<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Amendment #2)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 July 31,
1998, was:
Tele-Communications, Inc. Series A TCI Group common stock - 473,411,579 shares,
Tele-Communications, Inc. Series B TCI Group common stock - 49,932,623 shares,
Tele-Communications, Inc. Series A Liberty Media Group
common stock - 326,005,365 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
- 376,964,436 shares,
and
Tele-Communications, Inc. Series B TCI Ventures Group common stock
- 45,433,352 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>
June 30, December 31,
1998 * 1997
------------ ------------
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ 295 244
Restricted cash (note 4) 314 40
Trade and other receivables, net 578 529
Prepaid program rights 120 104
Committed program rights 132 115
Investments in affiliates, accounted for under the equity method,
and related receivables (note 5) 4,455 3,063
Investment in Time Warner, Inc. ("Time Warner") (note 6) 4,899 3,555
Property and equipment, at cost:
Land 70 96
Distribution systems 9,854 10,784
Support equipment and buildings 1,741 1,558
------------ ------------
11,665 12,438
Less accumulated depreciation 4,789 4,759
------------ ------------
6,876 7,679
------------ ------------
Franchise costs 16,083 17,910
Less accumulated amortization 2,645 2,763
------------ ------------
13,438 15,147
------------ ------------
Other assets, net of amortization (note 13) 2,392 2,001
------------ ------------
$ 33,499 32,477
============ ============
</TABLE>
*Restated - see note 16.
(continued)
I-1
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 * 1997
------------ ------------
Liabilities and Stockholders' Equity amounts in millions
<S> <C> <C>
Accounts payable $ 121 169
Accrued interest 256 258
Accrued programming expense 442 399
Other accrued expenses 988 997
Deferred option premium (note 6) -- 306
Debt (note 8) 14,422 15,250
Deferred income taxes 6,934 6,104
Other liabilities 1,061 664
------------ ------------
Total liabilities 24,224 24,147
------------ ------------
Minority interests in equity of consolidated subsidiaries 1,534 1,664
Redeemable securities:
Preferred stock (note 9) 299 655
Common stock 37 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
Stockholders' equity (note 11):
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
610,489,561 shares in 1998 and 605,616,143 shares in 1997 610 606
Series B TCI Group. Authorized 150,000,000 shares; issued
73,942,428 shares in 1998 and 78,203,044 shares in 1997 74 78
Series A Liberty Media Group. Authorized 750,000,000 shares;
issued 357,740,005 shares in 1998 and 344,962,521 shares in 1997 358 345
Series B Liberty Media Group. Authorized 75,000,000 shares;
issued 35,245,018 shares in 1998 and 35,180,385 shares in 1997 35 35
Series A TCI Ventures Group. Authorized 750,000,000 shares;
issued 377,092,104 shares in 1998 and 377,386,032 shares in 1997 377 377
Series B TCI Ventures Group. Authorized 75,000,000 shares;
issued 45,799,330 shares in 1998 and 32,532,800 shares in 1997 46 33
Additional paid-in capital 5,271 5,063
Accumulated other comprehensive earnings, net of taxes (note 1) 1,630 772
Accumulated deficit (765) (812)
------------ ------------
7,636 6,497
Treasury stock and common stock held by subsidiaries, at cost (note 11) (1,731) (1,991)
------------ ------------
Total stockholders' equity 5,905 4,506
------------ ------------
Commitments and contingencies (notes 2, 5, 7 and 14)
$ 33,499 32,477
============ ============
</TABLE>
* Restated-see note 16.
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 Six months ended
June 30, June 30,
-------------------- --------------------
1998 * 1997 1998 * 1997
------- ------- ------- -------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue $ 1,813 1,882 3,685 3,703
Operating costs and expenses:
Operating 685 731 1,423 1,421
Selling, general and administrative 462 435 890 828
Stock compensation 183 56 412 71
Depreciation and amortization 434 407 868 781
------- ------- ------- -------
1,764 1,629 3,593 3,101
------- ------- ------- -------
Operating income 49 253 92 602
Other income (expense):
Interest expense (251) (294) (536) (583)
Interest and dividend income 18 18 39 39
Share of losses of affiliates, net (note 5) (351) (182) (589) (338)
Loss on early extinguishment of debt (note 8) (22) (11) (38) (11)
Minority interests in earnings of consolidated subsidiaries, net
(note 10) (35) (56) (65) (94)
Gain on issuance of equity interest by subsidiary (note 7) -- 21 38 21
Gain on issuance of stock by equity investee (note 5) 201 -- 201 --
Gain on disposition of assets (notes 6 and 7) 36 43 1,099 62
Other, net (19) (4) (29) (6)
------- ------- ------- -------
(423) (465) 120 (910)
------- ------- ------- -------
Earnings (loss) before income taxes (374) (212) 212 (308)
Income tax benefit (expense) 75 58 (165) 96
------- ------- ------- -------
Net earnings (loss) (299) (154) 47 (212)
Dividend requirements on preferred stocks (2) (11) (13) (21)
------- ------- ------- -------
Net earnings (loