preferred stock of TCI, which is owned by subsidiaries of
TCI, eliminates in combination. Common stock of TCI held by
subsidiaries is included in combined deficit.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements and notes thereto of TCI
Group for the year ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Effective January 1, 1998, TCI Group adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). TCI Group has reclassified its prior
period combined balance sheet and combined 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. TCI Group has included unrealized holding gains and losses
on available-for-sale securities in other comprehensive earnings that
are recorded directly in combined deficit. Pursuant to SFAS 130, this
item is reflected, net of related tax effects, as a component of
comprehensive earnings in TCI Group's combined statements of
operations, and is included in accumulated other comprehensive earnings
in TCI Group's combined balance sheets and statement of combined
deficit.
(continued)
I-50
<PAGE> 53
"TCI 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 ("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 TCI Group has not completed
its assessment of the impact of SFAS 133 on its combined 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 ("TCI Group Series A Stock")
and Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share ("TCI Group Series B Stock", and together with
the TCI Group Series A Stock, the "TCI Group Stock"), respectively. On
August 10, 1995, TCI distributed, in the form of a dividend, 2.25
shares of Liberty Group Stock for each four shares of TCI Group Stock
owned (the "Liberty Distribution").
On August 28, 1997, the stockholders of TCI authorized the Board to
issue the Tele-Communications, Inc. Series A TCI Ventures Group Common
Stock, par value $1.00 per share ("TCI Ventures Group Series A Stock")
and Tele-Communications, Inc. Series B TCI Ventures Group Common Stock,
par value $1.00 per share ("TCI Ventures Group Series B Stock," and
together with the TCI Ventures Group Series A Stock, the "TCI Ventures
Group Stock"). The TCI Ventures Group Stock is intended to reflect the
separate performance of the "TCI Ventures Group," which is comprised of
TCI's principal international assets and businesses and substantially
all of TCI's non-cable and non-programming assets.
(continued)
I-51
<PAGE> 54
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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, respectively (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, TCI Group, Liberty Media
Group and TCI Ventures Group are referred to as the "Groups" and
individually, may be referred to herein as a "Group." The TCI Group
Series A Stock, TCI Ventures Group Series A Stock and Liberty Group
Series A Stock are sometimes collectively referred to herein as "Series
A Stock," and the TCI Group Series B Stock, TCI Ventures Group Series B
Stock and Liberty Group Series B Stock are sometimes collectively
referred to herein as the "Series B Stock."
As a result of the TCI Ventures Exchange, the combined financial
statements of TCI Group were restated to exclude those assets and
related liabilities which, prior to being attributed to TCI Ventures
Group in connection with the issuance of the TCI Ventures Group Stock,
had been attributed to TCI Group.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, the change in the capital structure of
TCI resulting from the redesignation of TCI Group Stock and issuance of
Liberty Group Stock and TCI Ventures Group Stock did not affect the
ownership or the respective legal title to assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries
each continue to be responsible for their respective liabilities.
Holders of TCI Group Stock, Liberty Group Stock and TCI Ventures Group
Stock are common stockholders of TCI and are subject to risks
associated with an investment in TCI and all of its businesses, assets
and liabilities. The redesignation of TCI Group Stock and issuance of
Liberty Group Stock and TCI Ventures Group Stock did not affect the
rights of creditors of TCI.
(continued)
I-52
<PAGE> 55
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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 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 combined with TCI Group for all periods in which TCI
Group held an Inter-Group Interest in Liberty Media Group or TCI
Ventures Group, respectively.
Dividends on TCI Group Stock are payable at the sole discretion of the
Board out of the lesser of assets of TCI legally available for
dividends or the available dividend amount with respect to TCI Group,
as defined. Determinations to pay dividends on TCI Group Stock are
based primarily upon the financial condition, results of operations and
business requirements of TCI Group and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
is (unless the Board otherwise provides) specifically attributed to and
reflected in the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred
stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., the TCI Group. The Board
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected in the combined financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
(continued)
I-53
<PAGE> 56
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstances, one of the
other Groups may transfer funds to such Group. Such transfers of funds
among the Groups will be reflected as borrowings or, if determined by
the Board, in the case of a transfer from TCI Group to either Liberty
Media Group or TCI Ventures Group, reflected as the creation of, or
increase in, TCI Group's Inter-Group Interest in such Group or, in the
case of a transfer from either Liberty Media Group or TCI Ventures
Group to TCI Group, reflected as a reduction in TCI Group's Inter-Group
Interest in such Group. There are no specific criteria for determining
when a transfer will be reflected as a borrowing or as an increase or
reduction in an Inter-Group Interest. The Board expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs
of TCI, the financing needs and objectives of the Groups, the
investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest
rates and general economic conditions.
Loans from one Group to another Group generally will bear interest at
such rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures established
by, the Board. The Board expects to make such determinations, either in
specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the use of proceeds by
and creditworthiness of the recipient Group, the capital expenditure
plans of and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group reflect its net loans or
advances to or borrowings from the other Groups. Similarly, the
respective combined statements of operations of the Groups reflect
interest income or expense, as the case may be, associated with such
loans or advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical combined financial statements,
net loans or advances between Groups have been, and will continue to
be, included as a component of each respective Group's 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 TCI Group to Liberty Media Group or TCI Ventures Group or any
decrease in such Inter-Group Interest resulting from a transfer of
funds from Liberty Media Group or TCI Ventures Group to TCI Group would
be determined by reference to the market value of the Liberty Group
Series A Stock or the TCI Ventures Group Series A Stock, respectively,
as of the date of such transfer, such an increase could occur at a time
when such shares could be considered undervalued and such a decrease
could occur at a time when such shares could be considered overvalued.
(continued)
I-54
<PAGE> 57
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
All financial impacts of issuances and purchases of shares of TCI Group
Stock, TCI Ventures Group Stock or Liberty Group Stock, 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 the
TCI Group and will result in an increase in TCI Group's Inter-Group
Interest in TCI Ventures Group or Liberty Media Group, respectively.
(continued)
I-55
<PAGE> 58
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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)
I-56
<PAGE> 59
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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 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)
I-57
<PAGE> 60
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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.
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.
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.
(continued)
I-58
<PAGE> 61
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to TCI Group Stock is presented below:
<TABLE>
<CAPTION>
Three months ended 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)
I-59
<PAGE> 62
"TCI 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 $831 million and $951 million for the nine
months ended September 30, 1998 and 1997, respectively. Cash paid for
income taxes was $20 million and $48 million for the nine months ended
September 30, 1998 and 1997, respectively. In addition, TCI Group
received income tax refunds of $76 million during the nine months ended
September 30, 1998.
Summary of cash paid for acquisitions and cash received in exchanges is
as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30
--------------------
1998 1997
------- -------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Recorded value of assets acquired $ (476) (1,707)
Net liabilities assumed -- 673
Deferred tax liability recorded in acquisitions 105 183
Change in minority interests in equity of
acquired entities (131) 1
Elimination of notes receivable from affiliates 350 --
Common stock and preferred stock issued in
acquisitions 24 1,060
TCI common stock and preferred stock held
by acquired company -- (484)
------- -------
Cash paid for acquisitions $ (128) (274)
======= =======
Cash received in exchanges:
Recorded value of assets acquired $ (72) (392)
Historical cost of assets disposed of 87 399
Gain recorded on exchange of assets 30 11
------- -------
Cash received in exchanges $ 45 18
======= =======
</TABLE>
For a description of certain non-cash transactions, see notes 6, 7 and
12.
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.
(continued)
I-60
<PAGE> 63
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Investment in Cablevision Systems Corporation
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").
CSC also assumed and repaid approximately $574 million of debt owed by
TCI Group to external parties and $95 million of debt owed to TCI
Group. As a result of the CSC Transaction, TCI Group recognized a $506
million gain in the accompanying combined 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 TCI Group to CSC. TCI Group has also entered into letters of intent
with CSC which provide for TCI Group to acquire a cable system in
Michigan and an additional 3% of CSC's Class A common shares and for
CSC to (i) acquire cable systems serving approximately 250,000
customers in Connecticut and (ii) assume $110 million of TCI Group's
debt. The ability of TCI Group to sell or increase its investment in
CSC is subject to certain restrictions and limitations set forth in a
stockholders agreement with CSC.
At September 30, 1998, TCI Group owned 48,942,172 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 32.5% 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 TCI
Group effectively has the right to designate two of CSC's directors,
and (ii) any increase in authorized shares, in which case TCI Group has
agreed to vote its interest in proportion with the public holders of
CSC Class A common shares.
Summarized unaudited results of operations for CSC, accounted for under
the equity method, are as follows for the period from the date of
acquisition through September 30, 1998 (amounts in millions):
<TABLE>
<S> <C>
Revenue $ 1,848
Operating, selling, general and
administrative expense (1,428)
Depreciation and amortization (407)
--------
Operating income 13
Interest expense (255)
Other, net (70)
--------
Net loss $ (312)
========
</TABLE>
(continued)
I-61
<PAGE> 64
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Investments in Other Affiliates
TCI Group's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in
the domestic cable business. Summarized unaudited results of operations
for the periods in which TCI Group used the equity method to account
for such other affiliates are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- -------------------
1998 1997
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 839 785
Operating, selling, general and
administrative expenses (459) (390)
Depreciation and amortization (272) (250)
------ ------
Operating income 108 145
Interest expense (181) (172)
Other, net 41 (46)
------ ------
Net loss $ (32) (73)
====== ======
</TABLE>
In January 1998, InterMedia Partners ("InterMedia Partners"), a
California limited partnership and an equity affiliate of TCI through
December 31, 1997, repurchased substantially all of the equity
interests held by partners other than TCI Group. InterMedia Partners
has been included in the combined financial statements of TCI Group
since the date of such repurchases.
Certain of TCI Group's affiliates are general partnerships and any
subsidiary of TCI Group that is a general partner in a general
partnership is, as such, liable as a matter of applicable partnership
law for all debts (other than non-recourse debts) of that partnership
in the event liabilities of that partnership were to exceed its assets.
(continued)
I-62
<PAGE> 65
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(7) Acquisitions and Dispositions
In addition to the CSC Transaction described in note 5, 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. 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 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, 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.
(continued)
I-63
<PAGE> 66
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 9,130 8,672
Bank credit facilities (b) 2,063 4,842
Commercial paper 830 533
Convertible notes (c) 40 40
Capital lease obligations and other debt 187 19
------------ ------------
$ 12,250 14,106
============ =============
</TABLE>
(a) During the nine months ended September 30, 1998, TCI Group
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, TCI Group 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.
During the nine months ended September 30, 1997, TCI Group
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, TCI Group recognized a
loss on early extinguishment of debt of $11 million. Such loss
related to prepayment penalties amounting to $7 million and
the retirement of deferred loan costs.
(b) At September 30, 1998, subsidiaries attributed to TCI Group
had approximately $2.1 billion in unused lines of credit,
excluding amounts related to lines of credit which provide
availability to support commercial paper.
Certain subsidiaries attributed to TCI Group are required to
maintain unused availability under bank credit facilities to
the extent of outstanding commercial paper. Also, certain
subsidiaries attributed to TCI Group pay fees ranging to 1/2%
per annum on the average unborrowed portion of the total
amount available for borrowings under bank credit facilities.
(continued)
I-64
<PAGE> 67
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) The convertible notes, which are stated net of unamortized
discount of $166 million 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
attributable to TCI Group generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
The fair value of the debt attributable to TCI Group is estimated based
on the quoted market prices for the same or similar issues or on the
current rates offered to TCI Group for debt of the same remaining
maturities. At September 30, 1998, the fair value of TCI Group's debt
was $15,269 million (including $2,039 million attributable to the value
of the common stock underlying the convertible notes), as compared to a
carrying value of $12,250 million on such date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group 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, 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.
(continued)
I-65
<PAGE> 68
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Information concerning TCI Group'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 TCI Group 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, TCI Group 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 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, TCI Group 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)
I-66
<PAGE> 69
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(9) Redeemable Preferred Stock
On February 20, 1998, TCI 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.
(10) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
The Trust Preferred Securities are presented together in a separate
line item in the accompanying combined balance sheet captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities of TCI
Communications, Inc." Dividends accrued on the Trust Preferred
Securities aggregated $106 million and $96 million for the nine months
ended September 30, 1998 and 1997, respectively, and are included in
minority interests in earnings of attributed subsidiaries in the
accompanying combined financial statements.
(11) Combined Deficit
General
During the fourth quarter of 1997, TCI Group entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to
the Equity Swap Facility, TCI Group has the right to direct the
counterparty (the "Counterparty") to use the Equity Swap Facility to
purchase shares ("Equity Swap Shares") of TCI Group Series A Stock and
TCI Ventures Group Series A Stock with an aggregate purchase price of
up to $300 million. TCI Group has the right, but not the obligation, to
purchase Equity Swap Shares through the September 30, 2000 termination
date of the Equity Swap Facility. During such period, TCI Group is to
settle periodically any increase or decrease in the market value of the
Equity Swap Shares. If the market value of the Equity Swap Shares
exceeds the Counterparty's cost, Equity Swap Shares with a fair value
equal to the difference between the market value and cost will be
segregated from the other Equity Swap Shares. If the market value of
Equity Swap Shares is less than the Counterparty's cost, TCI Group, at
its option, will settle such difference with shares of TCI Group Series
A Stock or TCI Ventures Group Series A Stock or, subject to certain
conditions, with cash or letters of credit. In addition, TCI Group is
required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap
Shares. Due to TCI Group's ability to issue shares to settle periodic
price fluctuations and fees under the Equity Swap Facility, TCI Group
records all amounts received or paid under this arrangement as
increases or decreases, respectively, to equity. As of 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.
(continued)
I-67
<PAGE> 70
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock Repurchases
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.
Such stock repurchases are reflected as an increase of combined deficit
in the accompanying combined financial statements.
Stock Options and Stock Appreciation Rights
TCI Group records stock compensation expense relating to restricted
stock awards, options and/or stock appreciation rights granted by TCI
to certain TCI employees and/or directors who are involved with the TCI
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 values, and
ultimately, on the final determination of market values when such
rights are exercised. The payable arising from the compensation related
to the SARs is included in the amount due from related parties.
(12) Transactions with Liberty Media Group, TCI Ventures Group and Other
Related Parties
The components of due to (from) related parties are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Notes receivable from Liberty Media Group, including
accrued interest (a) $ (85) (378)
TINTA Note Payable (b) -- 89
Ventures Intergroup Credit Facility (c) (37) --
Intercompany account (d) (370) (241)
-------- --------
$ (492) (530)
======== ========
</TABLE>
--------------------
(a) Amounts outstanding under the notes receivable from the Liberty
Media Group bear interest at 6.5%. Collections of principal and
interest on notes receivable from Liberty Media Group during the
nine months ended September 30, 1998 aggregated approximately
$296 million.
(b) Amounts outstanding under TCI's note payable to
Tele-Communications International, Inc. (the "TINTA Note
Payable") were repaid in their entirety during the third quarter
of 1998. During the nine months ended September 30, 1998 and
1997, interest expense related to the TINTA Note Payable
aggregated $2 million and $4 million, respectively.
(continued)
I-68
<PAGE> 71
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) TCI Group has provided a revolving loan facility (the "Ventures
Intergroup Credit Facility") to TCI Ventures Group for a
five-year period commencing on September 10, 1997. Such facility
permits aggregate 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 TCI Ventures
Group to TCI Group on a quarterly basis. Such commitment fee was
$1 million for the nine months ended September 30, 1998.
(d) 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. Through September 10, 1997, the date of
the TCI Ventures Exchange, the effects of all transactions with
TCI Ventures Group, except for those related to the TINTA Note
Payable, were reflected as adjustments to TCI Group's combined
deficit.
On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
(the "DMX Merger"). Simultaneously with the DMX Merger, substantially
all of TCI's controlling ownership interest in TCI Music was
transferred from TCI Group to Liberty Media Group in exchange for an
$80 million promissory note (the "Music Note") and an agreement to
reimburse TCI for any amounts required to be paid by TCI pursuant to
its contingent obligation under a Rights Agreement (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 7,602,483
shares and associated rights. On August 27, 1998, Liberty Media Group
paid $61 million to satisfy TCI's obligation to purchase such tendered
shares, including $22 million paid to acquire shares that were tendered
by a majority-owned subsidiary of TCI that is attributed to TCI
Ventures Group. The Music Note may be reduced by the payment of cash or
the issuance by TCI of shares of Liberty Group Stock for the benefit of
entities attributed to TCI Group. Additionally, Liberty Media Group may
elect to pay $50 million of the Music Note by delivery of a Stock
Appreciation Rights Agreement that will give TCI Group the right to
receive 20% of the appreciation in value of Liberty Media Group's
investment in TCI Music, to be determined at July 11, 2002.
(continued)
I-69
<PAGE> 72
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group and TCI 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 Media
Group was allocated $4 million and $1 million, respectively, and TCI
Ventures Group was allocated $8 million and $7 million, respectively,
in corporate general and administrative costs by TCI Group. Such
amounts are included in selling, general and administrative expenses in
the accompanying combined financial statements.
During 1996, TCI Group transferred, subject to regulatory approval,
certain distribution equipment to a subsidiary of a majority-owned
subsidiary of TCI that is attributed to TCI Ventures Group in exchange
for a (pound)15 million ($23 million using the applicable exchange
rate) principal amount promissory note (the "TVG LLC Promissory Note").
The TVG LLC Promissory Note was contributed by TCI Group to TCI
Ventures Group in connection with the September 10, 1997 consummation
of the Exchange Offers. The distribution equipment was subsequently
leased back to TCI Group over a five year term with semi-annual
payments of $2 million, plus expenses. Effective October 1, 1997, such
distribution equipment was transferred back to TCI Group and the
related lease and the TVG LLC Promissory Note were canceled. During the
nine months ended September 30, 1997, (i) the U.S. dollar equivalent of
interest income earned with respect to the TVG LLC Promissory Note was
$1 million and (ii) the U.S. dollar equivalent of the lease expense
under the above-described lease agreement aggregated $3 million.
In 1996, a subsidiary attributed to TCI 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
TCI 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 TCI
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).
Through June 30, 1997, TCI Group had a 50.1% partnership interest in
QE+ Ltd. ("QE+"), a limited partnership interest which distributes
"STARZ!," a first-run movie premium programming service. Entities
attributed to Liberty Media Group held the remaining 49.9% partnership
interest. Also prior to July 1, 1997, Encore Media Corporation ("EMC")
(at the time a 90%-owned subsidiary of TCI and a member of Liberty
Media Group) earned management fees from QE+ equal to 20% of managed
costs, as defined. In addition, Liberty Media Group earned a fee for
certain services provided to QE+ equal to 4% of the gross revenue of
QE+ ("STARZ Content Fees"). Such management fees and STARZ Content Fees
aggregated $4 million for the six months ended June 30, 1997 and are
included in operating costs and expenses in the accompanying combined
financial statements. In addition, during the six months ended June 30,
1997, QE+ provided $7 million of programming services to an entity
attributed to TCI Ventures Group. Such amount is included in revenue in
the accompanying combined financial statements.
Subsequent to June 30, 1997, TCI Group and Liberty Media Group entered
into a series of transactions pursuant to which the businesses of
"Encore," a movie premium programming service, and "STARZ!" were
contributed to Encore Media Group LLC ("Encore Media Group"), a
subsidiary of TCI that is attributed to the Liberty Media Group. Upon
the July 1997 formation of Encore Media Group, the operations of QE+
were no longer included in the combined financial results of TCI Group.
In connection with the foregoing transactions, Liberty Media Group
issued a note payable to TCI Group (which note was paid in full during
the first quarter of 1998) and TCI Group entered into a 25 year
affiliation agreement with Encore Media Group (the "EMG Affiliation
Agreement") pursuant to which TCI Group pays monthly fixed amounts in
exchange for unlimited access to all of the existing Encore and STARZ!
services.
(continued)
I-70
<PAGE> 73
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group's fixed annual commitments pursuant to the EMG Affiliation
Agreement increase annually from $220 million in 1998 to $315 million
in 2003, and will increase with inflation thereafter through 2022.
Encore Media Group and certain other TCI subsidiaries attributed to
Liberty Media Group produce and/or distribute programming to cable
television operators (including TCI Group) and others. Charges to TCI
Group, which are based upon customary rates charged to others,
aggregated $163 million and $75 million for the nine months ended
September 30, 1998 and 1997, respectively. Such amounts are included in
operating costs and expenses in the accompanying combined statements of
operations.
Pursuant to an agreement between TCI Music and TCI Group, certain
entities within TCI Group are required to deliver to TCI Music monthly
revenue payments aggregating $18 million annually (adjusted annually
for inflation) through 2017. During the nine months ended September 30,
1998 and 1997, the aggregate amount paid by TCI Group to TCI Music
pursuant to such arrangement was $14 million and $5 million,
respectively. Such amounts are included as reductions of revenue in the
accompanying combined statements of operations.
A subsidiary of TCI that was attributed to TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment
was subleased to TCI Group under an operating lease. In January 1998,
TCI Group paid $7 million to TCI Ventures Group in exchange for TCI
Ventures Group's assignment of its ownership interest in such
subsidiary to TCI Group. Due to the related party nature of the
transaction, the $50 million total of the cash payment and the
historical cost of the net liabilities assumed by TCI Group (including
capital lease obligations aggregating $176 million) has been reflected
as an increase to TCI Group's combined deficit.
Entities included in TCI Group lease satellite transponder facilities
and receive video transport services from entities included in TCI
Ventures Group. Charges by TCI Ventures Group for such arrangements and
other related operating expenses for the nine months ended September
30, 1998 and 1997, aggregated $10 million and $19 million,
respectively. Such amounts are included in operating costs and expenses
in the accompanying combined statements of operations.
In addition, a subsidiary attributed to TCI Ventures Group distributed
certain program services to TCI Group. Charges to TCI Group for such
services aggregated $7 million for each of the nine months ended
September 30, 1998 and 1997, and are included in operating costs and
expenses in the accompanying combined financial statements.
(continued)
I-71
<PAGE> 74
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group distributed certain program services to a subsidiary
attributed to TCI Ventures Group. The charges, which approximate TCI
Group's cost, aggregated $4 million and $5 million for the nine months
ended September 30, 1998 and 1997, respectively. Amounts received by
TCI Group pursuant to this agreement are included in operating costs
and expenses in the accompanying combined financial statements.
(13) Transactions with Officers and Directors
On June 16, 1997, (a) TCI Group issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the
Estate of Bob Magness (the "Magness Estate"), the late founder and
former Chairman of the Board of TCI in exchange (the "Exchange") for an
equal number of shares of TCI Group Series B Stock (which shares are
entitled to ten votes per share) owned by the Magness Estate, (b) the
Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock
received in the Exchange, together with approximately 1.5 million
shares of TCI Group Series A Stock that the Magness Estate previously
owned (collectively, the "Option Shares"), to two investment banking
firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment
Bankers whereby TCI has the option, but not the obligation, to purchase
the Option Shares at any time on or before June 16, 1999 (the "Option
Period"). The preceding transactions are referred to collectively as
the "June 16 Stock Transaction". During the Option Period, TCI Group
and the Investment Bankers are to settle quarterly any increase or
decrease in the market value of the Option Shares. If the market value
of the Option Shares exceeds the Investment Bankers' cost, Option
Shares with a fair value equal to the difference between the market
value and cost will be segregated from the other Option Shares. If the
market value of the Option Shares is less than the Investment Bankers'
cost, TCI Group, at its option, will settle such difference with shares
of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In
addition, TCI Group is required to pay the Investment Bankers a
quarterly fee equal to LIBOR plus 1% on the Sale Price, as adjusted for
payments made by TCI Group pursuant to any quarterly settlement with
the Investment Bankers. Due to TCI Group's ability to settle quarterly
price fluctuations and fees with shares of TCI Group Series A Stock or
TCI Ventures Group Series A Stock, TCI Group records all amounts
received or paid under this arrangement as increases or decreases,
respectively, to equity. During the fourth quarter of 1997, TCI Group
repurchased 4,000,000 shares of TCI Group Series A Stock from one of
the Investment Bankers for an aggregate cash purchase price of $66
million. Additionally, as a result of the Exchange Offers and certain
open market transactions that were completed to obtain the desired
weighting of TCI Group Series A Stock and TCI Ventures Group Series A
Stock, the Investment Bankers disposed of 4,210,308 shares of TCI Group
Series A Stock and acquired 23,407,118 shares of TCI Ventures Group
Series A Stock during the last half of 1997. As a result of the
foregoing transactions and certain transactions related to the January
5, 1998 settlement of litigation involving the Magness Estate, as
described below, the Option Shares were comprised of 6,201,042 shares
of TCI Group Series A Stock and 11,740,610 shares of TCI Ventures Group
Series A Stock at 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.
In consideration for such waiver, TCI Group granted Dr. Malone the
right (the "Malone Right") to acquire from time to time until June 30,
1999, from TCI Group up to 30,545,864 shares of the Series B TCI Group
Stock acquired by TCI Group from the Magness Estate pursuant to the
Exchange. Such acquisition may be made in exchange for either, or any
combination of, shares of Series A TCI Group Stock owned by Dr. Malone
(exchanged on a one for one basis), or cash in an amount equal to the
average closing sale price of the Series B TCI Group Stock for the five
trading days preceding the acquisition.
In connection with certain legal proceedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob
Magness' sons, Sharon Magness, Bob Magness' surviving second wife and
the original personal representatives of the Magness Estate advanced
various claims, causes of action, demands, complaints and requests
against one or more of the others. In addition, Kim Magness and Gary
Magness, in a Complaint And Request To Void Sale Of TCI Stock, And For
Damages And Surcharge, filed on October 29, 1997 (the "Voiding
Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI Group, Dr. Malone and the original personal
representatives of the Magness Estate. Among other matters, the Voiding
Action challenged the June 16 Stock Transaction on various fiduciary
bases and requested recision of such transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI Group, Gary Magness, Kim Magness, Sharon
Magness, the Magness Estate, the Estate of Betsy Magness (the first
wife of Bob Magness) and Dr. Malone agreed to settle their respective
claims against each other relating to the Magness Estate and the June
16 Stock Transaction, in each case without any of those parties
admitting any of the claims or allegations against that party (the
"Magness Settlement").
(continued)
I-72
<PAGE> 75
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A
Stock and 11,666,506 shares of TCI Ventures Group Series A Stock were
returned to TCI as authorized but unissued shares, (ii) the Magness
Estate returned to the Investment Bankers the portion of the Sales
Price attributable to such returned shares and (iii) the Magness Estate
paid $11 million to TCI representing a reimbursement of the Exchange
fees incurred by TCI from June 16, 1997 through February 9, 1998 with
respect to such returned shares. TCI then issued to the Magness Estate
10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares of
TCI Ventures Series B Stock. In addition, as part of the Magness
Settlement, TCI Group issued 1,334,415 shares of TCI Group Series B
Stock to the Estate of Betsy Magness in exchange for an equal number of
shares of TCI Group Series A Stock and issued 1,531,834 shares of TCI
Ventures Group Series B Stock for an equal number of shares of TCI
Ventures Group Series A Stock.
On February 9, 1998, in connection with the Magness Settlement, TCI
Group entered into a call agreement (the "Malone Call Agreement") with
Dr. Malone and Dr. Malone's wife (together with Dr. Malone, the
"Malones"), under which the Malones granted to TCI Group the right to
acquire any shares of TCI stock which are entitled to cast more than
one vote per share (the "High-Voting Shares") owned by the Malones,
which currently consist of an aggregate of approximately 60 million
High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third
persons. In either such event, TCI Group has the right to acquire the
shares at a maximum price equal to the then relevant market price of
shares of "low-voting" Series A Stock plus a ten percent premium. The
Malones also agreed that if TCI were ever to be sold to another entity,
then the maximum premium that the Malones would receive on their
High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid $150
million to the Malones in consideration of them entering into the
Malone Call Agreement.
Also, on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness and the Magness Estate
(collectively, the "Magness Family") also entered into a call agreement
with TCI (with substantially the same terms as the one entered into by
the Malones, including a call on the shares owned by the Magness Family
upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness
Family's aggregate of approximately 49 million High-Voting Shares. The
Magness Family was paid $124 million by TCI Group in consideration of
them entering into the Magness Call Agreement.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was
allocated to each of the Groups based upon the number of shares of each
Group (before giving effect to stock dividends) that are subject to the
Malone Call Agreement and the Magness Call Agreement. TCI Group's share
of the Call Payments of $134 million was paid during the first quarter
of 1998 and is reflected as an increase of combined deficit in the
accompanying combined financial statements.
(continued)
I-73
<PAGE> 76
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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
TCI's Board of Directors and Dr. Malone has agreed to vote his High
Voting Shares for such nominee and (iii) certain "tag along rights"
have been created in favor of the Magness Family and certain "drag
along rights" have been created in favor of the Malones. In addition,
the Malone Right granted by TCI Group to Dr. Malone to acquire
30,545,864 shares of TCI Group Series B Stock 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 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, TCI 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 and a
limited partnership interest in another limited partnership with a
capital account of $1 million. TCI's issuance of such shares of Liberty
Group Series B Stock resulted in a $5 million reduction of TCI's notes
receivable from Liberty Media Group. See note 12.
On August 5, 1998, a director of TCI paid $1.8 million to purchase, at
fair value, TCI Group's interest in General Communication, Inc.
(continued)
I-74
<PAGE> 77
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(14) Income Taxes
At December 31, 1997, TCI Group had net operating loss carryforwards
for income tax purposes aggregating approximately $1,425 million of
which, if not utilized to reduce taxable income in future periods, $134
million expires in 2003, $117 million in 2004, $344 million in 2005,
$245 million in 2006, $19 million in 2009, $147 million in 2010, $231
million in 2011 and $188 million in 2012. Certain subsidiaries of TCI
Group had additional net operating loss carryforwards for income tax
purposes aggregating approximately $232 million and these net operating
losses are subject to certain rules limiting their usage. Pursuant to
certain tax sharing agreements, TCI Group has been credited with
approximately $75 million of net operating loss carryforwards that are
in addition to the amounts disclosed above. TCI is responsible to TCI
Group to the extent TCI Group's net operating loss carryforwards are
utilized by TCI in future periods.
(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 Federal Communications Commission
(the "FCC") adopted certain rate regulations required by the 1992 Cable
Act and imposed a moratorium on certain rate increases. As a result of
such actions, TCI Group's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the
FCC. Basic and tier service rates are evaluated against competitive
benchmark rates as published by the FCC, and equipment and installation
charges are based on actual costs. Any rates for Regulated Services
that exceeded the benchmarks were reduced as required by the 1993 and
1994 rate regulations. The rate regulations do not apply to the
relatively few systems which are subject to "effective competition" or
to services offered on an individual service basis, such as premium
movie and pay-per-view services.
TCI Group believes that it has complied in all material respects with
the provisions of the 1992 Cable Act, including its rate setting
provisions. However, TCI Group's rates for Regulated Services are
subject to review by the FCC, if a complaint is filed by a customer, or
the appropriate franchise authority, if such authority has been
certified by the FCC to regulate rates. If, as a result of the review
process, a system cannot substantiate its rates, it could be required
to retroactively reduce its rates to the appropriate benchmark and
refund the excess portion of rates received. Any refunds of the excess
portion of tier service rates would be retroactive to the date of
complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
(continued)
I-75
<PAGE> 78
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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, 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 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.
As described in note 12, TCI Group has agreed to make fixed monthly
payments through 2022 to Liberty Media Group pursuant to the EMG
Affiliation Agreement.
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 specified numbers 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.
(continued)
I-76
<PAGE> 79
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it
is reasonably possible TCI Group may incur losses upon conclusion of
such matters, an estimate of any loss or range of loss cannot be made.
In the opinion of management, it is expected that amounts, if any,
which may be required to satisfy such contingencies will not be
material in relation to the accompanying combined financial statements.
Effective as of December 16, 1997, 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. 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
accompanying combined financial statements.
(continued)
I-77
<PAGE> 80
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(16) 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 TCI Group's most critical
systems, such as customer service and billing systems, headends and
other cable plant, business support operations, and other equipment and
facilities. TCI also continued its efforts to verify the year 2000
readiness of TCI 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 TCI Group's
year 2000 remediation efforts. It is comprised of a 90-member full-time
staff and is accountable to executive management of TCI Group.
The PMO has defined a four-phase approach to determining the year 2000
readiness of TCI Group's systems, software and equipment. Such approach
is intended to provide a detailed method for tracking the evaluation,
repair and testing of TCI 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 TCI Group's systems, software, and equipment for year 2000
readiness, or in certain cases, relying on test results provided to TCI
Group. Phase 4, Implementation, involves placing compliant systems,
software and equipment into production or service.
At September 30, 1998, TCI Group's overall progress by phase was as
follows:
<TABLE>
<CAPTION>
Percentage of all
Equipment/Systems
Phase In Phase*
----- -----------------
<S> <C>
Phase 1-Assessment 89%
Phase 2-Remediation 37%
Phase 3-Testing 9%
Phase 4-Implementation 14%
</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)
I-78
<PAGE> 81
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI 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,
TCI Group continued its survey of significant third-party vendors and
suppliers whose systems, services or products are important to TCI
Group's operations (e.g., suppliers of addressable controllers and
set-top boxes, and the provider of billing services). The year 2000
readiness of such providers is critical to continued provision of TCI
Group's cable service. TCI Group has received information that the most
critical systems, services or products supplied to TCI Group by third
parties are either year 2000 ready or are expected to be year 2000
ready by mid-1999. TCI Group is currently developing contingency plans
for systems provided by vendors who have not responded to TCI Group's
surveys.
In addition to the survey process described above, management of TCI
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. TCI 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 TCI Group's investments in
certain public and private corporations, partnerships and other
businesses. Accordingly, TCI Group is monitoring the public disclosure
of such publicly-held business entities to determine their year 2000
readiness. In addition, TCI Group has surveyed and monitored the year
2000 status of certain privately-held business entities in which TCI
Group has significant investments.
Year 2000 expenses and capital expenditures incurred in the three
months ended September 30, 1998 were $3 million and less than $1
million, respectively. Expenses and capital expenditures incurred in
the nine months ended September 30, 1998 were $5 million and less than
$1 million, respectively. Management of TCI Group currently estimates
the remaining costs to be not less than $59 million, bringing the total
estimated cost associated with TCI Group's year 2000 remediation
efforts to be not less than $64 million, including TCI Group's pro rata
share of the $32 million cost for replacement of noncompliant
information technology ("IT") systems. Also included in this estimate
is TCI 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 Group is a widely distributed enterprise in which allocation of
certain resources, including IT support, is decentralized. Accordingly,
neither TCI nor TCI 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.
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 TCI Group's systems or the systems of other
companies on which TCI Group relies will be converted in time or that
any such failure to convert by TCI Group or other companies will not
have a material adverse effect on its financial position, results of
operations or cash flows.
I-79
<PAGE> 82
"LIBERTY MEDIA 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 thousands
- ------
Cash and cash equivalents $ 51,845 40,871
Restricted cash (note 8) 16,790 4,527
Trade and other receivables, net 50,933 39,963
Prepaid program rights 128,167 104,219
Committed film inventory 108,237 114,658
Investments in affiliates, accounted for under the equity method,
and related receivables (note 5) 1,494,764 538,149
Investment in Time Warner, Inc. ("Time Warner") (note 6) 4,996,486 3,537,841
Other investments and related receivables (note 7) 495,206 401,810
Property and equipment, at cost:
Land -- 39
Support equipment and buildings 48,341 41,478
------------------ -------------------
48,341 41,517
Less accumulated depreciation 17,001 13,954
------------------ -------------------
31,340 27,563
------------------ -------------------
Excess cost over acquired net assets 219,179 203,300
Less accumulated amortization 23,958 9,057
------------------ -------------------
195,221 194,243
------------------ -------------------
Other assets, at cost, net of accumulated amortization 27,134 24,371
------------------ -------------------
$ 7,596,123 5,028,215
================== ===================
</TABLE>
(continued)
I-80
<PAGE> 83
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ -------------------
amounts in thousands
<S> <C> <C>
Liabilities and Combined Equity
Accounts payable $ 3,398 7,884
Accrued liabilities 84,355 61,483
Accrued stock compensation (note 10) 87,364 68,846
Program rights payable 152,179 156,351
Deferred option premium (note 6) -- 305,742
Debt (note 8) 1,441,166 348,590
Deferred income taxes 1,620,019 1,042,762
Other liabilities 3,158 2,060
----------------- -----------------
Total liabilities 3,391,639 1,993,718
----------------- -----------------
Minority interests in equity of attributed subsidiaries 63,934 101,000
Obligation to redeem Liberty Group Stock (note 9) 16,222 --
Combined equity (note 9):
Combined equity 2,034,734 1,690,256
Accumulated other comprehensive earnings, net of taxes (note 1) 1,617,775 734,649
----------------- -----------------
3,652,509 2,424,905
Due to related parties 471,819 508,592
----------------- -----------------
Total combined equity 4,124,328 2,933,497
----------------- -----------------
Commitments and contingencies (notes 2, 10 and 11)
$ 7,596,123 5,028,215
================= =================
</TABLE>
See accompanying notes to combined financial statements.
I-81
<PAGE> 84
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
amounts in thousands,
except per share amounts
<S> <C> <C> <C> <C>
Revenue:
Unaffiliated parties $ 107,987 66,063 288,274 138,456
Related parties (note 9) 68,278 58,442 209,686 105,080
------------ ------------ ------------ -------------
176,265 124,505 497,960 243,536
------------ ------------ ------------ -------------
Operating costs and expenses:
Operating 88,133 67,221 257,833 106,650
Selling, general and administrative 49,263 28,836 143,267 66,068
Charges from related parties (note 9) 8,225 4,703 22,111 9,136
Year 2000 costs (note 11) -- -- 139 --
Stock compensation (notes 9 and 10) 2,468 42,898 140,904 62,938
Depreciation and amortization 8,967 5,018 24,874 6,573
------------ ------------ ------------ -------------
157,056 148,676 589,128 251,365
------------ ------------ ------------ -------------
Operating income (loss) 19,209 (24,171) (91,168) (7,829)
Other income (expense):
Interest expense to related party (note 9) (1,302) (7,192) (8,176) (7,192)
Other interest expense (20,769) (643) (34,098) (1,254)
Dividend and interest income 13,775 14,262 40,530 33,509
Share of earnings (losses) of affiliates, net (note 5) (32,038) (7,832) (103,058) 5,143
Minority interests in (earnings) losses of attributed
subsidiaries 430 5,734 (332) (6,175)
Gain on disposition of assets (notes 6 and 7) 1,365 303,659 516,672 304,240
Gain on issuance of equity interests by
affiliate (note 5) -- -- 23,460 --
Other, net (27) (225) (142) (430)
------------ ------------ ------------ -------------
(38,566) 307,763 434,856 327,841
------------ ------------ ------------ -------------
Earnings (loss) before income taxes (19,357) 283,592 343,688 320,012
Income tax benefit (expense) 7,772 (121,283) (116,749) (135,550)
------------ ------------ ------------ -------------
Net earnings (loss) $ (11,585) 162,309 226,939 184,462
============ ============ ============ =============
Basic earnings (loss) attributable to common stockholders per
common share (note 3) $ (.03) .44 .64 .50
============ ============ =========== ============
Diluted earnings (loss) attributable to common stockholders
per common share (note 3) $ (.03) .40 .58 .45
============ ============ =========== ============
Comprehensive earnings (note 1) $ 532,856 160,955 1,110,065 185,868
============ ============ ============ =============
</TABLE>
See accompanying notes to combined financial statements.
I-82
<PAGE> 85
"LIBERTY MEDIA 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 taxes parties equity
---------------- --------------------- --------------- -------------
amounts in thousands
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 1,690,256 734,649 508,592 2,933,497
Net earnings 226,939 -- -- 226,939
Payments for call agreements (63,521) -- -- (63,521)
Purchase of Liberty Group Stock (25,780) -- -- (25,780)
Issuance of Liberty Group Stock 173,164 -- (5,074) 168,090
Gain, net of taxes, in connection
with the issuance of stock of
affiliate (note 5) 64,522 -- -- 64,522
Gain in connection with the issuance of stock
by attributed subsidiary 2,508 -- -- 2,508
Premium received in connection with put
obligation 1,283 -- -- 1,283
Reclassification of redemption amount of
Liberty Group Stock subject to put obligation (16,222) -- -- (16,222)
Excess of consideration paid over carryover
basis of net assets acquired from related
party (18,415) -- -- (18,415)
Other transfers to related parties, net -- -- (31,699) (31,699)
Change in unrealized holding gains on
available-for-sale securities -- 883,126 -- 883,126
---------------- --------------------- --------------- -------------
Balance at September 30, 1998 $ 2,034,734 1,617,775 471,819 4,124,328
================ ===================== =============== =============
</TABLE>
See accompanying notes to combined financial statements.
I-83
<PAGE> 86
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------
1998 1997
--------------- -------------
amounts in thousands
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 226,939 184,462
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 24,874 6,573
Stock compensation 140,904 62,938
Payments of stock compensation (4,324) (9,690)
Share of losses (earnings) of affiliates, net 103,058 (5,143)
Deferred income tax (benefit) expense (42,204) 105,111
Intergroup tax allocation 158,609 29,168
Minority interests in earnings of attributed subsidiaries 332 6,175
Gain on disposition of assets (516,672) (304,240)
Gain on issuance of equity interests by affiliate (23,460) --
Other noncash charges -- 320
Noncash interest expense 3,594 7,192
Changes in operating assets and liabilities, net of acquisitions:
Change in receivables (11,664) 4,032
Change in inventories 576 --
Change in prepaid expenses (16,182) (4,331)
Change in payables and accruals 3,633 2,383
--------------- -------------
Net cash provided by operating activities 48,013 84,950
--------------- -------------
Cash flows from investing activities:
Cash proceeds from dispositions 218,438 583
Cash (paid) received in acquisitions (73,499) 832
Capital expended for property and equipment (13,369) (1,541)
Investments in and loans to affiliates and others (860,337) (32,956)
Return of capital from affiliates 6,777 18,700
Other investing activities (4,993) (8,469)
--------------- -------------
Net cash used by investing activities (726,983) (22,851)
--------------- -------------
Cash flows from financing activities:
Borrowings of debt 1,516,700 27,770
Repayments of debt (426,446) (29,564)
Change in restricted cash (12,263) --
Contribution for issuance of Liberty Group Stock -- 2,054
Purchase of Liberty Group Stock (25,780) (186,097)
Premium received on put contracts 1,283 --
Cash transfers to related parties (299,996) (2,195)
Payments for call agreements (63,521) --
Other financing activities, net (33) (27)
---------------- -------------
Net cash provided (used) by financing activities 689,944 (188,059)
---------------- -------------
Net increase (decrease) in cash and cash equivalents 10,974 (125,960)
Cash and cash equivalents at beginning of period 40,871 317,359
---------------- -------------
Cash and cash equivalents at end of period $ 51,845 191,399
=============== =============
</TABLE>
See accompanying notes to combined financial statements.
I-84
<PAGE> 87
"LIBERTY MEDIA 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 Media Group, as defined below. All
significant intercompany accounts and transactions have been
eliminated. The combined financial statements of Liberty Media Group
are presented for purposes of additional analysis of the consolidated
financial statements of TCI and subsidiaries, and should be read in
conjunction with such consolidated financial statements.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements and notes thereto of Liberty
Media Group for the year ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Effective January 1, 1998, Liberty Media Group adopted the provisions
of Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). Liberty Media Group has reclassified
its prior period combined balance sheet and combined statement of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
be reported in a financial statement in the period in which they are
recognized. Liberty Media Group has included unrealized holding gains
and losses on available-for-sale securities in other comprehensive
earnings that are recorded directly in combined equity. Pursuant to
SFAS 130, this item is reflected, net of related tax effects, as a
component of other comprehensive earnings in Liberty Media Group's
combined statements of operations, and is included in accumulated other
comprehensive earnings in Liberty Media Group's combined balance sheets
and combined statement of equity.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
(continued)
I-85
<PAGE> 88
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Targeted Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue two new series of stock,
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") and
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series B Stock," and together
with the Liberty Group Series A Stock, the "Liberty Group Stock"). The
Liberty Group Stock is intended to reflect the separate performance of
TCI's assets which produce and distribute programming services
("Liberty Media Group"). Additionally, the stockholders, of TCI
approved the redesignation of the previously authorized Class A and
Class B common stock into Tele-Communications, Inc. Series A TCI Group
Common Stock, par value $1.00 per share (the " TCI Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock,
par value $1.00 per share (the "TCI Group Series B Stock", and together
with the TCI Group Series A Stock, the "TCI Group Stock"),
respectively. On August 10, 1995, TCI distributed, in the form of a
dividend, 2.25 shares of Liberty Group Stock for each four shares of
TCI Group Stock owned (the "Liberty Distribution").
Liberty Media Group's assets include businesses which provide
programming services, including production, acquisition and
distribution through all available formats and media of branded
entertainment, educational and informational programming and software,
including multimedia products. Liberty Media Group's assets also
include businesses engaged in electronic retailing, direct marketing,
advertising sales relating to programming services, infomercials and
transaction processing.
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.
The TCI Group Stock is intended to reflect the separate performance of
TCI and its subsidiaries and assets not attributed to Liberty Media
Group or TCI Ventures Group. Such subsidiaries and assets, which are
comprised primarily of TCI's domestic cable and communications
businesses, are collectively referred to as "TCI Group". Collectively,
Liberty Media Group, TCI Ventures Group and TCI Group are referred to
as the "Groups" and individually are referred to as a "Group". The TCI
Group Series A Stock, TCI Ventures Group Series A Stock and the Liberty
Group Series A Stock are sometimes collectively referred to herein as
the "Series A Stock," and the TCI Group Series B Stock, TCI Ventures
Group Series B Stock and Liberty Group Series B Stock are sometimes
collectively referred to herein as the "Series B Stock."
(continued)
I-86
<PAGE> 89
"LIBERTY MEDIA 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, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, the change in the capital structure of
TCI resulting from the redesignation of TCI Group Stock and issuance of
Liberty Group Stock and TCI Ventures Group Stock did not affect the
ownership or the respective legal title to assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries
each continue to be responsible for their respective liabilities.
Holders of Liberty Group Stock are common stockholders of TCI and are
subject to risks associated with an investment in TCI and all of its
businesses, assets and liabilities. The redesignation of TCI Group
Stock and issuance of Liberty Group Stock did not affect the rights of
creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of
Liberty Media Group and the market price of shares of Liberty Group
Stock. In addition, net losses of any portion of TCI, dividends and
distributions on, or repurchases of, any series of common stock, and
dividends on, or certain repurchases of preferred stock would reduce
funds of TCI legally available for dividends on all series of common
stock. Accordingly, Liberty Media Group financial information should be
read in conjunction with the TCI consolidated financial information.
After the Liberty Distribution, existing preferred stock and debt
securities of TCI that were convertible into or exchangeable for shares
of TCI Class A common stock were, as a result of the operation of
antidilution provisions, adjusted so that there will be delivered upon
their conversion or exchange (in addition to the same number of shares
of redesignated TCI Group Series A Stock as were theretofore issuable
thereunder) the number of shares of Liberty Group Series A Stock that
would have been issuable in the Liberty Distribution with respect to
the TCI Class A common stock issuable upon conversion or exchange had
such conversion or exchange occurred prior to the record date for the
Liberty Distribution. Options to purchase TCI Class A common stock
outstanding at the time of the Liberty Distribution were adjusted by
issuing to the holders of such options separate options to purchase
that number of shares of Liberty Group Series A Stock which the holder
would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date
for the Liberty Distribution and reallocating a portion of the
aggregate exercise price of the previously outstanding options to the
newly issued options to purchase Liberty Group Series A Stock.
The issuance of shares of Liberty Group Series A Stock upon such
conversion, exchange or exercise of such convertible securities will
not result in any transfer of funds or other assets from TCI Group to
Liberty Media Group in consideration of such issuance. In the case of
the exercise of such options to purchase Liberty Group Series A Stock,
the proceeds received upon the exercise of such options will be
attributed to Liberty Media Group.
(continued)
I-87
<PAGE> 90
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The common stockholders' equity value of Liberty Media Group that, at
any relevant time, is attributed to TCI Group, and accordingly not
represented by outstanding Liberty Group Stock is referred to as
"Inter-Group Interest." Prior to consummation of the Liberty
Distribution, TCI Group had a 100% Inter-Group Interest in Liberty
Media Group. Following consummation of the Liberty Distribution, TCI
Group no longer has an Inter-Group Interest in Liberty Media Group.
Following consummation of the Liberty Distribution an Inter-Group
Interest would be created with respect to Liberty Media Group only if a
subsequent transfer of cash or other property from TCI Group to Liberty
Media Group is specifically designated by the Board as being made to
create an Inter-Group Interest or if outstanding shares of Liberty
Group Stock are purchased with funds attributable to TCI Group.
Dividends on Liberty Group Stock are payable at the sole discretion of
the Board out of the lesser of assets of TCI legally available for
dividends or the available dividend amount with respect to Liberty
Media Group, as defined. Determinations to pay dividends on Liberty
Group Stock are based primarily upon the financial condition, results
of operations and business requirements of Liberty Media Group and TCI
as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
is (unless the Board otherwise provides) specifically attributed to and
reflected in the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred
stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., the TCI Group. The Board
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected in the combined financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstance, one of the other
Groups may transfer funds to such Group. Such transfers of funds among
the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from TCI Group to Liberty Media Group,
reflected as the creation of, or increase in, TCI Group's Inter-Group
Interest in Liberty Media Group or, in the case of a transfer from
Liberty Media Group to TCI Group, reflected as a reduction in TCI
Group's Inter-Group Interest in Liberty Media Group. There are no
specific criteria for determining when a transfer will be reflected as
a borrowing or as an increase or reduction in an Inter-Group Interest.
The Board expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the financing needs
and objectives of the Groups, the investment objectives of the Groups,
the availability, cost and time associated with alternative financing
sources, prevailing interest rates and general economic conditions.
(continued)
I-88
<PAGE> 91
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Loans from one Group to another Group generally will bear interest at
such rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures established
by, the Board. The Board expects to make such determinations, either in
specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the use of proceeds by
and creditworthiness of the recipient Group, the capital expenditure
plans of and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group reflect its net loans or
advances to or borrowings from the other Groups. Similarly, the
respective combined statements of operations of the Groups reflect
interest income or expense, as the case may be, associated with such
loans or advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical financial statements, net loans
or advances between Groups have been and will continue to be included
as a component of each respective Group's equity.
Although any increase in TCI Group's Inter-Group Interest in Liberty
Media Group resulting from an equity contribution by TCI Group to
Liberty Media Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from Liberty Media Group to TCI
Group would be determined by reference to the market value of the
Liberty Group Series A Stock, as of the date of such transfer, such an
increase could occur at a time when such shares could be considered
undervalued and such a decrease could occur at a time when such shares
could be considered overvalued.
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 the TCI Ventures Group or the 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)
I-89
<PAGE> 92
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(2) Proposed Merger
TCI and AT&T Corp. ("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 Italy Merger Corp.,
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, TCI's Convertible Preferred Stock Series C-Liberty Media
Group (the "Series C-Liberty Media Group Preferred Stock") 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) and TCI's Redeemable Convertible
Liberty Media Group Preferred Stock, Series H (the "Series H Preferred
Stock") 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)
I-90
<PAGE> 93
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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 "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., the stock
of At Home Corporation attributed to TCI Ventures Group and the assets
and business of the National Digital Television Center, Inc., 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 and its affiliates, 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 Board 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)
I-91
<PAGE> 94
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Earnings 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.
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 earnings (loss)
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
Series C-Liberty Media Group Preferred Stock, the Convertible Preferred
Stock, Series D (the "Series D Preferred Stock"), the Series H
Preferred Stock, convertible notes payable, stock options and other
performance awards have been included in the diluted calculation of
weighted average shares to the extent 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. 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)
I-92
<PAGE> 95
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Information concerning the reconciliation of basic EPS to dilutive 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 thousands, except per share amounts
<S> <C> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to
common stockholders $ (11,585) 162,309 226,939 184,462
============= =============== ============= ===============
Weighted average common shares 357,481 368,390 356,629 372,048
============= =============== ============= ===============
Basic earnings (loss) per share
attributable to common stockholders $ (.03) .44 .64 .50
============= =============== ============= ===============
Diluted EPS:
Earnings (loss) attributable to
common stockholders $ (11,585) 162,309 226,939 184,462
============= =============== ============= ===============
Weighted average common shares 357,481 368,390 356,629 372,048
------------- --------------- ------------- ---------------
Add dilutive potential common shares:
Employee and director options and
other performance awards -- 4,825 7,463 3,837
Convertible notes payable -- 19,428 19,417 19,428
Series C-Liberty Media Group
Preferred Stock -- 3,970 3,970 3,970
Series D Preferred Stock -- 5,596 372 5,596
Series H Preferred Stock -- 3,953 3,877 3,953
------------- --------------- ------------- ---------------
Dilutive potential common shares -- 37,772 35,099 36,784
------------- --------------- ------------- ---------------
Diluted weighted average common shares 357,481 406,162 391,728 408,832
============= =============== ============= ===============
Diluted earnings (loss) per share
attributable to common stockholders $ (.03) .40 .58 .45
============= =============== ============= ===============
</TABLE>
(continued)
I-93
<PAGE> 96
"LIBERTY MEDIA 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 $37,831,000 and $1,204,000 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 not material.
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
1998 1997
---------------- ----------------
amounts in thousands
<S> <C> <C>
Cash (paid) received in acquisitions is as follows:
Fair value of assets acquired $ (18,396) (324,288)
Net liabilities assumed 2,930 155,809
Debt issued to related parties -- 430,169
Deferred tax asset recorded in acquisition -- (116,837)
Minority interests in equity of acquired subsidiaries (42,126) 70,286
Excess of consideration paid over carryover basis of net
assets acquired from related party (note 9) (18,415) (244,307)
Gain in connection with the issuance of stock by
attributed subsidiary 2,508 --
Liberty Group Stock issued -- 30,000
---------------- ----------------
Cash (paid) received in acquisitions $ (73,499) 832
================ ================
</TABLE>
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
1998 1997
---------------- ----------------
amounts in thousands
<S> <C> <C>
Issuance of Liberty Group Stock in exchange for common stock
of affiliate (note 5) $ 168,090 --
================ ================
Noncash accretion of contingent obligation to purchase shares
of attributed subsidiary from minority holders $ 5,693 2,235
================ ================
Common stock received in exchange for option (note 6) $ -- 305,742
================ ================
Preferred stock received in exchange for common stock and note
receivable $ -- 370,875
================ ================
</TABLE>
(continued)
I-94
<PAGE> 97
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Investments in Affiliates
Summarized unaudited results of operations for the periods in which
Liberty Media Group used the equity method to account for such
affiliates are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
1998 1997
---------------- ----------------
amounts in thousands
<S> <C> <C>
Combined Operations
Revenue $ 7,725,883 3,804,597
Operating selling, general and administrative expenses (6,389,822) (3,379,639)
Depreciation and amortization (881,199) (209,979)
---------------- ----------------
Operating income 454,862 214,979
Interest expense (574,423) (104,630)
Other, net (151,372) (128,759)
---------------- ----------------
Net loss $ (270,933) (18,410)
================ ================
</TABLE>
The following table reflects the carrying value of Liberty Media
Group's investments, accounted for under the equity method, including
related receivables:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- -----------------
amounts in thousands
<S> <C> <C>
Discovery Communications, Inc. ("Discovery") $ 47,623 88,251
QVC, Inc. ("QVC") 172,209 133,920
BET Holdings, Inc. ("BET") 22,416 26,466
Courtroom Television Network ("Court") 32,981 (3,286)
Fox/Liberty Networks LLC ("Fox Sports")(a) 4,608 (21,608)
Liberty/TINTA LLC ("Liberty/TINTA") (16,902) (14,532)
Superstar/Netlink Group LLC ("SNG") (b) (5,699) (40,161)
USA Networks, Inc. ("USAI") formerly HSN, Inc. ("HSNI")
and related investments (c) 1,023,557 347,175
United Video Satellite Group, Inc. ("UVSG") (d) 170,687 --
Telemundo Network Group LLC ("Telemundo") 38,319 --
Other 4,965 21,924
---------------- ----------------
$ 1,494,764 538,149
================ ================
</TABLE>
(continued)
I-95
<PAGE> 98
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects Liberty Media Group's share of earnings
(losses) of each of the aforementioned affiliates:
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------------
1998 1997
---------------- -------------
amounts in thousands
<S> <C> <C>
Discovery $ (40,628) (17,725)
QVC 38,289 18,641
ICCP -- (2,452)
BET (4,050) 3,539
Court 463 --
Fox Sports (a) (75,642) --
Liberty/TINTA (9,957) --
SNG (b) 14,311 12,795
USAI and related investments (c) 10,897 4,449
UVSG (d) 2,597 --
Telemundo (3,520) --
Other (35,818) (14,104)
-------------- -------------
$ (103,058) 5,143
============== =============
</TABLE>
(a) Prior to the first quarter of 1998, Liberty Media Group had no
obligation, nor intention, to fund Fox Sports. During 1998,
Liberty Media Group made the determination to provide funding
to Fox Sports based on specific transactions consummated by
Fox Sports. Consequently, Liberty Media 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 Media
Group's investment in Fox Sports was less than zero.
(b) Effective February 1, 1998, Turner-Vision, Inc. contributed
the assets, obligations and operations of its retail C-band
satellite business to SNG in exchange for an approximate 20%
interest in SNG. As a result of this transaction, Liberty
Media Group's ownership interest in SNG decreased from 50% to
approximately 40%. In connection with the dilution of Liberty
Media Group's ownership interest in SNG, Liberty Media Group
recognized a gain of $23 million (before deducting deferred
income tax expense of $9 million).
(c) In February 1998, pursuant to an Investment Agreement among
Universal Studios, Inc. ("Universal"), HSNI, 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.
(continued)
I-96
<PAGE> 99
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At the closing of the Universal Transaction, 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.
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,
Liberty Media 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 Media
Group's commitment to purchase additional equity interests in
USAI.
(continued)
I-97
<PAGE> 100
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the Universal Transaction, each of
Universal and Liberty Media Group 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. 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.
(d) On January 12, 1998, TCI acquired from a minority stockholder
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 transactions, TCI increased its
ownership in the equity of UVSG to approximately 74%, of which
17% is attributed to Liberty Media Group. UVSG's Class A
common stock had a closing market value of $14-13/16 per share
on September 30, 1998.
Certain of Liberty Media Group's affiliates are general partnerships
and any subsidiary of Liberty Media Group that is a general partner in
a general partnership is, as such, liable as a matter of partnership
law for all debts (other than non-recourse debts) of that partnership
in the event liabilities of that partnership were to exceed its assets.
(continued)
I-98
<PAGE> 101
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(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 8.
On June 24, 1997 Liberty Media Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern
Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
(together with Southern, the "Southern Business") through a purchase of
assets (the "Southern Option"). Liberty Media Group received 6.4
million shares of TW Exchange Stock valued at $306 million in
consideration for the grant. In September 1997, Time Warner exercised
the Southern Option. Pursuant to the Southern Option, Time Warner
acquired the Southern Business, effective January 1, 1998, for $213
million in cash. Liberty Media Group recognized a $515 million pre-tax
gain in connection with such transactions in the first quarter of 1998.
(7) Other Investments
Other investments and related receivables are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- -----------------
amounts in thousands
<S> <C> <C>
Investment in preferred stock, at cost, including premium $ 370,634 370,791
Marketable equity securities, at fair value 20,479 --
Other investments, at cost, and related receivables 104,093 31,019
---------------- -----------------
$ 495,206 401,810
================ =================
</TABLE>
(continued)
I-99
<PAGE> 102
"LIBERTY MEDIA 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
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 Media Group estimates that the market value,
calculated utilizing a variety of approaches including multiple of cash
flow, per subscriber value, a value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty Media
Group's other investments aggregated $523 million and $458 million at
September 30, 1998 and December 31, 1997, respectively. No independent
external appraisals were conducted for those assets.
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ------------------
amounts in thousands
<S> <C> <C>
Bank credit facilities:
Communications Capital Corp. (a) $ 432,000 292,000
LMC Capital LLC (b) 620,000 --
TCI Music, Inc. (c) 89,166 53,200
Encore Media Group LLC (d) 300,000 --
Other (e) -- 3,390
--------------- -------------------
$ 1,441,166 348,590
=============== ===================
</TABLE>
(a) Payable by Communications Capital Corp. ("CCC")
This revolving credit agreement, as amended, provides for
borrowings up to $500 million through August of 2000. Interest
on borrowings under the agreement is tied to, at CCC's option,
the bank's prime rate or the London Interbank Offered Rate
("LIBOR") plus an applicable margin. The revolving credit
agreement provides as security for this indebtedness a portion
of Liberty Media Group's TW Exchange Stock with an estimated
market value of $1.9 billion based upon the market value of
the marketable common stock into which it is convertible.
Additionally, the agreement provides for a three-month
interest reserve to be held by an administrative agent. At
September 30, 1998, $6.7 million was held in the interest
reserve and is included in restricted cash in the accompanying
combined balance sheets. CCC must pay an annual commitment fee
of .2% of the unfunded portion of the commitment.
(continued)
I-100
<PAGE> 103
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(b) 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 the LIBOR plus an applicable
margin. Additionally, the credit agreement provides for a
three-month interest reserve to be held by an administrative
agent. At September 30, 1998, $10.1 million was held in the
interest reserve and is included in restricted cash in the
accompanying combined balance sheets. 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 Media Group's holdings in
Discovery, 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.
(c) 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.
(d) Payable by Encore Media Group LLC ("Encore Media Group")
On July 7, 1997, Encore Media Group obtained a $625 million
senior, secured facility (the "EMG Senior Facility") in the
form of a $225 million reducing revolving line of credit and a
$400 million, 364-day revolving credit facility convertible to
a term loan. In June, 1998, Encore Media Group converted the
364-day facility to a $300 million 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.
(continued)
I-101
<PAGE> 104
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(e) Other
Effective September 30, 1998, Liberty Media Corporation
("LMC") and TCI Ventures Group LLC ("Ventures LLC" and
collectively "Liberty/Ventures") entered into a revolving
credit agreement which provides for borrowings up to $800
million (the "Liberty/Ventures Facility") through September
29, 1999. LMC and Ventures LLC are jointly and severally
responsible for the obligations under the Liberty/Ventures
Facility. Interest on borrowings under the Liberty/Ventures
Facility is tied to, at Liberty/Ventures option, the bank's
prime rate or LIBOR plus an applicable margin. Liberty/
Ventures must pay an annual commitment fee of .2% of the
unfunded portion of the commitment. Such commitment fees are
shared equally between Liberty Media Group and TCI Ventures
Group. The Liberty/Ventures facility contains certain
provisions which limit LMC and Ventures LLC as to additional
indebtedness, sale of assets, liens, guarantees and
distributions. At September 30, 1998, $70 million was
outstanding under the Liberty/Ventures Facility which was used
to fund obligations of TCI Ventures Group and accordingly, is
attributed to TCI Ventures Group.
The fair market value of Liberty Media Group's debt approximated its
carrying value at September 30, 1998.
(9) 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 Liberty Group Stock are
reflected by Liberty Media Group as an increase to combined equity, and
an amount equal to the maximum redemption amount under unexpired put
options with respect to Liberty Group Stock is reflected as an
obligation to redeem Liberty Group Stock in the accompanying combined
balance sheets.
During the nine months ended September 30, 1998, pursuant to the stock
repurchase program, 766,783 shares of Liberty Group Stock were
repurchased at an aggregate cost of approximately $26 million. Such
amount is reflected as a decrease to combined equity in the
accompanying combined financial statements.
(continued)
I-102
<PAGE> 105
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On July 13, 1998, Liberty Media Group announced that it had made a
proposal to Tele-Communications International, Inc. ("TINTA"), an
85%-owned subsidiary of TCI that is attributed to TCI Ventures Group,
concerning the acquisition by Liberty Media Group of all of the
outstanding shares of common stock of TINTA not beneficially owned by
TCI Ventures Group. Under the proposal, Liberty Media Group would
exchange, in a merger transaction, 0.58 of a share of Liberty Group
Series A Stock for each share of Tele-Communications International,
Inc. Series A Common Stock acquired by Liberty Media Group in the
merger. Liberty Media 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 TCI Ventures Group) of less than
$22.00 per TINTA share, then Liberty Media 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 Group Series A Stock before the closing date of the merger.
Consummation of the merger, which is expected to occur in November
1998, is subject to customary closing conditions. No assurance can be
given that the merger will be consummated.
Stock Options and Stock Appreciation Rights
Liberty Media Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights
(collectively, "Awards") granted by TCI to certain TCI employees and/or
directors who are involved with Liberty Media 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. The
estimated compensation adjustment with respect to TCI SARs resulted in
increases to Liberty Media Group's share of TCI's stock compensation
liability of $122 million and $51 million for the nine months ended
September 30, 1998 and 1997, respectively. In addition, for the nine
months ended September 30, 1998, Liberty Media Group made cash payments
relating to its share of TCI's stock compensation obligations of $4
million.
Transactions with TCI and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are
set at levels that management believes to be reasonable and that
approximate the costs Liberty Media Group would incur for comparable
services on a stand-alone basis. During the nine months ended September
30, 1998 and 1997, Liberty Media Group was allocated $4,315,000 and
$790,000, respectively, in corporate general and administrative costs
by TCI. Such amounts are reflected in charges from related parties in
the accompanying combined statements of operations.
Entities included in Liberty Media Group lease satellite transponder
facilities from TCI Ventures Group. Charges by TCI Ventures Group for
such arrangements and other related operating expenses for the nine
months ended September 30, 1998 and 1997, aggregated $17,121,000 and
$8,346,000, respectively. Such amounts are reflected in charges from
related parties in the accompanying combined statements of operations.
(continued)
I-103
<PAGE> 106
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the formation of Encore Media Group during 1997, TCI
Group entered into a 25 year affiliation agreement with Encore Media
Group (the "EMG Affiliation Agreement") pursuant to which TCI Group
pays monthly fixed amounts in exchange for unlimited access to all of
the existing Encore and STARZ! services. Such amounts are included in
revenue from related parties. Additionally, certain other subsidiaries
attributed to Liberty Media Group produce and/or distribute programming
to cable television operators (including TCI Group) and others
(including TCI Ventures Group). Charges to TCI Group and TCI Ventures
Group are based upon customary rates charged to others.
On July 11, 1997, TCI Music merged with DMX, Inc. (the "DMX Merger").
In connection with the DMX Merger, TCI assumed a contingent obligation
to purchase from all holders who tender shares and rights in accordance
with the terms of a Rights Agreement (the "Rights Agreement") 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.
Simultaneously with the DMX Merger, Liberty Media Group acquired the
TCI Music Series B Common Stock and 2.6 million of the TCI-owned TCI
Music Series A Common Stock by 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 Media Group had
recorded its contingent obligation to purchase such shares (excluding
the TCI-owned 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
Rights Agreement, Liberty Media Group was notified of the tender of
7,602,483 shares and associated rights. On August 27, 1998, Liberty
Media Group paid $61 million (including amounts that were paid to a
subsidiary of TCI that is not attributed to Liberty Media Group) to
satisfy TCI's obligation under the Rights Agreement. Due to the related
party nature, the $18 million excess of the consideration paid to such
subsidiary of TCI over the carryover basis of the assets transferred
was reflected as a decrease to combined equity.
During the first quarter of 1998, 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
Media Group's ownership interest was diluted to 77.6% (TCI's ownership
interest was diluted to 80.7%) and Liberty Media Group recorded a $2.5
million increase to combined equity. No gain was recognized in the
combined statements of operations due primarily to Liberty Media
Group's contingent obligation under the Rights Agreement.
(continued)
I-104
<PAGE> 107
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Due to Related Parties
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ------------------
amounts in thousands
<S> <C> <C>
Note receivable from TCI Ventures Group, including accrued
interest $ (8,502) --
Notes payable to TCI Group, including accrued interest 85,374 378,348
Intercompany account 394,947 130,244
---------------- ------------------
$ 471,819 508,592
================ ==================
</TABLE>
Amounts outstanding under the note receivable from TCI Ventures Group
bear interest at variable rates based on the cost of borrowing under
the Liberty/Ventures Facility (see note 8). Principal and interest is
due and payable as mutually agreed from time to time.
Amounts outstanding under the notes payable to TCI Group bear interest
at 6.5%. Payments of principal and interest on notes payable to TCI
Group during the first nine months of 1998 aggregated approximately
$296 million. 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.
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.
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 "low voting" Series A Stock
plus a ten percent premium. The Malones also agreed that if TCI were
ever to be sold to another entity, then the maximum premium that the
Malones would receive on their High-Voting Shares would be no greater
than a ten percent premium over the price paid for the relevant shares
of Series A Stock. TCI paid $150 million to the Malones in
consideration of them entering into the Malone Call Agreement.
(continued)
I-105
<PAGE> 108
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness (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 based upon the number of shares of each
Group (before giving effect to stock dividends) that are subject to the
Malone Call Agreement and the Magness Call Agreement. Liberty Media
Group's share of the Call Payments of $64 million was paid during the
first quarter of 1998 and is reflected as a reduction of combined
equity in the accompanying combined financial statements.
(10) 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, it is anticipated that the required
aggregate payments under the Film Licensing Obligations will be
significant.
Liberty Media Group leases business offices, has entered into
transponder lease agreements, and uses certain equipment under lease
arrangements.
Estimates of stock compensation granted to employees of an attributed
subsidiary of Liberty Media Group have been recorded in the
accompanying combined financial statements, but are subject to future
adjustment based upon a valuation model derived from such attributed
subsidiary's cash flow, working capital and debt.
(continued)
I-106
<PAGE> 109
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Liberty Media Group has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. Although it is reasonably possible Liberty Media 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.
(11) 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 Media 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 Media
Group's year 2000 remediation efforts. It is comprised of a 90-member
full-time staff and is accountable to executive management of Liberty
Media Group.
The PMO has defined a four-phase approach to determining the year 2000
readiness of Liberty Media Group's systems, software and equipment.
Such approach is intended to provide a detailed method for tracking the
evaluation, repair and testing of Liberty Media 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 Media Group's systems,
software, and equipment for year 2000 readiness, or in certain cases,
relying on test results provided to Liberty Media Group. Phase 4,
Implementation, involves placing compliant systems, software and
equipment into production or service.
(continued)
I-107
<PAGE> 110
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At September 30, 1998, Liberty Media Group's overall progress by phase
was as follows:
<TABLE>
<CAPTION>
Percentage of all
Equipment/Systems
Phase In Phase*
----- -----------------
<S> <C>
Phase 1-Assessment 100%
Phase 2-Remediation 96%
Phase 3-Testing 7%
Phase 4-Implementation 0%
</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.
Liberty Media 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 Media Group continued its survey of significant third-party
vendors and suppliers whose systems, services or products are important
to Liberty Media Group's operations. The year 2000 readiness of such
providers is critical to continued provision of Liberty Media Group's
programming services. Liberty Media Group has received information that
the most critical systems, services or products supplied to Liberty
Media Group by third parties are either year 2000 ready or are expected
to be year 2000 ready by mid-1999. Liberty Media Group is currently
developing contingency plans for systems provided by vendors who have
not responded to Liberty Media Group's surveys.
In addition to the survey process described above, management of
Liberty Media 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 Media 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 Media Group's
investments in certain public and private corporations, partnerships
and other businesses. Accordingly, Liberty Media Group is monitoring
the public disclosure of such publicly-held business entities to
determine their year 2000 readiness. In addition, Liberty Media Group
has surveyed and monitored the year 2000 status of certain
privately-held business entities in which Liberty Media Group has
significant investments.
(continued)
I-108
<PAGE> 111
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Year 2000 expenses and capital expenditures incurred in the three
months ended September 30, 1998 were not material. Expenses and capital
expenditures incurred in the nine months ended September 30, 1998 were
$139,000 and zero, respectively. Management of Liberty Media Group
currently estimates the remaining costs to be not less than $2 million,
bringing the total estimated cost associated with Liberty Media Group's
year 2000 remediation efforts to be not less than $2 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 Media 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 Media 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.
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 Media Group's systems or the systems
of other companies on which Liberty Media Group relies will be
converted in time or that any such failure to convert by Liberty Media
Group or other companies will not have a material adverse effect on its
financial position, results of operations or cash flows.
I-109
<PAGE> 112
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998* 1997
----------------- -----------------
amounts in thousands
<S> <C> <C>
Assets
Cash and cash equivalents $ 333,398 161,495
Trade and other receivables, net 125,510 86,856
Investment in Telewest Communications plc ("Telewest"), accounted for under the
equity method (note 5) 432,465 324,417
Investments in Sprint Spectrum Holding Company, L.P., MinorCo, L.P.
and PhillieCo, L.P. (collectively, the "PCS Ventures"), accounted
for under the equity method (note 6) 258,204 607,333
Investment in Cablevision S.A. ("Cablevision"), accounted for under
the equity method (note 7) 224,555 239,379
Investments in other affiliates, accounted for under the equity method, and
related receivables (note 8) 604,333 926,769
Investment in AT&T Corp. ("AT&T") (note 9) 2,743,924 --
Deferred tax asset -- 85,737
Property and equipment, at cost:
Land 7,893 7,893
Distribution systems 717,911 851,145
Support equipment and buildings 126,903 116,088
------------------ -----------------
852,707 975,126
Less accumulated depreciation 312,027 265,945
------------------ -----------------
540,680 709,181
------------------ -----------------
Franchise costs and other intangible assets (note 12) 944,025 506,107
Less accumulated amortization 160,634 85,753
------------------ -----------------
783,391 420,354
------------------ -----------------
Other assets, net of accumulated amortization 756,315 381,726
------------------ -----------------
$ 6,802,775 3,943,247
================== =================
</TABLE>
* Restated - see note 18.
(continued)
I-110
<PAGE> 113
"TCI 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
----------------- ----------------
amounts in thousands
<S> <C> <C>
Liabilities and Combined Equity
Accounts payable $ 50,739 31,825
Accrued liabilities 95,722 109,549
Customer prepayments 136,412 133,479
Deferred revenue (note 16) 339,625 --
Capital lease obligations 191,660 386,808
Debt (note 13) 1,012,594 408,532
Deferred tax liability 770,634 --
Other liabilities 23,362 18,683
------------------ ----------------
Total liabilities 2,620,748 1,088,876
------------------ ----------------
Minority interests in equity of attributed subsidiaries 608,965 518,739
Obligation to redeem TCI Ventures Group Stock (note 14) 2,963 --
Combined equity (notes 11 and 14):
Combined equity 3,505,791 2,280,466
Accumulated other comprehensive earnings, net
of taxes (note 1) 44,218 33,661
------------------ ----------------
3,550,009 2,314,127
Due to related parties 20,090 21,505
------------------ ----------------
Total combined equity 3,570,099 2,335,632
------------------ ----------------
Commitments and contingencies (notes 2, 6, 8, 12, 14, 16 and 17)
$ 6,802,775 3,943,247
================= ================
</TABLE>
* Restated - see note 18
See accompanying notes to combined financial statements.
I-111
<PAGE> 114
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ---------------------------
1998* 1997 1998* 1997
------------ ------------ ------------ ------------
amounts in thousands,
except per share amounts
<S> <C> <C> <C> <C>
Revenue:
Related parties (note 14) $ 14,479 11,720 35,928 37,813
Other 234,276 247,222 648,956 720,269
------------ ------------ ------------ ------------
248,755 258,942 684,884 758,082
------------ ------------ ------------ ------------
Operating costs and expenses:
Operating:
Related parties (note 14) 11,984 16,321 36,954 46,540
Other 135,548 132,873 392,978 382,095
General and administrative:
Related parties (note 14) 1,905 2,212 8,175 6,636
Other 56,019 61,838 158,250 187,833
Year 2000 costs (note 16) 142 -- 480 --
Stock compensation (note 14) (4,404) 55,774 122,382 68,699
Depreciation and amortization 51,726 52,985 147,403 138,149
------------ ------------ ------------ ------------
252,920 322,003 866,622 829,952
------------ ------------ ------------ ------------
Operating income (loss) (4,165) (63,061) (181,738) (71,870)
Other income (expense):
Share of losses of the PCS Ventures (note 6) (186,674) (147,051) (510,464) (304,436)
Share of losses of Telewest (note 5) (26,366) (37,880) (90,083) (111,338)
Share of losses of Cablevision (note 7) (6,817) -- (14,408) --
Share of losses of other affiliates (note 8) (43,393) (42,541) (125,148) (120,767)
Interest expense (14,664) (11,634) (38,263) (41,178)
Dividend and interest income:
Related parties (note 14) 55 588 1,692 4,340
Other (note 9) 17,879 642 22,576 4,543
Minority interests' share of (earnings) losses 7,924 1,525 25,346 (6,935)
Gain on disposition of assets, net (note 9) 2,303,061 75,881 2,344,958 104,774
Gain on issuance of stock by affiliates (notes 5 and 8) 57,965 -- 259,350 21,251
Gain on issuance of equity interest by attributed
subsidiaries (notes 11 and 12) 16,553 60,233 31,253 60,233
Other, net (2,198) (2,875) (2,066) 3,375
------------ ------------ ------------ ------------
2,123,325 (103,112) 1,904,743 (386,138)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 2,119,160 (166,173) 1,723,005 (458,008)
Income tax benefit (expense) (821,625) 40,440 (711,652) 143,117
------------ ------------ ------------ ------------
Net earnings (loss) $ 1,297,535 (125,733) 1,011,353 (314,891)
============ ============ ============ ============
Basic earnings attributable to common stockholders
per common share subsequent to TCI Ventures
Exchange (note 3) $ 3.07 .07 2.40 .07
============ ============ ============= ============
Diluted earnings attributable to common stockholders
per common share subsequent to TCI Ventures
Exchange (note 3) $ 2.88 .07 2.24 .07
============ ============ ============ ===========
Comprehensive earnings (loss) (note 1) $ 1,265,851 (144,317) 1,021,910 (338,352)
============ ============ ============ ============
</TABLE>
* Restated - see note 18.
See accompanying notes to combined financial statements.
I-112
<PAGE> 115
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Statement of Combined Equity
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
comprehensive Due to Total
Combined earnings, related combined
equity* net of taxes parties equity*
----- ------------ ------- ------
amounts in thousands
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 2,280,466 33,661 21,505 2,335,632
Net earnings 1,011,353 -- -- 1,011,353
Repurchases of TCI Ventures Group Stock (3,857) -- -- (3,857)
Issuance of TCI Ventures Group Stock (note 11) 177,661 -- -- 177,661
Payments for call agreements (note 14) (75,836) -- -- (75,836)
Transfer of net liabilities to related party
(note 14) 49,528 -- -- 49,528
Adjustment to minority interest deficit in
joint venture (note 11) 24,524 -- -- 24,524
Excess of consideration received over basis
of net assets sold to related party (note
14) 18,415 -- -- 18,415
Assignment of option contract from related
party (note 14) 15,854 -- (15,854) --
Excess of earnings over distributions to
minority interest in joint venture 10,771 -- -- 10,771
Reclassification of redemption amount of TCI
Ventures Group Stock subject to put
obligation (2,963) -- -- (2,963)
Premium received in connection with put
obligation 348 -- -- 348
Recognition of fees related to Equity Swap
Facility (note 14) (473) -- -- (473)
Foreign currency translation adjustment -- 6,594 -- 6,594
Change in unrealized holding gains on
available-for-sale securities -- 3,963 -- 3,963
Other transfers from related parties, net -- -- 14,439 14,439
---------------- --------------- ------------ -------------
Balance at September 30, 1998 $ 3,505,791 44,218 20,090 3,570,099
================ =============== ============ =============
</TABLE>
* Restated - See note 18.
See accompanying notes to combined financial statements.
I-113
<PAGE> 116
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------
1998* 1997
--------------- -------------
amounts in thousands
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,011,353 (314,891)
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 147,403 138,149
Stock compensation 122,382 68,699
Payments of stock compensation (71,551) --
Share of losses of affiliates, net 740,103 536,541
Gain on disposition of assets, net (2,344,958) (104,774)
Gain on issuance of stock by affiliate (259,350) (21,251)
Gain on issuance of equity interest by attributed subsidiary (31,253) (60,233)
Minority interests' share of losses (earnings), net (25,346) 6,935
Other noncash charges 524 2,335
Deferred income tax expense 846,163 16,750
Intergroup tax allocation (157,154) (163,694)
Changes in operating assets and liabilities, net of the effect of
acquisitions and the deconsolidation of attributed subsidiary:
Change in receivables (20,218) (284)
Change in film inventory and other prepaid expenses 1,019 (2,331)
Change in payables, accruals, customer prepayments and
other liabilities (5,070) 31,073
--------------- -------------
Net cash provided by (used in) operating activities $ (45,953) 133,024
--------------- -------------
</TABLE>
* Restated - see note 18.
(continued)
I-114
<PAGE> 117
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
1998* 1997
--------------- ---------------
amounts in thousands
(see note 4)
<S> <C> <C>
Cash flows from investing activities:
Investments in and loans to affiliates $ (397,726) (364,752)
Capital expended for property and equipment (91,643) (145,186)
Proceeds from dispositions of assets 124,965 199,929
Collections of loans to affiliates 19,801 72,836
Cash balance of deconsolidated subsidiary -- (38,142)
Cash paid for acquisitions, net (30,855) (39,558)
Other, net (8,273) 21,039
--------------- ---------------
Net cash used in investing activities (383,731) (293,834)
--------------- ---------------
Cash flows from financing activities:
Borrowings of debt 544,750 225,780
Repayments of debt and capital lease obligations (61,834) (235,128)
Payments for call agreements (75,836) --
Repurchase of common stock by attributed subsidiaries (15,440) (42,014)
Repurchase of TCI Ventures Group Stock (3,857) --
Net proceeds from issuance of stock by attributed subsidiaries 91,762 148,015
Collections on note receivable from related party 88,707 149,245
Borrowings from related party 70,000 --
Cash transfers (to) from related parties (31,115) 160,373
Distribution to minority interest owners (3,704) (8,488)
Other, net (1,846) (950)
--------------- ---------------
Net cash provided by financing activities 601,587 396,833
--------------- ---------------
Net increase in cash and cash equivalents 171,903 236,023
Cash and cash equivalents: Beginning of period 161,495 105,527
--------------- ---------------
End of period $ 333,398 341,550
=============== ===============
</TABLE>
* Restated - see note 18.
See accompanying notes to combined financial statements.
I-115
<PAGE> 118
"TCI 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 TCI Ventures Group, as defined below. The combined
financial statements of TCI Ventures Group are presented for purposes
of additional analysis of the consolidated financial statements of TCI
and subsidiaries, and should be read in conjunction with such
consolidated financial statements.
All significant intercompany accounts and transactions have been
eliminated. Preferred stock of TCI, which is owned by subsidiaries of
TCI, eliminates in combination. Common stock of TCI held by
subsidiaries is included in combined equity.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results of such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These unaudited interim combined financial statements should be read in
conjunction with the TCI Ventures Group's December 31, 1997 audited
financial statements and notes thereto.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Effective January 1, 1998, TCI Ventures Group adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). TCI Ventures Group has reclassified
its prior period combined balance sheet and combined statement of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
or losses be reported in a financial statement in the period in which
they are recognized. TCI Ventures Group has included cumulative foreign
currency translation adjustments and unrealized holding gains and
losses on available-for-sale securities in other comprehensive earnings
that are recorded directly in combined equity. Pursuant to SFAS 130,
these items are reflected, net of related tax effects, as components of
comprehensive losses in TCI Ventures Group's combined statements of
operations, and are included in accumulated other comprehensive
earnings in TCI Ventures Group's combined balance sheets and statements
of combined equity.
(continued)
I-116
<PAGE> 119
"TCI 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," ("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
combined results of operations and financial position, management
estimates that the impact of SFAS 133 will not be material.
TINTA ceased to consolidate Flextech p.l.c. ("Flextech") and
Cablevision and began to account for Flextech and Cablevision using the
equity method of accounting, effective January 1, 1997 and October 1,
1997, respectively. See notes 7 and 8.
Unless otherwise indicated, convenience translations of foreign
currencies into U.S. dollars are calculated using the applicable spot
rate at September 30, 1998, as published in The Wall Street Journal.
Targeted Stock
On August 28, 1997, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue the Tele-Communications, Inc.
Series A TCI Ventures Group Common Stock, par value $1.00 per share
(the "TCI Ventures Group Series A Stock") and Tele-Communications, Inc.
Series B TCI Ventures Group Common Stock, par value $1.00 per share
(the "TCI Ventures Group Series B Stock," and together with TCI
Ventures Group Series A Stock, the "TCI Ventures Group Stock") The TCI
Ventures Group Stock is intended to reflect the separate performance of
the TCI Ventures Group, as defined below.
(continued)
I-117
<PAGE> 120
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
As of September 30, 1998, the TCI Ventures Group consisted principally
of the following assets and their related liabilities: (i) TCI's 85%
equity interest (representing a 92% voting interest) in
Tele-Communications International, Inc. ("TINTA"), which is TCI's
primary vehicle for the conduct of its international cable, telephony
and programming businesses (other than those international programming
businesses attributed to the Liberty Media Group), (ii) TCI's principal
interests in the telephony business ("TCI Telephony") consisting
primarily of TCI's investment in a series of partnerships formed to
engage in the business of providing wireless communications services,
using the radio spectrum for broadband personal communications services
("PCS"), to residential and business customers nationwide under the
Sprint(R) brand (a registered trademark of Sprint Communications
Company, L.P.), TCI's 3% 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, (iii) a 57% equity interest
(representing a 89% voting interest) in United Video Satellite Group,
Inc. ("UVSG"), which provides satellite-delivered video, audio, data
and program promotion services to cable television systems, satellite
dish owners, radio stations and private network users, primarily
throughout North America, (iv) TCI's 39% equity interest (representing
a 72% voting interest) in At Home Corporation ("@Home"), a provider of
high speed multimedia Internet services, and TCI's interest in other
Internet-related assets and (v) other assets, including ETC w/tci, Inc.
("ETC"), a wholly-owned subsidiary of TCI which is a developer and
distributor of for-profit education, training and communications
services and products, and National Digital Television Center, Inc. and
related companies ("NDTC"), which provide digital compression and
authorization services to programming suppliers and to video
distribution outlets. The foregoing subsidiaries and assets are
collectively referred to as "TCI Ventures Group." The stocks of TINTA,
AT&T, @Home and UVSG are publicly traded.
The TCI Ventures Group may also include such other assets and
liabilities of the TCI Group as the Board may in the future determine
to attribute or sell to the TCI Ventures Group and such other
businesses, assets and liabilities that TCI or any of its subsidiaries
may in the future acquire for the TCI Ventures Group, as determined by
the Board. It is currently the intention of TCI that any businesses,
assets and liabilities so attributed to the TCI Ventures Group in the
future would not include assets and liabilities of TCI's domestic
programming businesses and investments or its domestic cable operations
(including its businesses which utilize its cable network to distribute
telephony and Internet services).
(continued)
I-118
<PAGE> 121
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The "TCI Group" is intended to reflect the performance of those
businesses of TCI and its subsidiaries not attributed to the "Liberty
Media Group" (which is intended to reflect the performance of TCI's
assets which produce and distribute programming services) and TCI
Ventures Group. Collectively, TCI Group, Liberty Media Group and TCI
Ventures Group are referred to as the "Groups" and individually may be
referred to herein as a "Group". The Tele-Communications, Inc. Series A
TCI Group Common Stock, par value $1.00 per share (the "TCI Group
Series A Stock"), TCI Ventures Group Series A Stock and the
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") are
sometimes collectively referred to herein as the "Series A Stock," and
the Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share (the "TCI Group Series B Stock"), TCI Ventures
Group Series B Stock and Tele-Communications, Inc. Series B Liberty
Media Group Common Stock, par value $1.00 per share ("Liberty Group
Series B Stock") are sometimes collectively referred to herein as the
"Series B Stock."
The common stockholders' equity value of TCI attributable to TCI
Ventures Group that, at any relevant time, is attributed to TCI Group,
and accordingly, not represented by outstanding TCI Ventures Group
Stock is referred to as "Inter-Group Interest". Prior to the issuance
of shares of TCI Ventures Group Stock, the Inter-Group Interest of TCI
Group in TCI Ventures Group was 100%. Following consummation of the TCI
Ventures Exchange, TCI Group no longer has an Inter-Group Interest in
TCI Ventures Group. Following consummation of the TCI Ventures
Exchange, an Inter-Group Interest would be created with respect to TCI
Ventures Group only if a subsequent transfer of cash or other property
from TCI Group to TCI Ventures Group is specifically designated by the
Board as being made to create an Inter-Group Interest or if outstanding
shares of TCI Ventures Stock are purchased with funds attributable to
TCI Group.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures Group Stock did not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect
the rights of holders of TCI's or any of its subsidiaries' debt.
Holders of TCI Group Series A Stock and TCI Group Series B Stock
(collectively, the "TCI Group Stock"), Liberty Group Series A Stock and
Liberty Group Series B Stock (collectively, the "Liberty Group Stock")
and TCI Ventures Group Stock are common stockholders of TCI and are
subject to risks associated with an investment in TCI and all of its
businesses, assets and liabilities.
(continued)
I-119
<PAGE> 122
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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 (as adjusted for a stock
dividend - see below), (the "TCI Ventures Exchange"). The aggregate
number of shares of TCI Ventures Group Stock issued in the Exchange
Offers represented 100% of the common stockholders' equity value of TCI
attributable to the TCI Ventures Group. Accordingly, the Inter-Group
Interest of the TCI Group was reduced to zero upon consummation of the
Exchange Offers.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, the change in the capital structure of
TCI resulting from the redesignation of TCI Group Stock and the
issuance of TCI Ventures Group Stock did not affect the ownership or
the respective legal title to assets or responsibility for liabilities
of TCI or any of its subsidiaries. TCI and its subsidiaries each
continue to be responsible for their respective liabilities. Holders of
TCI Group Stock, Liberty Media Group Stock and TCI Ventures Group Stock
are common stockholders of TCI and are subject to risks associated with
an investment in TCI and all of its businesses, assets and liabilities.
The redesignation of TCI Group Stock and the issuance of TCI Ventures
Group Stock did not affect the rights of the creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition could affect
the combined results of operations or financial condition of the TCI
Ventures Group and the market price of shares of TCI Ventures Group
Stock. In addition, net losses of any portion of TCI, dividends or
distributions on, or repurchases of, any series of common stock, and
dividends on, or certain repurchases of, preferred stock, would reduce
funds of TCI legally available for dividends on all series of common
stock. Accordingly, TCI Ventures Group financial information should be
read in conjunction with the financial information of TCI and the other
Groups.
Dividends on TCI Ventures Group Stock will be payable at the sole
discretion of the Board out of the lesser of the assets of TCI legally
available for dividends or the available dividend amount with respect
to the TCI Ventures Group, as defined. Determinations to pay dividends
on TCI Ventures Group Stock are based primarily upon the financial
condition, results of operations and business requirements of the TCI
Ventures Group and TCI as a whole.
(continued)
I-120
<PAGE> 123
"TCI 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
Ventures Group Stock which are attributed to TCI Ventures Group will be
to such extent reflected in the combined financial statements of TCI
Ventures Group. All financial impacts of issuances of shares of TCI
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 TCI
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 Ventures Group Stock will be attributed
entirely to TCI Ventures Group, except that dividends or other
distributions on TCI Ventures Group Stock will (if at the time there is
an Inter-Group Interest in the TCI Ventures Group) result in TCI Group
being credited, and TCI Ventures Group being charged (in addition to
the charge for the dividend or other distribution paid), with an amount
equal to the product of the aggregate amount of such dividend or other
distribution paid or distributed in respect of outstanding shares of
TCI Ventures Group Stock and a fraction the numerator of which is the
"TCI Ventures Group Inter-Group Interest Fraction" and the denominator
of which is the "TCI Ventures Group Outstanding Interest Fraction"
(both as defined). Financial impacts of repurchases of TCI Ventures
Group Stock, the consideration for which is charged to 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.
All debt incurred or preferred stock issued by TCI and its subsidiaries
following the issuance of TCI Ventures Group Stock is (unless the Board
otherwise provides) specifically attributed to and reflected in the
combined financial statements of the Group that includes the entity
which incurred the debt or issued the preferred stock or, in case the
entity incurring the debt or issuing the preferred stock is
Tele-Communications, Inc., the TCI Group. The Board could, however,
determine from time to time that debt incurred or preferred stock
issued by entities included in a Group should be specifically
attributed to and reflected on the combined financial statements of one
of the other Groups to the extent that the debt is incurred or the
preferred stock is issued for the benefit of such other Group.
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstances, one of the
other Groups may transfer funds to such Group. Such transfers of funds
among the Groups will be reflected as borrowings or, if determined by
the Board, in the case of a transfer from the TCI Group to either the
Liberty Media Group or the TCI Ventures Group, reflected as the
creation of, or increase in, the TCI Group's Inter-Group Interest in
such Group or, in the case of a transfer from either the Liberty Media
Group or the TCI Ventures Group to the TCI Group, reflected as a
reduction in the TCI Group's Inter-Group Interest in such Group. There
are no specific criteria for determining when a transfer will be
reflected as a borrowing or as an increase or reduction in an
Inter-Group Interest. The Board expects to make such determinations,
either in specific instances or by setting generally applicable
policies from time to time, after consideration of such factors as it
deems relevant, including, without limitation, the needs of TCI, the
financing needs and objectives of the Groups, the investment objectives
of the Groups, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general
economic conditions.
(continued)
I-121
<PAGE> 124
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Loans from one Group to another Group would bear interest at such rates
and have such repayment schedules and other terms as are established
from time to time by, or pursuant to procedures established by, the
Board. The Board expects to make such determinations, either in
specific instances or by setting generally applicable polices from time
to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of TCI, the use of proceeds by
and creditworthiness of the recipient Group, the capital expenditure
plans and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group reflect its net loans or
advances to or borrowings from the other Groups. Similarly, the
respective combined statements of operations of the Groups reflect
interest income or expense, as the case may be, associated with such
loans or advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical financial statements, net loans
or advances between Groups have been and will continue to be included
as a component of each respective Group's equity.
Although any increase in the TCI Group's Inter-Group Interest in the
TCI Ventures Group resulting from an equity contribution by the TCI
Group to the TCI Ventures Group or any decrease in such Inter-Group
Interest resulting from a transfer of funds from the TCI Ventures Group
to the TCI Group would be determined by reference to the market value
of the Series A TCI Ventures Group Stock as of the date of such
transfer, such an increase could occur at a time when such shares could
be considered undervalued and such a decrease could occur at a time
when such shares could be considered overvalued.
(continued)
I-122
<PAGE> 125
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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.
(continued)
I-123
<PAGE> 126
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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 ("TCG"), the stock
of @Home attributed to TCI Ventures Group, the assets and business of
NDTC and TCI Ventures Group's equity interest in WTCI) 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)
I-124
<PAGE> 127
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Earnings Per Common Share 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.
The basic earnings 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 attributable to TCI Ventures
Group stockholders by the weighted average number of common shares
outstanding of TCI Ventures Group Stock during the period.
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, stock options and other
performance awards have been included in the computation of weighted
average shares to the extent 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.
(continued)
I-125
<PAGE> 128
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 thousands, except per share amounts
<S> <C> <C> <C> <C>
Basic EPS:
Net earnings (loss) $ 1,297,535 (125,733) 1,011,353 (314,891)
Loss through the date of the TCI
Ventures Exchange (note 1) -- 156,184 -- 345,342
------------- --------------- ------------- ---------------
Earnings attributable to common
stockholders $ 1,297,535 30,451 1,011,353 30,451
============= =============== ============= ===============
Weighted average common shares 422,398 409,855 421,744 409,855
============= =============== ============= ===============
Basic earnings per share
attributable to common stockholders $ 3.07 .07 2.40 .07
============= =============== ============= ===============
Diluted EPS:
Earnings attributable to common
stockholders $ 1,297,535 30,451 1,011,353 30,451
============= =============== ============= ===============
Weighted average common shares 422,398 409,855 421,744 409,855
------------- --------------- ------------- ---------------
Add dilutive potential common shares:
Employee and director options and
other performance awards 7,919 4,590 8,569 4,590
Convertible notes payable 20,711 20,774 20,711 20,774
------------- --------------- ------------- ---------------
Dilutive potential common shares 28,630 25,364 29,280 25,364
------------- --------------- ------------- ---------------
Diluted weighted average common shares 451,028 435,219 451,024 435,219
============= =============== ============= ===============
Diluted earnings per share
attributable to common stockholders $ 2.88 .07 2.24 .07
============= =============== ============= ===============
</TABLE>
* Restated - see note 18.
(continued)
I-126
<PAGE> 129
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Supplemental Disclosures to Statements of Cash Flows
Cash paid for interest was $41 million and $45 million for the nine
months ended September 30, 1998 and 1997, respectively. Cash paid for
income taxes was $19 million and $28 million during the nine months
ended September 30, 1998 and 1997, respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------------------
1998* 1997
---------------- -------------------
amounts in thousands
<S> <C> <C>
Fair value of assets acquired $ (117,089) (79,555)
Issuance of notes payable 65,000 --
Net liabilities assumed 21,234 38,482
Minority interest in equity of acquired entity -- 1,515
---------------- -------------------
Cash paid for acquisitions $ (30,855) (39,558)
================ ===================
</TABLE>
<TABLE>
<S> <C> <C>
Costs of distribution agreements $ 83,320 --
================ ===================
Property and equipment purchased under capital
leases $ -- 168,326
================ ===================
</TABLE>
* Restated - see note 18.
The effects of changing the method of accounting for TINTA's ownership
interest in Flextech from the consolidation method to the equity method
(see note 8) are summarized below (amounts in thousands):
<TABLE>
<S> <C>
Assets reclassified to equity investments $ 177,003
Liabilities reclassified to equity investments (72,512)
Minority interests in equity of attributed
subsidiary reclassified to equity investments (142,633)
-----------------
Decrease in cash and cash equivalents $ (38,142)
=================
</TABLE>
For information concerning additional non-cash transactions see notes
11 and 14.
(5) Investment in Telewest
At September 30, 1998, TINTA 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.
(continued)
I-127
<PAGE> 130
"TCI 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"). TINTA subscribed
to 84,688,960 Telewest ordinary shares at an aggregate cost of
(pound)78.3 million ($133.1 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
$58.0 million (excluding related tax expense of $20.3 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)11.1
million ($18.5 million using the applicable exchange rate) and
(pound)(32.87 million) ($54.5 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.
The functional currency of Telewest is the UK pound sterling. The
average exchange rate used to translate the TCI Ventures Group's share
of Telewest's operating results from UK pounds to U.S. dollars was
1.6584 to 1 and 1.6393 to 1 during the nine months ended September 30,
1998 and 1997, respectively. The spot rate used to translate the TCI
Ventures Group's share of Telewest's net assets from UK pounds to U.S.
dollars was 1.7000 to 1 and 1.6508 to 1 at September 30, 1998 and
December 31, 1997, respectively.
(continued)
I-128
<PAGE> 131
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Summarized unaudited results of operations for Telewest are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------------------
1998 1997
--------------- ----------------
Consolidated Operations amounts in thousands
-----------------------
<S> <C> <C>
Revenue $ 604,537 460,646
Operating, selling, general and administrative expenses (456,421) (408,038)
Depreciation and amortization (281,106) (239,987)
--------------- ----------------
Operating loss (132,990) (187,379)
Interest expense, net (209,585) (154,510)
Share of losses of affiliates (25,951) (26,078)
Foreign currency transaction gain (loss) 18,511 (54,487)
Other, net 2,051 339
--------------- ----------------
Net loss $ (347,964) (422,115)
=============== ================
</TABLE>
(6) Investments in the PCS Ventures
TCI Telephony is a partner in a series of partnerships formed to engage
in the business of providing wireless communications services, using
the radio spectrum for broadband personal communications services
("PCS"), to residential and business customers nationwide, using the
"Sprint" brand. The PCS Ventures include Sprint Spectrum Holding
Company, L. P. ("Sprint Spectrum") and MinorCo, L.P. (collectively,
"Sprint PCS") and PhillieCo, L.P. ("PhillieCo"). The partners of Sprint
PCS are subsidiaries of Sprint Corporation ("Sprint"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and TCI. The
partners of PhillieCo are subsidiaries of Sprint, Cox and TCI. TCI
Ventures Group has a 30% partnership interest in Sprint PCS and a 35%
partnership interest in PhillieCo.
From inception through September 1998, the four partners have
contributed $4.6 billion to Sprint PCS (of which TCI Telephony
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.
(continued)
I-129
<PAGE> 132
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized
management to operate Sprint PCS in accordance with such budget. The
Sprint PCS partners may mutually agree to make additional capital
contributions. However, the Sprint PCS partners have no such obligation
in the absence of an approved budget, and there can be no assurance the
Sprint PCS partners will reach such an agreement or approve the 1998
proposed budget. In addition, the failure by the Sprint PCS partners to
approve a business plan may impair the ability of Sprint PCS to obtain
required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS partners could result in the
delay or abandonment of Sprint PCS's development and expansion plans
and expenditures, the failure to meet regulatory requirements or other
potential adverse consequences.
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership
board has resulted in the occurrence of a "Deadlock Event" under the
Sprint PCS partnership agreement as of January 1, 1998. Under the
Sprint PCS partnership agreement, if one of the Sprint PCS partners
refers the budget issue to the chief executive officers of the
corporate parents of the Sprint PCS partners for resolution pursuant to
specified procedures and the issue remains unresolved, buy/sell
provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other Sprint
PCS partners, or, in certain circumstances, liquidation of Sprint PCS.
In May 1998 the Sprint PCS partners entered into a series of agreements
pursuant to which TCI Telephony, 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, TCI
Telephony 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 TCI Telephony'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.
(continued)
I-130
<PAGE> 133
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Summarized unaudited results of operations for the PCS Ventures,
accounted for under the equity method, are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------------
Combined Operations 1998 1997
------------------- ----------------- -----------------
amounts in thousands
<S> <C> <C>
Revenue $ 787,953 110,528
Operating, selling, general and
administrative expenses (1,714,629) (789,583)
Depreciation and amortization (529,166) (189,924)
----------------- -----------------
Operating loss (1,455,842) (868,979)
Interest expense (358,321) (55,568)
Other, net 122,173 (96,911)
----------------- -----------------
Net loss $ (1,691,990) (1,021,458)
================= =================
</TABLE>
(7) Cablevision
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision to unaffiliated third parties (the "Buyers") for cash
proceeds of $120 million. In addition, on October 9, 1997, Cablevision
issued 3,541,829 shares of stock in the aggregate to the Buyers for
$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.
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
shareholders, 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.
Summarized unaudited results of operations for Cablevision are as
follows:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1998
------------------
Consolidated Operations amounts in thousands
-----------------------
<S> <C>
Revenue $ 337,323
Operating, selling, general and
administrative expenses (241,977)
Depreciation and amortization (54,559)
-----------------
Operating income 40,787
Interest expense, net (66,794)
Other, net (6,731)
-----------------
Net loss $ (32,738)
=================
</TABLE>
(continued)
I-131
<PAGE> 134
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(8) Investments in Other Affiliates
The TCI Ventures Group's affiliates other than Telewest, the PCS
Ventures and Cablevision (the "Other Affiliates") generally are engaged
in the cable and/or programming businesses in the U.S. and in various
foreign countries.
The TCI Ventures Group has guaranteed notes payable and other
obligations of certain of the Other Affiliates (the "Guaranteed
Obligations"). At September 30, 1998, the U.S. dollar equivalent of the
amounts borrowed pursuant to the Guaranteed Obligations aggregated
approximately $123 million.
Certain of the Other Affiliates are general partnerships and any
subsidiary of the TCI Ventures Group that is a general partner in a
general partnership is, as such, liable, as a matter of partnership law
for all debts (other than non-recourse debts) of that partnership to
the extent liabilities of that partnership were to exceed its assets.
Agreements governing the TCI Ventures Group's investment in certain of
the Other Affiliates contain (i) buy-sell and other exit arrangements
whereby the TCI Ventures Group could be required to purchase another
investor's ownership interest and (ii) performance guarantees whereby
the TCI Ventures Group has guaranteed the performance of the TCI
Ventures Group's subsidiary that directly holds the related investment.
The following table reflects the TCI Ventures Group's carrying value
(including receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ --------------------
amounts in thousands
<S> <C> <C>
Flextech (a) $ 255,606 261,453
Liberty/TINTA LLC ("Liberty/TINTA") 124,383 115,720
MultiThematiques S.A. ("MultiThematiques") 74,670 68,335
Jupiter Telecommunications
Co., Ltd. ("Jupiter") 45,170 49,197
United International Investments 23,682 26,966
Bresnan International Partners (Poland), L.P.
("BIP Poland") 23,726 26,110
Jupiter Programming Co., Ltd. ("JPC") 17,688 15,582
Bresnan International Partners (Chile), L.P. 18,720 22,863
TCG (b) -- 294,851
Other 20,688 45,692
------------------ --------------------
$ 604,333 926,769
================== ====================
</TABLE>
---------------------
(continued)
I-132
<PAGE> 135
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) Flextech
TINTA owned, at September 30, 1998, 57,889,032 Flextech
ordinary shares ("Flextech Ordinary Shares") representing
36.8% of the issued and outstanding Flextech share capital
and, when combined with a special voting share owned by TINTA,
50% of the aggregate voting interests attributable to such
Flextech share capital. Based upon the (pound)5.73 ($9.74) per
share closing price of the Flextech Ordinary Shares on the
London Stock Exchange, the Flextech Ordinary Shares owned by
TINTA had an aggregate market value of (pound)332 million
($564 million) at September 30, 1998.
In April 1997, Flextech and BBC Worldwide Limited ("BBC
Worldwide") formed two separate joint ventures (the "Principal
Joint Venture" and the "Second Joint Venture", collectively
the "BBC Joint Ventures"). Flextech has undertaken to finance
the working capital requirements of the Principal Joint
Venture and is obligated to provide the Principal Joint
Venture with a primary credit facility of (pound)88 million
($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. Flextech has also agreed to make available to the
Second Joint Venture, if required, funding of up to (pound)10
million ($17 million). As of September 30, 1998, Flextech had
funded (pound)7.5 million ($12.8 million) to the Second Joint
Venture under such obligation. If Flextech defaults in its
funding obligation to the Principal Joint Venture and fails to
cure within 42 days after receipt of notice from BBC
Worldwide, BBC Worldwide is entitled, within the following 90
days, to require that TINTA assume all of Flextech's funding
obligations to the Principal Joint Venture (the "Standby
Commitment").
If BBC Worldwide requires TINTA to perform Flextech's funding
obligations pursuant to the Standby Commitment, then TINTA
will acquire Flextech's entire equity interest in the
Principal Joint Venture for (pound)1.00, and will replace
Flextech's directors on the board of the Principal Joint
Venture with representatives of TINTA. Flextech will pay
commitment and standby fees to TINTA for its undertaking under
the Standby Commitment. If Flextech repays to TINTA all loans
it makes to the Principal Joint Venture (plus interest at
TINTA's marginal cost of funds plus 2% per annum) within 180
days after TINTA first becomes obligated to perform Flextech's
financial obligations, it may reacquire its interest in the
Principal Joint Venture for (pound)1.00. TINTA may also,
within the same period, require Flextech to reacquire its
interest on the same terms. The Standby Commitment will
terminate on the earliest of (i) the date on which Flextech
has met all of its required financial obligations to the
Principal Joint Venture under the primary and standby credit
facilities, or (ii) the date on which Flextech delivers a bank
guarantee of all of its funding obligations to the Principal
Joint Venture.
(continued)
I-133
<PAGE> 136
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
So long as TINTA is contingently obligated under the Standby
Commitment, it has been agreed that (i) Flextech will not sell
any of its direct or indirect interests in the Principal Joint
Venture, (ii) Flextech will not conduct its business in such a
way as is likely to cause it to be in material breach of any
material contracts or to have insufficient working capital to
meet its funding obligation to the Principal Joint Venture,
and (iii) Flextech will use its available resources to
subscribe for any outstanding loan stock of the Principal
Joint Venture, if and to the extent required by TINTA at any
time after December 31, 2011.
(b) On July 23, 1998, a merger, in which TCG agreed to be acquired
by AT&T, was consummated. See note 9. 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 Ventures Group's interest
in TCG was reduced to approximately 26%. In connection with
the dilution of TCI Ventures Group's interest in TCG, TCI
Ventures Group recorded a non-cash gain of $201.4 million
(excluding related tax expense of $70.5 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, TCI Ventures Group's ownership
interest in TCG was reduced to approximately 30%. Accordingly,
TCI Ventures Group recognized a gain of $21 million (excluding
related tax expense of $8 million) as a result of such
dilution.
The following table reflects the TCI Ventures Group's share of losses
of the Other Affiliates:
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------
1998 1997
------------- ---------------
amounts in thousands
<S> <C> <C>
TCG $ 32,043 43,417
Jupiter 17,270 17,173
Liberty/TINTA 15,917 11,364
MultiThematiques 14,690 9,337
JPC 10,941 12,614
BIP Poland 7,109 1,507
Other 27,178 25,355
------------- ---------------
$ 125,148 120,767
============= ===============
</TABLE>
(continued)
I-134
<PAGE> 137
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Summarized unaudited results of operations of the Other Affiliates for
the periods in which the TCI Ventures Group used the equity method to
account for its investments in the Other Affiliates are as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
-------------- ----------------
Combined Operations amounts in thousands
-------------------
<S> <C> <C>
Revenue $ 903,809 667,590
Operating expenses (917,933) (685,222)
Depreciation and amortization (157,990) (135,773)
-------------- ----------------
Operating loss (172,114) (153,405)
Interest expense, net (68,463) (108,734)
Other, net (71,774) (32,586)
-------------- ----------------
Net loss $ (312,351) (294,725)
============== ================
</TABLE>
(9) 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 Ventures Group
received in exchange for its 26% interest in TCG, approximately 47
million shares of AT&T Common Stock. TCI 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
TCI Ventures Group's interest in TCG and the fair value of the AT&T
Common Stock received. See note 8. TCI Ventures Group accounts for its
ownership interest in AT&T Common Stock as an available-for-sale
security. During the third quarter of 1998, TCI Ventures Group
recognized dividend income of $15.5 million on its AT&T Common Stock.
See note 2.
(10) Acquisitions and Dispositions
On August 21, 1998, TINTA purchased 100% of the issued and outstanding
common stock of Pramer SCA ("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"). See note 13. In
accordance with the purchase method of accounting, the purchase price
was allocated using the estimated fair values of the net assets
acquired and Pramer has been included in TCI Ventures Group's combined
financial statements since the August 21, 1998 acquisition date. The
$101 million excess of the purchase price over the fair value of the
tangible net assets acquired is being amortized over ten years.
(continued)
I-135
<PAGE> 138
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(11) UVSG
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 74%, of
which 57% is attributed to the TCI Ventures Group and 17% is attributed
to Liberty Media Group. In addition, TCI's collective voting power
increased to 93%. In connection with such transaction, during the first
quarter of 1998, TCI Ventures Group recorded a $154.2 million increase
to intangible assets, a $23.5 million decrease to minority interests in
equity and a $177.7 million increase to combined equity.
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, each of UVSG's and Liberty Media Group's ownership
interest in SNG decreased from 50% to approximately 40%. Turner
Vision's contribution to SNG was accounted for as a purchase and the
$61.2 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.
In connection with the dilution of UVSG's ownership interest in SNG,
UVSG recognized a gain of $14.7 million (excluding related tax expense
of $5.9 million). The minority interest deficit in SNG attributable to
Liberty Media Group has been included in combined equity in the
accompanying combined financial statements. Accordingly, the effect of
the change in Liberty Media Group's ownership in the underlying equity
of SNG of $24.5 million has been credited to combined equity in the
accompanying combined financial statements.
In February 1998, TCI, Liberty Media Group and UVSG announced an
agreement in principal for UVSG to acquire Liberty Media Group's 40%
interest in SNG and its 100% interest in certain businesses conducted
by Netlink USA in exchange for 12.8 million shares of UVSG's common
stock (as adjusted for a two-for-one stock split). Consummation of this
transaction is subject to UVSG stockholder approval and certain
regulatory approvals. Accordingly, no assurance can be given that this
transaction will be consummated.
(continued)
I-136
<PAGE> 139
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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
22,503,412 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 the above-described pending
transation with Liberty Media Group, 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 such transactions, 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.
(12) @Home
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) TCI Ventures Group paid $36.9
million to purchase 800,000 shares of @Home common stock and (ii) TCI
Ventures Group's economic interest in @Home decreased to 38.8%. In
connection with the associated dilution of TCI Ventures Group's
ownership interest in @Home, TCI Ventures Group recognized a gain of
$16.6 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 10,350,000 shares of @Home common stock were
sold for net cash proceeds of approximately $100 million. As a result
of the @Home IPO, TCI Ventures Group's economic interest in @Home
decreased from 43% to 39%, which economic interest represents an
approximate 72% voting interest. In connection with the associated
dilution of TCI Ventures Group's ownership interest in @Home, TCI
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 17,946,956
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 TCI Ventures Group's equity interest and voting power
in @Home. See note 18.
(continued)
I-137
<PAGE> 140
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Pursuant to a shareholder's agreement among certain shareholders of
@Home, under certain circumstances, TCI Ventures Group could be
required to sell a portion of its @Home common stock to such
shareholders.
(13) Debt
The components of debt are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ----------------
amounts in thousands
<S> <C> <C>
Debentures (a) $ 345,000 345,000
Bank Facilities:
Ventures Group (b) 400,000 --
Puerto Rico Subsidiary (c) 90,000 45,000
Liberty/Ventures (d) 70,000 --
Pramer Notes (e) 65,731 --
Other 41,863 18,532
-------------- ----------------
$ 1,012,594 408,532
============== ================
</TABLE>
--------------------
(a) On February 8, 1996, TINTA received net cash proceeds of
approximately $336 million from the issuance of 4-1/2%
Convertible Subordinated Debentures (the "Debentures") due
2006 having an aggregate principal amount of $345 million. The
Debentures are convertible into shares of TINTA Series A
common stock at a price of $27.30 per share of TINTA Series A
common stock, subject to anti-dilution adjustments. Interest
on the Debentures is payable on February 15 and August 15 of
each year. The Debentures may be redeemed by TINTA in whole or
in part, at any time on or after February 15, 1999.
(b) On March 10, 1998, TCI Ventures Group entered into a bank
credit facility with a term of one year which provides for
aggregate borrowings of up to $400 million (the "Ventures
Group Bank Facility"). Borrowings under the Ventures Group
Bank Facility bear interest at variable rates. TCI Ventures
Group is required to pay a commitment fee equal to 0.15% on
the average daily unused portion of the maximum borrowing
commitments. The Ventures Group Bank Facility contains
restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and includes
limitations on indebtedness, liens and encumbrances,
acquisitions, dispositions and dividends.
(continued)
I-138
<PAGE> 141
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) TINTA's Puerto Rico subsidiary (the "Puerto Rico
Subsidiary") has a reducing revolving bank facility which is
unsecured and provides for maximum borrowing commitments of
$100 million (the "Puerto Rico Bank Facility"). The
availability of such commitments for borrowing is subject to
the Puerto Rico Subsidiary's compliance with applicable
financial covenants and other customary conditions. Commencing
March 31, 2000, the maximum commitments will be reduced
quarterly through March 31, 2006. Borrowings under the Puerto
Rico Bank Facility bear interest at variable rates. 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.
As described more fully in note 16, 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.
(d) Effective September 30, 1998, Liberty Media Corporation
("LMC") and TCI Ventures Group LLC ("Ventures LLC" and
collectively "Liberty/Ventures") entered into a revolving
credit agreement which provides for borrowings of up to $800
million through September 29, 1999 (the "Liberty/Ventures
Facility"). LMC and Ventures LLC are jointly and severally
responsible for the obligations under the Liberty/Ventures
Facility. Interest on borrowings under the Liberty/Ventures
Facility is tied to, at Liberty/Ventures option, the bank's
prime rate or LIBOR plus an applicable margin.
Liberty/Ventures must pay an annual commitment fee of .2% of
the unfunded portion of the commitment. Such commitment fees
are shared equally between Liberty Media Group and TCI
Ventures Group. The Liberty/Ventures Facility contains certain
provisions which limit LMC and Ventures LLC as to additional
indebtedness, sale of assets, liens, guarantees and
distributions. Amounts outstanding under the Liberty/Ventures
Facility at September 30, 1998 were used to fund requirements
of TCI Ventures Group and accordingly, have been attributed to
TCI Ventures Group.
(continued)
I-139
<PAGE> 142
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(e) In connection with TINTA's acquisition of Pramer, TINTA 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. TINTA 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 Debentures, which had a fair value of $336
million, TCI Ventures Group believes the carrying value of TCI Ventures
Group's debt approximates its fair value at September 30, 1998.
(14) Combined Equity
General
During the fourth quarter of 1997, TCI entered into a Total Return
Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the
Equity Swap Facility, TCI has the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares
("Equity Swap Shares") of TCI Group Series A Stock and TCI Ventures
Group Series A Stock with an aggregate purchase price of up to $300
million. TCI has the right, but not the obligation, to purchase Equity
Swap Shares through the September 30, 2000 termination date of the
Equity Swap Facility. During such period, TCI is to settle periodically
any increase or decrease in the market value of the Equity Swap Shares.
If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from
the other Equity Swap Shares. If the market value of Equity Swap Shares
is less than the Counterparty's cost, TCI, at its option, will settle
such difference with shares of TCI Group Series A Stock or TCI Ventures
Group Series A Stock or, subject to certain conditions, with cash or
letters of credit. In addition, 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 4,935,780
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
Ventures Group Series A Stock held by the Equity Swap Facility are
attributed to TCI Ventures Group.
On January 5, 1998, TCI announced that a settlement (the "Magness
Settlement") had been reached in the litigation brought against it and
other parties in connection with the administration of the Estate of
Bob Magness (the "Magness Estate"), the late founder and former
Chairman of the Board of TCI.
(continued)
I-140
<PAGE> 143
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On February 9, 1998, in connection with the Magness Settlement, TCI,
entered into a call agreement (the "Malone Call Agreement") with Dr.
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 "low-voting" Series A Stock
plus a ten percent premium. The Malones also agreed that if TCI were
ever to be sold to another entity, then the maximum premium that the
Malones would receive on their High-Voting Shares would be no greater
than a ten percent premium over the price paid for the relevant shares
of Series A Stock. TCI paid $150 million to the Malones in
consideration of them entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness (the first wife of Bob
Magness) and the Magness Estate (collectively, the "Magness Family")
also entered into a call agreement with TCI (with substantially the
same terms as the one entered into by the Malones, including a call on
the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of
approximately 49 million High-Voting Shares. The Magness Family was
paid $124 million by TCI in consideration of them entering into the
Magness Call Agreement. Additionally, on February 9, 1998, the Magness
Family entered into a 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 based upon the number of shares of each
Group (before giving effect to stock dividends) that are subject to the
Malone Call Agreement and the Magness Call Agreement. TCI Ventures
Group's share of the Call Payments of $76 million was paid during the
first quarter of 1998 and is reflected as a decrease to combined
equity.
Stock Repurchases
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 are
reflected by TCI 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 is reflected as an
obligation to redeem TCI Ventures Group Stock in the accompanying
combined balance sheets.
(continued)
I-141
<PAGE> 144
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the nine months ended September 30, 1998, pursuant to the stock
repurchase program, 145,450 shares of TCI Ventures Group Series A Stock
and 94,000 shares of TCI Ventures Group Series B Stock were repurchased
at an aggregate cost of $3.9 million. Such amount is reflected as a
decrease to combined equity in the accompanying combined financial
statements.
Transactions with Related Parties
The components of due to (from) related parties are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ------------------
amounts in thousands
<S> <C> <C>
Ventures Intergroup Credit Facility (a) $ 36,900 --
Note payable to Liberty Media Group, including accrued
interest (b) 8,502 --
TCI Note Receivable (c) -- (88,707)
Intercompany account (d) (25,312) 110,212
---------------- ------------------
$ 20,090 21,505
================ ==================
</TABLE>
--------------------
(a) TCI Group has provided a revolving loan facility (the
"Ventures Intergroup Credit Facility") to TCI Ventures Group
for a five-year period commencing on September 10, 1997. Such
facility permits aggregate 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 TCI Ventures Group to TCI Group on a
quarterly basis. Such commitment fee was $1.4 million and not
material for the nine months ended September 30, 1998 and
1997, respectively.
(b) Amounts outstanding under the note payable to Liberty Media
Group bear interest at variable rates based on the cost of
borrowing under the Liberty/Ventures Facility (see note 13).
Principal and interest is due and payable as mutually agreed
from time to time.
(c) Amounts outstanding under a note agreement between TCI
Ventures Group and TCI (the "TCI Note Receivable") were repaid
in their entirety during the third quarter of 1998. During the
nine months ended September 30, 1998 and 1997, interest income
related to the TCI Note Receivable aggregated $1.7 million and
$4.3 million, respectively.
(d) 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. Through September 10, 1997, the date
of the TCI Ventures Exchange, the effects of all transactions
with TCI Group, except those related to the TCI Note
Receivable, were reflected as adjustments to TCI Ventures
Group's combined equity.
(continued)
I-142
<PAGE> 145
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In 1996, a subsidiary attributed to TCI 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 TCI 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 TCI Ventures Group. As a result
of such assignment, TCI Ventures Group recorded a $15.9 million
reduction to the intercompany amount due to TCI Group and a
corresponding increase to combined equity. In July 1998, TCI Ventures
Group entered into an equity swap transaction with a commercial bank,
which provides TCI 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 TCI
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 TCI
Ventures Group Series A Stock at TCI Ventures Group's option. Such
shares could be used to satisfy the exchange requirements of the
aforementioned preferred stock.
During 1996, TCI Group transferred, subject to regulatory approval,
certain distribution equipment to a subsidiary of TINTA in exchange for
a (pound)15 million ($23 million using the applicable exchange rate)
principal amount promissory note (the "TVG LLC Promissory Note"). The
TVG LLC Promissory Note was contributed by TCI Group to TCI Ventures
Group in connection with the September 10, 1997 consummation of the
Exchange Offers. The distribution equipment was subsequently leased
back to TCI Group over a five year term with semi-annual payments of $2
million, plus expenses. Effective October 1, 1997, such distribution
equipment was transferred back to TCI Group and the related lease and
the TVG LLC Promissory Note were canceled. During the nine months ended
September 30, 1997, (i) the U.S. dollar equivalent of interest expense
with respect to the TVG LLC Promissory Note was $1 million, (ii) the
U.S. dollar equivalent of the lease revenue under the above-described
lease agreement aggregated $3 million and (iii) TINTA experienced
foreign currency transaction losses of $1 million, with respect to the
TVG LLC Promissory Note.
Certain TCI corporate general and administrative costs are charged to
TCI Ventures Group at rates set at the beginning of the year based on
projected utilization for that year. TCI Ventures Group was allocated
$8.2 million and $6.6 million in corporate general and administrative
costs by the TCI Group during the nine months ended September 30, 1998
and 1997, respectively.
During the nine months ended September 30, 1998 and 1997, programming
revenue earned by UVSG from TCI Group was $6.9 million and $7.0
million, respectively. UVSG purchases programming from Liberty Media
Group and, during the nine months ended September 30, 1997, also
purchased programming from TCI Group. These purchases totaled $33.2
million and $27.5 million for the nine months ended September 30, 1998
and 1997, respectively, and are included in operating costs in the
accompanying combined statements of operations.
(continued)
I-143
<PAGE> 146
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Amounts included in revenue for services provided to the other Groups
by WTCI and NDTC are $26.8 million and $27.6 million for the nine
months ended September 30, 1998 and 1997, respectively.
During the third quarter of 1998, TINTA exercised its right to require
Liberty Media Group to purchase from TINTA 2,710,406 shares of TCI
Music, Inc. Series A common stock for $8.00 per share. Due to the
related party nature of the transaction, TCI Ventures Group has
reflected its share of the excess consideration received over the basis
of net assets sold of $18.4 million as an increase to combined equity
in the accompanying combined financial statements.
A subsidiary of TCI that was attributed to TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment
was subleased to TCI Group under an operating lease. In January 1998,
TCI Group paid $7 million to TCI Ventures Group in exchange for TCI
Ventures Group's assignment of its ownership interest in such
subsidiary to TCI Group. Due to the related party nature of the
transaction, the $49.5 million total of the cash payment and the
historical cost of the net liabilities assumed by TCI Group (including
capital lease obligations aggregating $175.8 million) has been
reflected as an increase to TCI Ventures Group's combined equity.
The Puerto Rico Subsidiary purchases programming services from the TCI
Group. The charges, which approximate the TCI Group's cost and are
based on the aggregate number of subscribers served by the Puerto Rico
Subsidiary, aggregated $3.8 million and $4.9 million during the nine
months ended September 30, 1998 and 1997, respectively. The
above-described programming fee charges are included in operating costs
in the accompanying combined statements of operations.
As further described in note 5, effective October 1, 1997, TINTA ceased
to consolidate Cablevision and began to account for Cablevision under
the equity method of accounting. Cablevision purchases programming
services from certain affiliates. The related charges generally are
based upon the number of Cablevision's subscribers that receive the
respective services. During the nine months ended September 30, 1997,
such charges aggregated $11.8 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
$2.3 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.
(15) Income Taxes
At December 31, 1997, the TCI Ventures Group had federal net operating
loss carryforwards for income tax purposes aggregating approximately
$504 million which, if not utilized to reduce taxable income in future
periods, will begin to expire at various dates beginning in the year
2004. Pursuant to certain tax sharing agreements, TCI Ventures Group
has already received benefit for approximately $37 million of such net
operating loss carryforwards. TCI Ventures Group is responsible to TCI
to the extent this amount of net operating loss carryforwards is
utilized by TCI in future periods.
(continued)
I-144
<PAGE> 147
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(16) Commitments and Contingencies
In addition to the commitments and contingent obligations described
below, TCI Ventures Group has significant commitments and contingent
obligations with respect to certain of its affiliates and other
matters. See notes 2, 6, 8, 12, 14 and 17.
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.
TINTA has formed strategic partnerships with News Corp., Organizacoes
Globo and Grupo Televisa S.A. to develop and operate a direct-to-home
satellite service for Latin America, Mexico, and various Central and
South American countries (collectively, the "DTH Ventures"). Through
September 30, 1998, TINTA had contributed $52.9 million to the DTH
Ventures. It is anticipated that TINTA could be required to make
additional cash contributions in connection with the DTH Ventures. In
addition, as of September 30, 1998, TINTA had guaranteed approximately
$174 million of the DTH Ventures' financial obligations.
TCI Ventures Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights
(collectively, "Awards") granted (i) by TCI to certain TCI employees
and/or directors who are involved with the TCI Ventures Group and (ii)
by TINTA, UVSG, and @Home to employees and/or directors of such
entities. Stock compensation with respect to Awards granted by TCI
includes amounts related to TCI common stock and to common stock of
certain non-public subsidiaries of TCI and is allocated to TCI Ventures
Group based on the Awards held by TCI employees and/or directors who
are involved with TCI Ventures Group. Estimated compensation relating
to the Awards has been recorded in the accompanying combined financial
statements through September 30, 1998. Such estimate is subject to
future adjustment based upon vesting and market value, and ultimately,
on the final determination of market value when such rights are
exercised. The estimated compensation adjustment with respect to TCI
Awards resulted in increases to TCI Ventures Group's share of TCI's
stock compensation liability of $115.5 million and $68.0 million for
the nine months ended September 30, 1998 and 1997, respectively. In
addition, for the nine months ended September 30, 1998, TCI Ventures
Group made cash payments relating to its share of TCI's stock
compensation obligations of $71.3 million. The payable arising from the
compensation related to the Awards granted by TCI is included in the
amount due to related parties.
(continued)
I-145
<PAGE> 148
"TCI 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 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)
I-146
<PAGE> 149
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On July 17, 1998, NDTC acquired 21.4 million shares of 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 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. TCI
Ventures Group recorded its investment in such shares at fair value
which included a discount attributable to the above-described liquidity
restriction. TCI 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 TCI Ventures Group to GI,
has been deferred by NDTC 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.
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 $35.9 million of TCI
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 $8.3 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. TCI
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.
(continued)
I-147
<PAGE> 150
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
TCI Ventures Group has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. Although it is reasonably possible TCI 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.
On January 1, 1999, eleven of the fifteen European Union countries (the
"Participating Countries") will adopt a new currency, the "euro". The
other members of the European Union countries (Denmark, Greece, the
United Kingdom and Sweden) have elected not to adopt the euro at this
time. In connection with the adoption of the euro, (i) a fixed
conversion rate will be established between the existing currencies of
the Participating Countries (the "legacy currencies") and the euro,
(ii) the legacy currencies will trade on currency exchanges and will
remain legal tender in the Participating Countries through January 1,
2002 and (iii) the Participating Countries will no longer control their
own monetary policies. Instead, the new European Central Bank will
direct monetary policy, including money supply and official interest
rates of the euro. Certain of TINTA's affiliates (primarily
MultiThematiques and UII) have operations in the Participating
Countries. Management of TINTA has had communications with such
affiliates to assess the impact of the euro conversion on TINTA.
Although there can be no assurance, TINTA anticipates that the euro
conversion will not have an adverse material effect on it's financial
position, results of operations or cash flows.
(continued)
I-148
<PAGE> 151
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(17) 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 TCI Ventures Group's most
critical systems, equipment, and facilities. TCI also continued its
efforts to verify the year 2000 readiness of TCI 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 TCI Ventures
Group's year 2000 remediation efforts. It is comprised of a 90-member
full-time staff and is accountable to executive management of TCI
Ventures Group.
The PMO has defined a four-phase approach to determining the year 2000
readiness of TCI Ventures Group's systems, software and equipment. Such
approach is intended to provide a detailed method for tracking the
evaluation, repair and testing of TCI 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 TCI Ventures Group's systems,
software, and equipment for year 2000 readiness, or in certain cases,
relying on test results provided to TCI Ventures Group. Phase 4,
Implementation, involves placing compliant systems, software and
equipment into production or service.
At September 30, 1998, TCI Ventures Group's overall progress by phase
was as follows:
<TABLE>
<CAPTION>
Percentage of all
Equipment/Systems
Phase In Phase*
----- -----------------
<S> <C>
Phase 1-Assessment 87%
Phase 2-Remediation 29%
Phase 3-Testing 16%
Phase 4-Implementation 3%
</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)
I-149
<PAGE> 152
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI 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,
TCI Ventures Group continued its survey of significant third-party
vendors and suppliers whose systems, services or products are important
to TCI Ventures Group's operations (e.g., suppliers of addressable
controllers and set-top boxes, and the provider of billing services).
The year 2000 readiness of such providers is critical to continued
provision of TCI Ventures Group's cable and programming services. TCI
Ventures Group has received information that the most critical systems,
services or products supplied to TCI Ventures Group by third parties
are either year 2000 ready or are expected to be year 2000 ready by
mid-1999. TCI Ventures Group is currently developing contingency plans
for systems provided by vendors who have not responded to TCI Ventures
Group's surveys.
In addition to the survey process described above, management of TCI
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. TCI 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 TCI Ventures Group's
investments in certain public and private corporations, partnerships
and other businesses. Accordingly, TCI Ventures Group is monitoring the
public disclosure of such publicly-held business entities to determine
their year 2000 readiness. In addition, TCI Ventures Group has surveyed
and monitored the year 2000 status of certain privately-held business
entities in which TCI Ventures Group has significant investments.
(continued)
I-150
<PAGE> 153
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Year 2000 expenses and capital expenditures incurred in the three
months ended September 30, 1998 were approximately $200,000 and zero,
respectively. Expenses and capital expenditures incurred in the nine
months ended September 30, 1998 were approximately $500,000 and zero,
respectively. Management of TCI Ventures Group currently estimates the
remaining costs to be not less than $10.5 million, bringing the total
estimated cost associated with TCI Ventures Group's year 2000
remediation efforts to be not less than $11 million, including TCI
Ventures Group's pro rata share of the $32 million cost for replacement
of noncompliant information technology ("IT") systems. Also included in
this estimate is TCI 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 TCI 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.
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 TCI Ventures Group's systems or the systems of
other companies on which TCI Ventures Group relies will be converted in
time or that any such failure to convert by TCI Ventures Group or other
companies will not have a material adverse effect on its financial
position, results of operations or cash flows.
(18) Restatement of Costs Associated with Distribution Agreements
TCI Ventures Group has restated its combined financial statements to
record non-cash costs of certain distribution agreements as assets to
be amortized over the exclusivity periods set forth in the respective
distribution agreements. Such non-cash costs had originally been
expensed in the period that the underlying warrants had become
exercisable. This restatement resulted in a $208.0 million increase to
other intangible 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 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 12.
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<PAGE> 154
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information concerning
the results of operations and financial condition of the Company, TCI Group,
Liberty Media Group and TCI Ventures Group. Such discussion should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto of the Company and the accompanying combined financial statements and
notes thereto of each of the TCI Group, Liberty Media Group and TCI Ventures
Group. Additionally, the following discussion and analysis should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations and financial statements included in Part II of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. The
following discussion focuses on material trends, risks and uncertainties
affecting the results of operations and financial condition of the Company, TCI
Group, Liberty Media Group and TCI Ventures Group.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under this caption are forward-looking. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company (or
entities in which the Company has interests), or industry results, to differ
materially from future results, performance or achievements expressed or implied
by such forward-looking statements. Such risks, uncertainties and other factors
include, among others: general economic and business conditions and industry
trends; the regulatory and competitive environment of the industries in which
the Company, and the entities in which the Company has interests, operate;
uncertainties inherent in new business strategies; 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, and adverse outcomes from regulatory proceedings; changes in the
nature of key strategic relationships with partners and joint venturers;
competitor responses to the Company's products and services, and the products
and services of the entities in which the Company has interests, and the overall
market acceptance of such products and services; and other factors. These
forward-looking statements (and such risks, uncertainties and other factors)
speak only as of the date of this Report, and the Company expressly disclaims
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein, to reflect any change in the
Company's expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based. Any statement
contained within Management's Discussion and Analysis of Financial Condition and
Results of Operations on this Form 10-Q related to year 2000 are hereby
denominated as "Year 2000 Statements" within the meaning of the Year 2000
Information and Readiness Disclosure Act.
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<PAGE> 155
Targeted Stock
TCI targeted common stock is comprised of six series: TCI Group Series
A Stock, TCI Group Series B Stock, Liberty Group Series A Stock, Liberty Group
Series B Stock, TCI Ventures Group Series A Stock and TCI Ventures Group Series
B Stock.
The Liberty Group Stock is intended to reflect the separate performance
of the Liberty Media Group, which is comprised of TCI's assets which produce and
distribute programming services. The TCI Ventures Group Stock is intended to
reflect the separate performance of the TCI Ventures Group, which is comprised
of TCI's principal international assets and businesses and substantially all of
TCI's non-cable and non-programming assets. The TCI Group Stock is intended to
reflect the separate performance of TCI and its subsidiaries and assets not
attributed to Liberty Media Group or TCI Ventures Group. TCI Group is comprised
primarily of TCI's domestic cable and communications business. For additional
information concerning targeted stock, see note 1 to the accompanying
consolidated financial statements of TCI.
Proposed Merger
TCI and AT&T have agreed to a Merger pursuant to, and subject to the
terms and conditions set forth in, the Merger Agreement dated as of June 23,
1998. In the Merger, TCI will become a wholly-owned subsidiary of AT&T. 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.
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. For additional information concerning the Merger, see note 2
to the accompanying consolidated financial statements of TCI.
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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 LIBOR plus 1% on the
Sale Price, as adjusted for payments made by the Company pursuant to any
quarterly settlement with the Investment Bankers. Due to the Company's ability
to settle quarterly price fluctuations and fees with shares of TCI Group Series
A Stock or TCI Ventures Group Series A Stock, the Company records all amounts
received or paid under this arrangement as increases or decreases, respectively,
to equity. During the fourth quarter of 1997, the Company repurchased 4 million
shares of TCI Group Series A Stock from one of the Investment Bankers for an
aggregate cash purchase price of $66 million. Additionally, as a result of the
Exchange Offers and certain open market transactions that were completed to
obtain the desired weighting of TCI Group Series A Stock and TCI Ventures Group
Series A Stock, the Investment Bankers disposed of 4,210,308 shares of TCI Group
Series A Stock and acquired 23,407,118 shares of TCI Ventures Group Series A
Stock during the last half of 1997. As a result of the foregoing transactions
and certain transactions related to the January 5, 1998 settlement of litigation
involving the Magness Estate, as described below, the Option Shares were
comprised of 6,201,042 shares of TCI Group Series A Stock and 11,740,610 shares
of TCI Ventures Group Series A Stock at 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.
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").
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A Stock
and 11,666,506 shares of TCI Ventures Group Series A Stock were returned to TCI
as authorized but unissued shares, (ii) the Magness Estate returned to the
Investment Bankers the portion of the Sales Price attributable to such returned
shares and (iii) the Magness Estate paid $11 million to TCI representing a
reimbursement of the Exchange fees incurred by TCI from June 16, 1997 through
February 9, 1998 with respect to such returned shares. TCI then issued to the
Magness Estate 10,017,145 shares of TCI Group Series B Stock and 12,034,298
shares of TCI Ventures Series B Stock. In addition, as part of the Magness
Settlement, TCI 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.
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<PAGE> 157
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 (collectively, the "Call Payments") was reflected as
a $274 million reduction of additional paid-in capital. The Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, $134 million, $64 million
and $76 million of the Call Payments were allocated to TCI Group, Liberty Media
Group and TCI Ventures Group, respectively.
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<PAGE> 158
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 agree 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
TCI Group 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.
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.
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<PAGE> 159
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.
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.
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<PAGE> 160
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 CSC, 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.
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.
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<PAGE> 161
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.
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.
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<PAGE> 162
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* 1997 1998* 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>
* Restated - see note 18 to the accompanying consolidated financial statements
of TCI.
The operating results of each of the TCI Group, Liberty Media Group and
TCI Ventures Group are separately discussed below.
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<PAGE> 163
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 Regulated Services are regulated if a
complaint is filed by a customer or if the appropriate franchise authority is
certified by the Federal Communications Commission to regulate rates. At
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.
During the first nine months of 1998, TCI Group consummated 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 note 7 to the
accompanying combined financial statements of TCI Group.
I-161
<PAGE> 164
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.
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 period. 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
period. 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.
I-162
<PAGE> 165
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 accompanying combined financial statements of TCI Group.
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.
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. As described in
note 5 to the accompanying combined financial statements of TCI Group, TCI Group
acquired an equity interest in CSC on March 4, 1998.
TCI Group's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in the
domestic cable television business. TCI Group's share of net earnings (losses)
of other affiliates 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.
I-163
<PAGE> 166
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 accompanying
combined financial statements of TCI Group.
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 accompanying combined financial statements of TCI
Group.
Net Earnings
As a result of the above-described fluctuations in the Company's
results of operations, (i) TCI Group's net earnings (before preferred stock
dividend requirements) of $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.
I-164
<PAGE> 167
LIBERTY MEDIA GROUP
Liberty Media Group's assets include businesses which provide
programming services including production, acquisition and distribution through
all available formats and media of branded entertainment, educational and
informational programming and software, including multimedia products. Liberty
Media Group's assets also include businesses engaged in electronic retailing,
direct marketing, advertising sales relating to programming services,
infomercials and transaction processing. A significant portion of Liberty Media
Group's operations are conducted through corporations and partnerships in which
Liberty Media Group holds a 20%-50% ownership interest. As Liberty Media Group
generally accounts for such ownership interests using the equity method of
accounting, the financial condition and results of operations of such entities
are not reflected on a combined basis within Liberty Media Group's combined
financial statements.
On June 24, 1997 Liberty Media Group granted Time Warner the Southern
Option. Liberty Media Group received 6.4 million shares of TW Exchange Stock
valued at $306 million in consideration for the grant. In September 1997, Time
Warner exercised the Southern Option. Pursuant to the Southern Option, Time
Warner acquired the Southern Business, effective January 1, 1998, for $213
million, which was paid in cash, together with the assumption of certain
liabilities on January 2, 1998. Effective January 1, 1998, the Southern Business
is no longer included in the combined financial statements of Liberty Media
Group.
Subsequent to June 30, 1997, Liberty Media Group and TCI Group entered
into a series of transactions pursuant to which the businesses of "Encore," a
movie premium programming service, and "STARZ!," a first-run movie premium
programming service, were contributed to Encore Media Group, a subsidiary of TCI
that is attributed to the Liberty Media Group. Upon the July 1997 formation of
Encore Media Group, the operations of STARZ! were included in the combined
financial statements of Liberty Media Group.
Simultaneously with the July 1997 DMX Merger, substantially all of
TCI's controlling ownership interest in TCI Music was transferred to Liberty
Media Group in exchange for the Music Note and the assumption of the obligation
under the Rights Agreement. Accordingly, TCI Music has been included in the
combined financial statements of Liberty Media Group since the date of the DMX
Merger.
Effective November 1, 1997, Liberty Media Group acquired the remaining
50% interest in International Cable Channels Partnership, Ltd. ("ICCP") for
$1.75 million. Upon consummation of such transaction the operations of ICCP were
included in the combined financial statements of Liberty Media Group.
I-165
<PAGE> 168
Summary of Operations
Liberty Media Group's programming services include production,
acquisition and distribution through all available formats and media of branded
entertainment, educational and informational programming and software, including
multimedia products ("Entertainment and Information Programming Services"). The
table below sets forth, for the periods indicated, certain financial information
and the percentage relationship that certain items bear to revenue. This summary
provides trend data related to the normal recurring operations of Liberty Media
Group. Corporate expenses have been reflected separately in the following table.
Liberty Media Group holds significant equity investments, the results of which
are not a component of operating income, but are discussed below under "Other
Income and Expense." Other items of significance are discussed separately below.
<TABLE>
<CAPTION>
Three months ended September 30,
----------------------------------
1998 1997
--------------- ----------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
Programming Services
Revenue 100% $ 176,265 100% $ 124,505
Operating, selling, general and administrative 81% (142,321) 80% (99,362)
Stock compensation 2% (4,489) 6% (7,406)
Depreciation and amortization 5% (8,936) 4% (4,988)
---- --------- --- ---------
Operating income 12% $ 20,519 10% $ 12,749
==== ========= === =========
Corporate expenses
Selling, general and administrative $ (3,300) $ (1,398)
Stock compensation 2,021 (35,492)
Depreciation and amortization (31) (30)
--------- ---------
Operating loss $ (1,310) $ (36,920)
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
----------------------------------
1998 1997
--------------- ----------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
Programming Services
Revenue 100% $ 497,960 100% $ 243,536
Operating, selling, general and administrative 83% (414,741) 73% (177,657)
Stock compensation 4% (18,518) 5% (11,982)
Depreciation and amortization 5% (24,784) 3% (6,486)
---- --------- --- ---------
Operating income 8% $ 39,917 19% $ 47,411
==== ========= === =========
Corporate expenses
Selling, general and administrative $ (8,609) $ (4,197)
Stock compensation (122,386) (50,956)
Depreciation and amortization (90) (87)
--------- ---------
Operating loss $(131,085) $ (55,240)
========= =========
</TABLE>
I-166
<PAGE> 169
Entertainment and Information Programming Services
As discussed above, certain acquisitions and dispositions have affected
the comparability of Liberty Media Group's operating results for the nine months
and three months ended September 30, 1998 and 1997. The following table presents
adjustments to remove the effects of such acquisitions and dispositions.
<TABLE>
<CAPTION>
Three months ended September 30, 1998
--------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
---------- ------------------ ------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 176,265 (24,674) 151,591
Operating, selling, general and
administrative expenses (142,321) 24,317 (118,004)
Stock compensation (4,489) 128 (4,361)
Depreciation and amortization (8,936) 6,905 (2,031)
--------- --------- ---------
Operating income $ 20,519 6,676 27,195
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1997
--------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
---------- ------------------ ------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 124,505 (17,978) 106,527
Operating, selling, general and
administrative expenses (99,362) 6,893 (92,469)
Stock compensation (7,406) 581 (6,825)
Depreciation and amortization (4,988) 3,140 (1,848)
--------- --------- ---------
Operating income $ 12,749 (7,364) 5,385
========= ========= =========
</TABLE>
I-167
<PAGE> 170
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
--------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
---------- ------------------ ------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 497,960 (287,468) 210,492
Operating, selling, general and
administrative expenses (414,741) 277,489 (137,252)
Stock compensation (18,518) 369 (18,149)
Depreciation and amortization (24,784) 19,410 (5,374)
---------- -------- --------
Operating income $ 39,917 9,800 49,717
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1997
--------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
---------- ------------------ ------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 243,536 (83,423) 160,113
Operating, selling, general and
administrative expenses (177,657) 72,519 (105,138)
Stock compensation (11,982) 581 (11,401)
Depreciation and amortization (6,486) 3,583 (2,903)
---------- --------- --------
Operating income $ 47,411 (6,740) 40,671
========== ========= ========
</TABLE>
Excluding the effect of acquisitions and dispositions, revenue from
Entertainment and Information Programming Services increased 42% or $45 million
for the quarter ended September 30, 1998, as compared to the quarter ended
September 30, 1997. The increase is primarily attributable to higher revenue
from the distribution of Encore services to cable operators, including TCI
Group. In connection with the formation of Encore Media Group, TCI Group entered
into the EMG Affiliation Agreement pursuant to which TCI Group pays monthly
fixed amounts in exchange for unlimited access to all of the existing Encore and
STARZ! services. During the three months ended September 30, 1998, revenue from
Encore services distributed to TCI Group increased due to the EMG Affiliation
Agreement, when compared to the three months ended September 30, 1997.
Additionally, Netlink had increased revenue during the third quarter of 1998
compared to the same period in 1997 of approximately $1 million, primarily due
to increased rates as a result of increased copyright fees.
I-168
<PAGE> 171
Operating, selling, general and administrative expenses from
Entertainment and Information Programming Services, as adjusted for the effect
of acquisitions and dispositions, increased 28% or $26 million for the quarter
ended September 30, 1998 compared to the quarter ended September 30, 1997.
Operating, selling, general and administrative expenses related to Encore
services increased by $22 million during the third quarter of 1998 compared to
the third quarter of 1997 primarily due to a $14 million increase in first run
program license fees, $1 million increase in music rights costs and $1 million
due to increased transponder costs from the acquisition of an additional
transponder. The remainder of the increase from Encore Services is due to a $6
million increase in marketing support costs. Operating, selling, general and
administrative expenses at Netlink increased by approximately $2 million which
is primarily attributable to an increase in the copyright fee rate from
approximately $.06 per subscriber to $.27 per subscriber. Additionally, Liberty
Media Group incurred start up costs of approximately $1 million during the
second quarter of 1998 for a new package of Spanish language channels (the
"Spanish Plex").
Revenue from TCI Music contributed $22 million and $10 million to
revenue from Entertainment and Information Programming Services for the quarter
ended September 30, 1998 and 1997, respectively. Operating, selling, general and
administrative expenses for the three months ended September 30, 1998 and 1997
included $22 million and $5 million, respectively, from the operations of TCI
Music, As discussed above, operations for TCI Music were not included in the
combined financial results of Liberty Media Group prior to the date of the DMX
Merger. Additionally, revenue from ICCP contributed $2 million to revenue for
the three months ended September 30, 1998. Operating, selling, general and
administrative expenses for Entertainment and Information Programming Services
for the quarter ended September 30, 1998 included $3 million from the operations
of ICCP. Operations for ICCP were not included in the combined financial results
of Liberty Media Group for the nine months ended September 30, 1997.
Excluding the effect of acquisitions and dispositions, revenue from
Entertainment and Information Programming Services increased 31% or $50 million
during the nine months ended September 30, 1998 compared to the nine months
ended September 30, 1997. The increase is primarily attributable to higher
subscription revenue from the distribution of Encore services to cable
operators, including TCI Group. Additionally, 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.
Operating, selling, general and administrative expenses from
Entertainment and Information Programming Services, as adjusted for the effect
of acquisitions and dispositions, increased 31% or $32 million for the nine
months ended September 30, 1998 compared to the same period of 1997. Increased
first run program license fees related to the Encore services accounted for $16
million of the increase. Additionally, operating, selling, general and
administrative costs for the Encore services increased by $3 million due to
increased music rights costs and $3 million due to increased marketing support
costs. Operating, selling, general and administrative expenses at Netlink
increased $7 million for the nine months ended September 30, 1998 compared to
1997 primarily due to the increase in the copyright fee rate. Additionally,
Liberty Media Group incurred start up costs of approximately $2 million during
the nine months ended September 30, 1998 for the Spanish Plex.
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 an increase in Encore Media Group's
stock compensation. See note 10 to the accompanying combined financial
statements of Liberty Media Group.
I-169
<PAGE> 172
Revenue from TCI Music contributed $63 million and $10 million to
revenue from Entertainment and Information Programming Services for the nine
months ended September 30, 1998 and 1997, respectively. Additionally, revenue
from STARZ! contributed $218 million and $50 million for the nine month periods
in 1998 and 1997, respectively, and ICCP contributed $7 million to revenue for
the nine months ended September 30, 1998. As discussed above, the operations for
STARZ! were not included in the combined financial results of Liberty Media
Group for the six months ended June 30, 1997. Operating, selling, general and
administrative expenses for Entertainment and Information Programming Services
for the nine months ended September 30, 1998 and 1997 included $59 million and
$5 million, respectively, from the operations of TCI Music and $208 million and
$62 million, respectively, from the operations of STARZ!. Operating, selling,
general and administrative expenses for the nine months ended September 30, 1998
included $10 million from the operations of ICCP.
Corporate Expenses
The amount of expense associated with stock compensation is based on
the vesting of the related stock options and stock appreciation rights and the
market price of the underlying common stock as of the date of the financial
statements. The expense is subject to future adjustment based on vesting and
market price fluctuations and, ultimately, on the final determination of market
value when the rights are exercised. See note 9 to the accompanying combined
financial statements of Liberty Media Group.
Other Income and Expense
Interest expense was $42 million and $8 million during the nine months
ended September 30, 1998 and 1997, respectively. Increased interest expense is
directly related to increased outstanding debt at Encore Media Group, TCI Music,
CCC and LMC Capital as well as an increase in interest-bearing amounts due to
TCI Group during the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997.
Dividend and interest income was $41 million and $34 million during the
nine months ended September 30, 1998 and 1997, respectively. Such amounts are
primarily comprised of dividends received on the FKW Preferred Stock and the
Time Warner Exchange Stock.
Liberty Media Group's share of losses of affiliates for the quarters
ended September 30, 1998 and 1997 was $32 million and $8 million, respectively.
Liberty Media Group's share of losses of affiliates was $103 million for the
nine months ended September 30, 1998 compared to earnings of $5 million for the
corresponding period in 1997.
Liberty Media Group's share of earnings of affiliates attributable to
its interest in Discovery decreased $4 million and $23 million during the
quarter and nine months ended September 30, 1998 compared to the quarter and
nine months ended September 30, 1997, respectively. While Discovery's revenue
increased by 32% and 27% during the third quarter and nine months of 1998,
respectively, its earnings before interest, taxes, depreciation and amortization
decreased by 70% and 44%, principally because of costs associated with launching
new digital services, continuing investments in the retail business as well as
new joint ventures including the joint venture with the British Broadcasting
Corporation. Interest expense for Discovery was 98% and 113% higher in the third
quarter and nine months of 1998, respectively, compared to the same periods 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.
I-170
<PAGE> 173
Liberty Media Group's share of earnings of affiliates attributable to
its interest in QVC increased approximately $11 million and $20 million during
the quarter and nine months ended September 30, 1998, respectively, compared to
the same period in 1997. QVC's revenue increased by 17% and 15% for the quarter
and nine months ended September 30, 1998, respectively, contributing to a 34%
and 26% increase in earnings before interest, taxes, depreciation and
amortization over the corresponding periods in 1997. In the aggregate, interest
expense, interest income, taxes, depreciation and amortization for QVC increased
by 1% and 8% for the third quarter and first nine months of 1998, respectively,
resulting in a 181% and 106% increase in net income for QVC for the quarter and
nine months ended September 30, 1998, respectively, compared to the quarter and
nine months ended September 30, 1997.
The share of losses of Fox Sports was responsible for approximately $76
million of the decrease in share of earnings of affiliates for the first nine
months of 1998 compared to 1997. Prior to the first quarter of 1998, Liberty
Media Group had no obligation, nor intention, to fund Fox Sports. During 1998,
Liberty Media Group made the determination to provide funding to Fox Sports
based on specific transactions consummated by Fox Sports. Consequently, Liberty
Media 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 Media Group's investment in Fox Sports was less than zero.
During 1997, Liberty Media Group granted Time Warner the Southern
Option and received 6.4 million shares of Time Warner Exchange Stock valued at
$306 million in consideration for the grant. Such amount had been reflected as a
deferred option premium in the accompanying combined financial statements of
Liberty Media Group. Pursuant to the Southern Option, Time Warner acquired the
Southern Business, effective January 1, 1998 for $213 million in cash. Liberty
Media Group recognized a $515 million pre-tax gain in connection with these
transactions in the first quarter of 1998. See note 6 to the accompanying
combined financial statements of Liberty Media Group.
Effective February 1, 1998, Turner-Vision, Inc. contributed the assets,
obligations and operations of its retail C-band Satellite business to SNG in
exchange for an approximate 20% interest in SNG. As a result of this
transaction, Liberty Media Group's ownership interest in SNG decreased from 50%
to approximately 40%. In connection with such dilution, Liberty Media Group
recognized a $23 million gain (before deducting deferred income tax expense of
$9 million). See note 5 to the accompanying combined financial statements of
Liberty Media Group.
On August 1, 1997, Liberty IFE Inc., a wholly owned subsidiary of
Liberty Media Group which holds the Class C Stock and the Convertible Notes,
contributed its Class C Stock and Convertible Notes to FKW in exchange for the
FKW Preferred Stock. As a result of the exchange, Liberty Media Group recognized
a pre-tax gain of approximately $304 million.
I-171
<PAGE> 174
TCI VENTURES GROUP
The following table sets forth certain financial information for the
TCI Ventures Group and the businesses attributed to it during the nine months
ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------
1998(4) 1997
------------------- ----------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Revenue:
UVSG $ 443,177 65% $ 376,882 50%
NDTC (1) 76,080 11 69,750 9
ETC 63,222 9 65,245 9
TINTA (2) 43,557 6 206,621 27
WTCI 27,044 4 25,984 3
@Home 28,808 4 3,737 1
Corporate and other 2,996 1 9,863 1
---------- ------ ---------- -----
$ 684,884 100% $ 758,082 100%
========== ====== ========== =====
Operating, selling, general,
administrative:
UVSG $ 350,428 59% $ 302,237 48%
NDTC 54,172 9 41,838 7
ETC 67,497 11 78,858 13
TINTA (2) 33,468 6 132,447 21
WTCI 19,908 3 17,058 3
@Home 55,004 9 34,804 6
Corporate and other 15,880 3 15,862 2
---------- ------ ---------- -----
$ 596,357 100% $ 623,104 100%
========== ====== ========== =====
Depreciation, amortization,
other non-cash charges,
stock compensation and
year 2000 costs:
UVSG $ 44,850 17% $ 26,839 13%
NDTC 28,862 10 23,204 11
ETC 4,921 2 4,663 2
TINTA (2) 21,179 8 56,950 28
WTCI 9,126 3 6,416 3
@Home 48,461 18 5,311 3
Corporate and other (3) 112,866 42 83,465 40
---------- ------ ---------- -----
$ 270,265 100% $ 206,848 100%
========== ====== ========== =====
Operating income (loss):
UVSG $ 47,899 (5) $ 47,806 (5)
NDTC (6,954) 4,708
ETC (9,196) (18,276)
TINTA (2) (11,090) 17,224
WTCI (1,990) 2,510
@Home (74,657) (36,378)
Corporate and other (3) (125,750) (89,464)
---------- ----------
$ (181,738) $ (71,870)
========== ==========
</TABLE>
- -----------------------
I-172
<PAGE> 175
(1) A significant number of NDTC's major customers are affiliates
of TCI, and NDTC derives a substantial portion of its revenue
from such affiliated companies. For the 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.
(2) As described in note 7 to the accompanying combined financial
statements of TCI Ventures Group, effective October 1, 1997,
TINTA ceased to consolidate Cablevision and began to account
for Cablevision using the equity method of accounting. As a
result, effective October 1, 1997, TINTA's results of
operations no longer include Cablevision's results of
operations on a consolidated basis. The following table sets
forth summary information with respect to the operating
results of Cablevision that were included in TINTA's results
of operations for the nine months ended September 30, 1997
(amounts in thousands):
<TABLE>
<S> <C>
Revenue $ 173,517
Operating costs and expenses (105,351)
Depreciation and amortization (40,882)
---------
Operating income $ 27,284
=========
</TABLE>
(3) Amount includes stock compensation expense of $109.9 million
and $61.3 million for the nine months ended September 30, 1998
and 1997, respectively.
(4) Restated - see note 18 to the accompanying combined financial
statements of TCI Ventures Group.
(5) Not meaningful.
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 $35.9 million of TCI 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 $8.3 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. TCI
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.
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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.
Revenue
Revenue decreased by $10.2 million or 4% and $73.2 million or 10%
during the three and nine month periods ended September 30, 1998, respectively,
as compared to the corresponding prior year periods. Such decreases are largely
attributable to TINTA's deconsolidation of Cablevision which was partially
offset by increased revenue of UVSG.
Revenue from UVSG increased $27.7 million or 22% and $66.3 million or
18% during the three and nine month periods ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
increases are due primarily to Turner Vision's retail C-band operations which
were combined with SNG effective February 1, 1998.
Operating Costs and Expenses
Operating costs and expenses, excluding depreciation, amortization,
stock compensation, other non-cash charges and year 2000 costs decreased by $7.6
million or 4% and $26.7 million or 4% during the three and nine month periods
ended September 30, 1998, respectively, as compared to the corresponding prior
year periods. Such decreases are attributable to TINTA's deconsolidation of
Cablevision which was partially offset by increased costs attributable to UVSG.
Operating costs and expenses, excluding depreciation, amortization,
stock compensation and other non-cash charges from UVSG increased $18.7 million
or 19% and $48.2 million or 16% during the three and nine month periods ended
September 30, 1998, respectively, as compared to the corresponding prior year
periods. Such increases are primarily attributable to Turner Vision's retail
C-band operations which were combined with SNG effective February 1, 1998.
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Certain TCI corporate general and administrative costs are charged to
the TCI Ventures Group at rates set at the beginning of the year based on
projected utilization for that year. During the three months ended September 30,
1998 and 1997, TCI Ventures Group was allocated $1.9 million and $2.2 million,
respectively, in corporate general and administrative costs by TCI Group. During
the nine months ended September 30, 1998 and 1997, TCI Ventures Group was
allocated $8.2 million and $6.6 million, respectively, in corporate general and
administrative costs by TCI Group.
Stock compensation expense increased (decreased) $(60.2 million) and
$53.7 million during the three and nine month periods ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. Such amounts
represent changes in TCI Ventures Group's stock compensation liability. TCI
Ventures Group records stock compensation expense relating to Awards granted by
(i) TCI to certain TCI employees and/or directors who are involved with the TCI
Ventures Group and (ii) TINTA, UVSG, and @Home to employees and/or directors of
such entities. Stock compensation with respect to Awards granted by TCI includes
amounts related to TCI common stock and to common stock of certain non-public
subsidiaries of TCI and is allocated to TCI Ventures Group based on the Awards
held by TCI employees and/or directors who are involved with TCI Ventures Group.
Estimated compensation relating to stock appreciation rights has been recorded
through September 30, 1998. Such estimate is subject to future adjustment based
upon vesting and market value, and ultimately, on the final determination of
market value when such rights are exercised. See note 16 to the accompanying
combined financial statements of TCI Ventures Group.
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Other Income and Expense
The TCI Ventures Group's share of losses from its investment in the PCS
Ventures increased $39.6 million and $206.0 million during the three and nine
month periods ended September 30, 1998, respectively, as compared to the
corresponding prior year periods. The increases in the share of losses are
attributed primarily to increases in (i) selling, general and administrative
costs associated with Sprint Spectrum's efforts to increase its customer base,
(ii) depreciation expense resulting from capital expenditures made to expand its
PCS network and (iii) interest expense associated with higher amounts of
outstanding debt. It is expected that Sprint PCS will continue to incur
significant operating losses and significant negative cash flow from operating
activities during the next several years while it continues to expand its PCS
network and build its customer base. Sprint PCS's operating profitability will
depend upon many factors, including, among others, its ability to (i) market its
products and services successfully, (ii) achieve its projected market
penetration, (iii) manage customer turnover rates effectively and (iv) price its
products and services competitively. There can be no assurance that Sprint PCS
will achieve or sustain operating profitability or positive cash flow from
operating activities in the future. If Sprint PCS does not achieve and maintain
operating profitability and positive cash flow from operating activities on a
timely basis, it may not be able to meet its debt service requirements.
The TCI Ventures Group's share of Telewest's net losses decreased $11.5
million and $21.3 million during the three and nine month periods ended
September 30, 1998, respectively, as compared to the corresponding prior year
periods. Such changes are primarily attributable to the net effects of (i)
changes in foreign currency transaction losses, (ii) an increase in operating
cash flow resulting from revenue growth and (iii) an increase in interest
expense. In connection with a previous merger transaction, Telewest issued the
Telewest Debentures. Changes in the exchange rate used to translate the Telewest
Debentures into U.K. pounds sterling and the adjustment of a foreign currency
option contract to market value caused Telewest to experience foreign currency
transaction gains (losses) of (i) $20.9 million and $(14.5 million) during the
three months ended September 30, 1998 and 1997, respectively, and (ii) $18.5
million and $(54.5 million) during the nine months ended September 30, 1998 and
1997, respectively. It is anticipated that Telewest will continue to experience
realized and unrealized foreign currency transaction gains and losses throughout
the term of the Telewest Debentures, which mature in 2006 and 2007, if not
redeemed earlier.
As described above, effective October 1, 1997, TINTA ceased to
consolidate Cablevision and began to account for Cablevision using the equity
method of accounting. The TCI Ventures Group's share of losses from Cablevision
was $6.8 million and $14.4 million for the three and nine month periods ended
September 30, 1998, respectively.
TCI Ventures Group's share of losses from the Other Affiliates remained
relatively constant during the three and nine month periods ended September 30,
1998, as compared to the corresponding prior year periods. Increased losses of
MultiThematiques, Liberty/TINTA and BIP Poland were partially offset by a
decrease in TCG's share of losses. As described below, 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 Ventures Group received in exchange for its 26% interest in
TCG, shares of AT&T Common Stock. TCI Ventures Group accounts for its ownership
interest in AT&T Common Stock as an available-for-sale security. TCI Ventures
Group expects that the Other Affiliates will continue to incur losses as they
continue to expand their operations and/or launch new services. For additional
information, see note 8 to the accompanying combined financial statements of TCI
Ventures Group.
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Interest expense increased (decreased) $3.0 million and $(2.9 million)
during the three and nine month periods ended September 30, 1998, respectively,
as compared to the corresponding prior year periods. Such changes are primarily
the result of the net effects of increased borrowings during the second and
third quarters of 1998, the October 1997 deconsolidation of Cablevision and the
January 1998 assignment of certain capital lease obligations to TCI Group.
Dividend and interest income increased $16.7 million and $15.4 million
during the three and nine month periods ended September 30, 1998, respectively,
as compared to the corresponding prior year periods. Such changes are primarily
the result of dividends received on TCI Ventures Group's investment in AT&T
Common Stock.
During the nine months ended September 30, 1998 and 1997, TCI Ventures
Group recognized $2.3 billion and $104.8 million, respectively, in gains from
the disposition of assets. The most significant of such gains are described
below.
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 Ventures Group received in
exchange for its 26% interest in TCG, approximately 47 million shares of AT&T
Common Stock. TCI 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 TCI Ventures Group's interest in TCG and the fair
value of the AT&T Common Stock received.
On February 12, 1998, TCI Ventures Group sold its (i) 79% interest in
New Jersey Fiber Technologies, L.P., (ii) 40% interest in NHT Partnership and
(iii) 50% interest in Louisville Lightwave for aggregate cash proceeds of $44.1
million. TCI Ventures Group recognized a gain of $28.6 million on such
transactions.
In July 1998, TCI and the other partner of Kansas City Fiber Network,
L.P. ("KC Fiber") sold the assets of KC Fiber to TCG for cash proceeds of
approximately $55 million. TCI Ventures Group held a 50% interest in KC Fiber.
TCI Ventures Group received proceeds of $20.3 million and recognized a gain of
$14.6 million in connection with such sale.
On September 26, 1997, TINTA sold its interest in Sky Network
Television New Zealand, Ltd. for cash proceeds of $53.0 million. TINTA
recognized a gain on such sale of $58.4 million.
In February 1997, TSX Corporation ("TSX"), an equity affiliate of the
TCI Ventures Group, and Antec Corporation ("Antec") entered into a business
combination with Antec being the surviving entity. In connection with this
transaction, the TCI Ventures Group recognized a $29 million gain representing
the difference between the fair value of the Antec shares received and the
carrying value of its investment in TSX at the date of the transaction. The TCI
Ventures Group accounts for its investment in Antec as an available-for-sale
security.
During the first quarter of 1998, UVSG recognized a gain of $14.7
million from the dilution of its interest in SNG. In addition, during the third
quarter of 1998, TCI Ventures Group recognized a gain of $16.6 million from the
dilution of its interest in @Home. For additional information regarding such
transactions, see notes 11 and 12 to the accompanying combined financial
statements of TCI Ventures Group.
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On April 22, 1998, TCG completed a merger transaction with ACC in which
ACC shares were exchanged with shares of TCG. As a result of such merger
transaction, TCI Ventures Group's interest in TCG was reduced to approximately
26%. In connection with the dilution of TCI Ventures Group's interest in TCG,
TCI Ventures Group recorded a non-cash gain of $201.4 million (excluding related
tax expense of $70.5 million). In addition, effective September 1, 1998,
Telewest and General Cable consummated the General Cable Merger. As a result of
the General Cable Merger, TINTA's ownership interest in Telewest was reduced to
22%. In connection with such dilution, TINTA recorded a non-cash gain of $58.0
million (excluding related tax expense of $20.3 million). For additional
information regarding such transactions, see notes 5 and 8 to the accompanying
combined financial statements of TCI Ventures Group.
During 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, TCI Ventures Group's ownership interest in TCG was reduced to
approximately 30%. Accordingly, TCI Ventures Group recognized a gain of $21
million (excluding related tax expense of $8 million) as a result of such
dilution.
The minority interests' share of net losses increased $6.4 million and
$32.3 million during the three and nine month periods ended September 30, 1998,
respectively, as compared to the corresponding prior year periods.
Net Losses
The TCI Ventures Group reported net earnings of $1,297.5 million and
$1,011.4 million during the three and nine month periods ended September 30,
1998, respectively, as compared to net losses of $125.7 million and $314.9
million for the three and nine month periods ended September 30, 1997,
respectively. Included in such amounts was the recognition of certain
non-operating gains aggregating (i) $2,377.6 million and $136.1 million during
the three months ended September 30, 1998 and 1997, respectively, and (ii)
$2,635.6 million and $186.3 million during the nine months ended September 30,
1998 and 1997, respectively. With the exception of UVSG, WTCI and the Puerto
Rico Subsidiary, the entities included in the TCI Ventures Group's combined
financial statements generally have sustained losses since their respective
inception dates. Any improvements in such entities' results of operations are
largely dependent upon the ability of such entities to increase their respective
customer bases while maintaining pricing structures and controlling costs. There
can be no assurance that any such improvements will occur.
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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 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 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 accompanying
combined financial statements of TCI Group.
In addition to the CSC Transaction, TCI also 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. 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. The CSC Transaction and the formation of the 1998 Joint Ventures
are collectively referred to herein as the "1998 Contribution Transactions."
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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.
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 accompanying combined
financial statements of TCI Group.
During the fourth quarter of 1997, TCI Group entered into an Equity
Swap Facility. Pursuant to the Equity Swap Facility, TCI Group has the right to
direct the Counterparty to use the Equity Swap Facility to purchase Equity Swap
Shares of TCI Group Series A Stock and TCI Ventures Group Series A Stock with an
aggregate purchase price of up to $300 million. TCI Group has the right, but not
the obligation, to purchase Equity Swap Shares through the September 30, 2000
termination date of the Equity Swap Facility. During such period, TCI Group is
to settle periodically any increase or decrease in the market value of the
Equity Swap Shares. If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from the other
Equity Swap Shares. If the market value of the Equity Swap Shares is less than
the Counterparty's cost, TCI Group, at its option, will settle such difference
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In addition, TCI
Group is required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares.
Due to TCI Group's ability to issue shares to settle periodic price fluctuations
and fees under the Equity Swap Facility, TCI Group records all amounts received
or paid under this arrangement as increases or decreases, respectively, to
equity. As of 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.
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TCI Group's fixed annual commitments pursuant to the EMG Affiliation
Agreement increase annually from $220 million in 1998 to $315 million in 2003,
and will increase with inflation thereafter through 2022.
In 1996, a subsidiary attributed to TCI 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 TCI 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 TCI 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).
On July 11, 1997, TCI Music merged with DMX. Simultaneously with the
DMX Merger, substantially all of TCI's controlling ownership interest in TCI
Music was transferred from TCI Group to Liberty Media Group in exchange for an
$80 million promissory note and an agreement to reimburse TCI for any amounts
required to be paid by TCI pursuant to its contingent obligation under a Rights
Agreement (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 7,602,483 shares
and associated rights. On August 27, 1998, Liberty Media Group paid $61 million
to satisfy TCI's obligation to purchase such tendered shares, including $22
million paid to acquire shares that were tendered by a majority-owned subsidiary
of TCI that is attributed to TCI Ventures Group. The Music Note may be reduced
by the payment of cash or the issuance by TCI of shares of Liberty Group Stock
for the benefit of entities attributed to TCI Group. Additionally, Liberty Media
Group may elect to pay $50 million of the Music Note by delivery of a Stock
Appreciation Rights Agreement that will give TCI Group the right to receive 20%
of the appreciation in value of Liberty Media Group's investment in TCI Music,
to be determined at July 11, 2002.
A subsidiary of TCI that was attributed to TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment was
subleased to TCI Group under an operating lease. In January 1998, TCI Group paid
$7 million to TCI Ventures Group in exchange for TCI Ventures Group's assignment
of its ownership interest in such subsidiary to TCI Group. Due to the related
party nature of the transaction, the $50 million total of the cash payment and
the historical cost of the net liabilities assumed by TCI Group (including
capital lease obligations aggregating $176 million) has been reflected as an
increase to TCI Group's combined deficit.
At 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 accompanying combined financial statements
of TCI Group for additional information regarding TCI Group's debt.
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One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of "Operating Cash
Flow" (operating income before depreciation, amortization, 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 the accompanying combined
financial statements.
Operating Cash Flow is a measure of value and borrowing capacity within
the cable television industry and is not intended to be a substitute for cash
flows provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying combined statements of cash flows.
Net cash provided by operating activities ($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 accompanying combined financial statements of TCI
Group, 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 TCI Ventures Group
for a five-year period commencing on September 10, 1997. 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 TCI 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, entered
into the Digital Terminal Purchase Agreement with GI to purchase advanced
digital set-top devices. The hardware and software incorporated into these
devices will be designed and manufactured to be compatible and interoperable
with the OpenCable(TM) architecture specifications adopted by CableLabs, the
cable television industry's research and development consortium, in November
1997. NDTC has agreed that Approved Purchasers will purchase, in the aggregate,
a minimum of 6.5 million set-top devices during calendar years 1998, 1999 and
2000 at an average price of $318 per 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 TCI 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 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 accompanying combined financial statements.
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 may enter into Interest Rate Swaps pursuant to which it
(i) pays fixed interest rates and receives variable interest rates and (ii) pays
variable interest rates and receives fixed interest rates. During the 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.
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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 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 accompanying combined financial statements 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 MEDIA GROUP
Liberty Media Group's sources of funds include its available cash
balances, net cash provided by operating activities, cash distributions from
affiliates, dividend and interest receipts, proceeds from asset sales,
availability under certain credit facilities, and loans from TCI Group. To the
extent cash needs of Liberty Media Group exceed cash provided by Liberty Media
Group, TCI Group may transfer funds to Liberty Media Group. Conversely, to the
extent cash provided by Liberty Media Group exceeds cash needs of Liberty Media
Group, Liberty Media Group may transfer funds to TCI Group.
On January 12, 1998, TCI acquired from a minority stockholder of UVSG
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
74%, of which 17% is attributed to Liberty Media Group.
In February 1998, TCI, Liberty Media Group and UVSG announced their
agreement in principal for UVSG to acquire Liberty Media Group's 40% interest in
SNG and its 100% interest in certain businesses conducted by Netlink USA
("Netlink") (the "Netlink Business") in exchange for 12.8 million shares of
UVSG's common stock (as adjusted for a two-for-one stock split). Consummation of
such transaction is subject to UVSG stockholder approval and certain regulatory
approvals.
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Encore Media Group's loan agreement contains restrictions regarding
transfers of funds to other members of Liberty Media Group in the form of loans,
advances or cash dividends. In addition, subsequent to the exercise of the
Southern Option, cash provided by operating activities of Southern was no longer
available as a source of cash for Liberty Media Group. Additionally, subsequent
to the sale of the Netlink Business to UVSG, cash provided by operating
activities of the Netlink Business will no longer be available as a source of
cash for Liberty Media Group. Cash provided by operating activities of Southern
and the Netlink Business has been a significant source of cash for Liberty Media
Group. Although no assurance can be given, cash generated by Liberty Media
Group's remaining operating activities, distributions from affiliates, dividend
and interest payments, availability under its credit facilities and available
cash balances should provide adequate cash to meet its obligations. For
additional information concerning Liberty Media Group's cash flows see the
combined statements of cash flows included in the accompanying combined
financial statements of Liberty Media Group.
As of September 30, 1998, Liberty Media 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 Media 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 Media Group will receive dividends on the TW
Exchange Stock it holds. However, there can be no assurance that such dividends
will continue to be paid.
Liberty Media Group received approximately $23 million and $5 million
in cash dividends on a 30 year non-convertible 9% preferred stock, with a stated
value of $345 million, during the nine months ended September 30, 1998 and 1997,
respectively.
Liberty Media Group has a revolving line of credit which provides for
borrowings of up to $500 million and another which provides up to $640 million.
Borrowings of $432 million and $620 million, respectively, were outstanding at
September 30, 1998. Certain assets of Liberty Media Group serve as collateral
for borrowings under these two bank credit facilities. Encore Media Group has a
$525 million senior, secured facility. The credit agreement for the EMG Senior
Facility contains certain provisions which limit Encore Media Group as to
additional indebtedness, sale of assets, liens, guarantees, and distributions.
Additionally, Encore Media Group must maintain certain specified financial
ratios. Borrowings of $300 million were outstanding on the EMG Senior Facility
at September 30, 1998. TCI Music has a revolving loan agreement which provides
for borrowings of up to $100 million. Borrowings of $89 million were outstanding
at September 30, 1998. Additionally, Liberty Media Group is a party to an $800
million credit facility. Liberty Media Group and TCI Ventures Group are jointly
and severally responsible for the borrowings under such facility. The
outstanding borrowings of $70 million were attributed to TCI Ventures Group at
September 30, 1998. See note 8 to the accompanying combined financial statements
of Liberty Media Group.
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<PAGE> 189
The Music Note may be reduced by the payment of cash or the issuance by
TCI of shares of Liberty Media Group Stock for the benefit of entities included
within the TCI Group. 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 Media 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 Media Group's
investment in TCI Music, to be determined at July 11, 2002.
Including rights exercised by a subsidiary of TCI that is not a member
of Liberty Media Group, the obligation under the Rights Agreement was paid by
Liberty Media Group in August of 1998. Such payment aggregated $61 million. See
note 9 to the accompanying combined financial statements of Liberty Media Group.
Various partnerships and other affiliates of Liberty Media Group
accounted for under the equity method finance a substantial portion of their
acquisitions and capital expenditures through borrowings under their own credit
facilities and net cash provided by their operating activities.
As of September 30, 1998, Liberty Media Group was not exposed to
material near-term losses in future earnings, fair values, or cash flows
resulting from derivative financial instruments.
Liberty Media Group intends to continue to develop its entertainment
and information programming services and has made certain financial commitments
related to the acquisition of programming. As of September 30, 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 Media Group will obtain such financing. If additional
financing cannot be obtained, Liberty Media Group could attempt to sell assets
but there can be no assurance that asset sales, if any, can be consummated at a
price and on terms acceptable to Liberty Media Group. Further, Liberty Media
Group and/or TCI could attempt to sell equity securities, however, there can be
no certainty that such a sale could be accomplished on acceptable terms.
In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, Liberty Media Group paid
$64 million during the first quarter of 1998 for its allocated share of the Call
Payments. See note 9 to the accompanying combined financial statements of
Liberty Media Group.
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. Subject to
certain restrictions, each LLC Share issued or to be issued to Liberty Media
Group is exchangeable for one share of USAI's Common Stock pursuant to the LLC
Exchange Agreement.
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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
immediately prior to such issuances. On June 24, 1998, Liberty Media 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 Media Group purchased 7.9 million LLC Shares at $20 per share as a
result of the issuance of common stock by USAI in the Ticketmaster Transaction.
During the nine months ended September 30, 1998, pursuant to the stock
repurchase program, 766,783 shares of Liberty Group Stock were repurchased at an
aggregate cost of approximately $26 million. Such amount is reflected as a
decrease to combined equity in the accompanying combined financial statements.
On July 13, 1998, Liberty Media Group announced that it had made a
proposal to TINTA concerning the acquisition by Liberty Media Group of all of
the outstanding shares of common stock of TINTA not beneficially owned by TCI
Ventures Group. Under the proposal, Liberty Media Group would exchange, in a
merger transaction, 0.58 of a share of Liberty Group Series A Stock for each
share of Tele-Communications International, Inc. Series A Common Stock acquired
by Liberty Media Group in the merger. Liberty Media 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 TCI Ventures Group) 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, which is expected to occur in November
1998, is subject to customary closing conditions. No assurance can be given that
the merger will be consummated.
TCI VENTURES GROUP
The following table sets forth total assets and debt and capital lease
obligations for the TCI Ventures Group and each of the businesses attributed to
it:
<TABLE>
<CAPTION>
September 30,
1998(3)
--------------------
amounts in thousands
<S> <C>
Total assets
TCI Telephony $3,017,860
TINTA 1,657,563
@Home 474,562
UVSG 672,815
NDTC 350,275
ETC 81,006
WTCI 79,370
Other 469,324
----------
$6,802,775
==========
Debt and capital lease obligations (1)
Corporate and other $ 511,581
TINTA (2) 501,026
NDTC 148,113
UVSG 17,838
@Home 25,696
----------
$1,204,254
==========
</TABLE>
(1) For additional information concerning the terms of TCI Ventures
Group's debt, see note 13 to the accompanying combined financial
statements of the TCI Ventures Group.
(2) Excludes amounts due to TCI Ventures Group of $145.0 million.
(3) Restated - see note 18 to the accompanying combined financial
statements of TCI Ventures Group.
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The TCI Ventures Group's combined operating activities provided (used)
cash of $(46.0 million) and $133.0 million during the nine months ended
September 30, 1998 and 1997, respectively. As discussed above, effective October
1, 1997, Cablevision's cash flows are no longer included in the TCI Ventures
Group's combined statements of cash flows. Cablevision's operating activities
provided cash of $40.0 million during the nine months ended September 30, 1997.
At September 30, 1998, @Home and UVSG held cash and cash equivalents of $203.7
million and $104.8 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 the TCI Ventures Group.
During the nine months ended September 30, 1998 and 1997, cash used by
TCI Ventures Group's investing activities aggregated $383.7 million and $293.8
million, respectively. The 1998 amount includes cash proceeds of $125.0 million
received upon the disposition of assets. Additionally, the 1998 and 1997 amounts
include $397.7 million and $364.8 million, respectively, that were used by the
TCI Ventures Group to fund investments in, and loans to, affiliates. For
additional information concerning the TCI Ventures Group's cash flows, see the
combined statements of cash flows included in the accompanying combined
financial statements of TCI Ventures Group.
Substantially all of the entities the ownership of which, or the
investment in which, has been attributed to the TCI Ventures Group will require
significant additional capital in order to develop their respective businesses
and assets, to fund future operating losses and to fund future growth. In
certain cases, the TCI Ventures Group has contractual commitments pursuant to
which (subject to certain conditions) it may be required to make significant
additional capital contributions to the entities in which it has investments.
TINTA and its consolidated subsidiaries also have commitments under various
partnership and other funding agreements to contribute capital or loan money to
fund capital expenditures and other capital requirements of certain affiliates.
There can be no assurance that any of the TCI Ventures Group's entities will be
successful in generating sufficient cash flow from operating activities or
raising debt or equity capital in sufficient amounts or on terms acceptable to
them to be able to meet their respective capital requirements. There is also no
assurance that the anticipated capital requirements of TCI Ventures Group's
entities and/or affiliates will not significantly increase due to changing
circumstances, such as unanticipated opportunities, technological or marketing
hurdles, unanticipated expenses, and the like. The failure to generate
sufficient cash flow from operating activities or to raise sufficient funds may
require such entity to delay or abandon some or all of its development and
expansion plans or in certain instances, could result in the failure to meet
certain regulatory requirements, any and all of which could have a material
adverse effect on such entity's growth, its ability to compete in its industry
and its ability to service its debt.
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The ability of one of the TCI Ventures Group entities to fund the cash
flow deficits of other TCI Ventures Group entities is limited not only by the
structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of the TCI Ventures Group entities. In addition, TINTA and certain of
the other TCI Ventures Group entities, such as 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.
From inception through September 1998, the Sprint PCS partners have
contributed $4.6 billion to Sprint PCS (of which TCI Telephony 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.
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In May 1998 the Sprint PCS partners entered into a series of agreements
pursuant to which TCI Telephony, 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, TCI Telephony 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 TCI
Telephony'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.
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Historically, the TCI Ventures Group's combined operating activities
have not provided sufficient funds to meet all of the TCI Ventures Group's
capital requirements. The TCI Ventures Group's ability to obtain sufficient
capital resources to make its expected additional capital contributions to the
Sprint PCS Partnerships and other entities in which it has investments are
limited. WTCI and NDTC are the only wholly-owned subsidiaries attributed to the
TCI Ventures Group that are operating companies and such entities are currently
the TCI Ventures Group's only source of cash provided by operating activities.
As a result, the TCI Ventures Group has limited ability to generate funds
internally to fund capital requirements and limited cash flow from operating
activities to support external financings. The other operating companies
attributed to the TCI Ventures Group have other investors, public or private,
and the payment of dividends, or the making of loans or advances by any one of
such TCI Ventures Group entities to any other of such TCI Ventures Group
entities would be subject to various business considerations, as well as any
legal restrictions, including pursuant to agreements among the investors. At
September 30, 1998, TCI Ventures Group had the Ventures Intergroup Credit
Facility with TCI Group which has a five-year term commencing on September 10,
1997 and which permits aggregate borrowings at any one time outstanding of up to
$500 million (subject to reduction as provided below). At September 30, 1998,
borrowings of $37 million were outstanding pursuant to the Ventures Intergroup
Credit Facility. In March 1998, TCI Ventures Group entered into the Ventures
Group Bank Facility with a term of one year which provides for aggregate
borrowings of up to $400 million. At September 30, 1998, borrowings of $400
million were outstanding under the Ventures Group Bank Facility. In addition,
effective September 30, 1998, LMC and Ventures LLC entered into the
Liberty/Ventures Facility which provides for borrowings of up to $800 million.
LMC and Ventures LLC are jointly and severally responsible for the obligations
under the Liberty/Ventures Facility. At September 30, 1998, borrowings of $70
million, which have been attributed to TCI Ventures Group, were outstanding
under the Liberty/Ventures Facility. If the available borrowings under the
Liberty/Ventures Group Facility and the Ventures Intergroup Credit Facility are
not sufficient to fund the TCI Ventures Group's capital requirements, no
assurance can be given that the TCI Ventures Group will be able to obtain any
required additional financing on terms acceptable to it, or at all. Additional
capital could be raised for the TCI Ventures Group by, among other things,
engaging in public offerings or private placements of TCI Ventures Group common
stock or through issuance of debt securities or preferred equity securities
attributed to the TCI Ventures Group. If TCI Ventures Group is unable to obtain
sufficient financing from outside sources, the TCI Ventures Group may continue
to be dependent upon funding from the TCI Group. The TCI Ventures Group's
failure to meet its contractual and other capital requirements could have
significant adverse consequences to a particular operating company or affiliate
and to the TCI Ventures Group.
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TINTA's business strategy requires that it have the ability to access
or raise sufficient funds to allow it to take advantage of new acquisition and
joint venture opportunities as they arise, which management of TINTA believes
may require substantial additional funds. Although TINTA has, at September 30,
1998, (i) available borrowings of $55.8 million under a credit facility with TCI
Ventures Group and (ii) the ability to access any excess cash and borrowing
availability from the Puerto Rico Subsidiary, TINTA's ability to otherwise
obtain debt financing to assist its operating companies and to meet its capital
obligations at other than the subsidiary level will be limited because TINTA
does not conduct any operations directly. (As described below, TINTA will use
$42.4 million of the availability under its credit facility with TCI Ventures
Group to fund a capital contribution to Cablevision.) Furthermore, because
TINTA's assets consist primarily of ownership interests in foreign subsidiaries
and affiliates, the repatriation of any cash provided by such subsidiaries' and
affiliates' operating activities in the form of dividends, loans or other
payments is subject to, among other things, exchange rate fluctuations, tax laws
and other economic considerations, as well as applicable statutory and
contractual restrictions. Moreover, the liquidity sources of TINTA's foreign
subsidiaries and affiliates are generally intended to be applied towards the
respective liquidity requirements of such foreign subsidiaries and affiliates,
and accordingly, do not represent a direct source of liquidity to TINTA.
Accordingly, with the exception of any liquidity that may be provided to TINTA
by the Puerto Rico Subsidiary, no assurance can be given that TINTA will have
access to any cash generated by its foreign operating subsidiaries and
affiliates.
On 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 shareholders, 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.
Effective September 1, 1998, Telewest and General Cable consummated 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 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 261 million new
Telewest shares at a price of (pound)0.925 ($1.57) per share. TINTA subscribed
to 84,688,960 Telewest ordinary shares at an aggregate cost of (pound)78.3
million ($133.1 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 $58.0 million (excluding related
tax expense of $20.3 million) during the third quarter of 1998.
On August 21, 1998, TINTA purchased 100% of the issued and outstanding
common stock of Pramer, an Argentine programming company, for $32 million in
cash and the issuance of the Pramer Notes in the amount of $65 million. TINTA
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. For additional information concerning TINTA's acquisition of
Pramer, see note 10 to the accompanying combined financial statements of TCI
Ventures Group.
I-193
<PAGE> 196
On November 6, 1998, United International Investments ("UII")
distributed to TINTA a 45% interest in Princes Holding Limited ("PHL").
Immediately following the distribution, TINTA sold its interest in UII to United
International Holdings, Inc. for $68 million plus an additional 5% interest in
PHL.
During the third quarter of 1997, Fox Sports International distributed
its 35% interest in Torneos y Competencias S.A. ("Torneos") to Liberty/TINTA. On
October 2, 1997, TINTA purchased a 5% direct interest in Torneos for $12
million. As of September 30, 1998, TINTA had made cash contributions to Torneos
on the behalf of Liberty/TINTA of $56.5 million.
@Home is investing significantly in the development of its network
infrastructure. @Home believes that the net cash proceeds from its public
offering, 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.
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) TCI Ventures Group paid $36.9 million to purchase 800,000
shares of @Home common stock and (ii) TCI Ventures Group's economic interest in
@Home decreased to 38.8%. In connection with the associated dilution of TCI
Ventures Group's ownership interest in @Home, TCI Ventures Group recognized a
gain of $16.6 million during the third quarter of 1998.
@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 TCI Ventures Group's equity interest and voting power in
@Home.
I-194
<PAGE> 197
During the period in which each of TCI, Cox, Comcast and Cablevision
Systems Corporation ("CSC") have agreed (subject to certain exceptions and
limitations) to use @Home as its exclusive provider of high speed residential
consumer Internet access services, a stockholders agreement among such parties
and @Home provides that in the event the number of exclusive homes passed
attributable to TCI decreases below 80% of the number of homes passed of TCI and
its controlled affiliates as of June 1996, then TCI will be required to offer to
sell a proportionate amount of its equity in @Home to certain other stockholders
of @Home at fair market value. Since June 1996, TCI has sold or transferred
certain cable systems that reduce TCI's number of base homes passed. In
addition, TCI has announced the proposed sale or transfer of additional cable
systems that would further reduce TCI's number of base homes passed. In the
event that such cable systems continue to be exclusive to @Home, such cable
systems and their homes passed would continue to be included in TCI's homes
passed for purposes of determining whether or not TCI is obligated to offer a
portion of its equity interest in @Home to Cox, Comcast and CSC, even though
such cable systems are no longer owned or controlled by TCI. If TCI does not
require that such cable systems remain exclusive to @Home, the TCI Ventures
Group could be required to sell shares to Cox, Comcast, CSC and certain other
stockholders of @Home, at fair market value. There can be no assurance that, if
the TCI Ventures Group is required to sell shares of @Home, the price paid to
the TCI Ventures Group would represent adequate consideration to the TCI
Ventures Group because such fair market value may not adequately reflect the TCI
Ventures Group's expectation of the long term value of such investments in
@Home. In addition to the exceptions to the general exclusivity obligations, Cox
and Comcast have the right to terminate the exclusivity provisions with respect
to TCI, Cox, Comcast and CSC in the event TCI does not attain certain customer
penetration levels for the @Home service relative to the customer penetration
levels of Cox and Comcast, as of June 4, 1999, and each anniversary thereafter
until 2002. Such termination could have a material adverse effect on @Home and
the value of the TCI Ventures Group's interest in @Home.
In addition, although TCI, Cox, Comcast and CSC are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.
Because TINTA generally views its foreign operating subsidiaries and
affiliates as long-term investments, TINTA generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries. Although TINTA
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, TINTA believes that, given
the nature of its business, it is not possible or practical to eliminate TINTA's
exposure to unfavorable fluctuations in foreign currency exchange rates. As of
September 30, 1998, TINTA was not exposed to material near-term losses in future
earnings, fair values or cash flows resulting from derivative financial
instruments.
TINTA has significant commitments and contingent obligations with
respect to certain affiliates. For additional information see notes 8 and 16 to
the accompanying combined financial statements of TCI Ventures Group.
In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
that were subject to the Malone Call Agreement and the Magness Call Agreement.
Accordingly, TCI Ventures Group paid $76 million during the first quarter of
1998 for its allocated share of the Call Payments. For additional information
see note 14 to the accompanying combined financial statements of TCI Ventures
Group.
I-195
<PAGE> 198
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
4,935,780 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 Ventures Group Series A
Stock held by the Equity Swap Facility are attributed to TCI Ventures Group.
In 1996, a subsidiary attributed to TCI 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 TCI 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 TCI Ventures Group. As a result of such
assignment, TCI Ventures Group recorded a $15.9 million reduction to the
intercompany amount due to TCI Group and a corresponding increase to combined
equity. In July 1998, TCI Ventures Group entered into an equity swap transaction
with a commercial bank, which provides TCI 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 TCI 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 TCI Ventures Group Series A Stock at
TCI Ventures Group's option. Such shares will be used to satisfy the exchange
requirements of the aforementioned preferred stock.
During the nine months ended September 30, 1998, pursuant to the stock
repurchase program, 145,450 shares of TCI Ventures Group Series A Stock and
94,000 shares of TCI Ventures Group Series B Stock were repurchased at an
aggregate cost of $3.9 million. Such amount is reflected as a decrease to
combined equity in the accompanying combined financial statements.
The board of directors of UVSG has authorized UVSG to repurchase from
time to time up to an aggregate of 2,000,000 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 $15.2 million.
I-196
<PAGE> 199
In February 1998, TCI, Liberty Media Group and UVSG announced an
agreement in principal for UVSG to acquire Liberty Media Group's 40% interest in
SNG and its 100% interest in certain businesses conducted by Netlink USA in
exchange for 12.8 million shares of UVSG's common stock (as adjusted for a
two-for-one stock split). Consummation of such transaction is subject to UVSG
stockholder approval and certain regulatory approvals.
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
22,503,412 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 the above-described pending transaction with Liberty Media
Group, 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 such transactions, 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 stockholder approval and certain regulatory approvals.
Accordingly, no assurance can be given that this transaction will be
consummated.
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
74%, of which 57% is attributed to TCI Ventures Group and 17% is attributed to
Liberty Media Group. In addition, TCI's collective voting power increased to
93%. In connection with such transaction, during the first quarter of 1998, TCI
Ventures Group recorded a $154.2 million increase to intangible assets, a $23.5
million decrease to minority interest in equity of attributed subsidiaries and a
$177.7 million increase to combined equity.
A subsidiary of TCI that was a member of TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment was
subleased to TCI Group under an operating lease. In January 1998, TCI Group paid
$7 million to TCI Ventures Group in exchange for TCI Ventures Group's assignment
of its ownership interest in such subsidiary to TCI Group. Due to the related
party nature of the transaction, the $49.5 million total of the cash payment and
the historical cost of the net liabilities assumed by TCI Group (including
capital lease obligations aggregating $175.8 million) has been reflected as an
addition to TCI Ventures Group's combined equity.
On February 12, 1998, TCI Ventures Group sold its (i) 40% interest in
NHT Partnership, (ii) 50% interest in Louisville Lightwave and (iii) 79%
interest in New Jersey Fiber Technologies, L.P. for aggregate cash proceeds of
$44.1 million.
In July 1998, TCI and the other partners of KC Fiber sold the assets of
KC Fiber to TCG for cash proceeds of $55 million. TCI Ventures Group holds a 50%
interest in KC Fiber. TCI Ventures Group received proceeds of $20.3 million in
connection with such sale.
I-197
<PAGE> 200
During the third quarter of 1998, TINTA exercised its right to require
Liberty Media Group to purchase from TINTA 2,710,406 shares of TCI Music, Inc.
Series A common stock for $8.00 per share. Due to the related party nature of
the transaction, TCI Ventures Group has reflected its share of excess
consideration received over the basis of net assets sold of $18.4 million as an
increase to combined equity in the accompanying combined financial statements of
TCI Ventures Group.
During the third quarter of 1998, TCI Ventures Group recognized
dividend income of $15.5 million on its AT&T Common Stock. No assurance can be
given that future dividends will be paid at such rate or at all. See notes 2 and
9 to the accompanying combined financial statements of TCI Ventures Group.
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 TCI 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, TCI Ventures Group acquired 21.4 million shares of
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 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. TCI Ventures Group recorded its investment in
such shares at fair value which included a discount attributable to the
above-described liquidity restriction. TCI 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 TCI Ventures Group to GI, has been
deferred by TCI 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.
I-198
<PAGE> 201
As described more fully in note 16 to the accompanying combined
financial statements of TCI Ventures Group, 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.
I-199
<PAGE> 202
EXHIBIT INDEX
The following exhibit is filed herewith:
(27) Tele-Communications, Inc. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TELE-COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM
10-Q/(AMENDMENT #1) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. PRIMARY AND
DILUTED EARNINGS PER SHARE REPRESENT EARNINGS PER SHARE OF THE COMPANY'S TCI
GROUP STOCK, SEE THE COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 320
<SECURITIES> 0
<RECEIVABLES> 664
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,831
<DEPRECIATION> 4,839
<TOTAL-ASSETS> 36,573
<CURRENT-LIABILITIES> 0
<BONDS> 14,895
299
0
<COMMON> 1,500
<OTHER-SE> 5,816
<TOTAL-LIABILITY-AND-EQUITY> 36,573
<SALES> 0
<TOTAL-REVENUES> 5,510
<CGS> 0
<TOTAL-COSTS> 2,157
<OTHER-EXPENSES> 1,289
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 808
<INCOME-PRETAX> 2,455
<INCOME-TAX> 1,068
<INCOME-CONTINUING> 1,387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,387
<EPS-PRIMARY> .25
<EPS-DILUTED> .22
</TABLE>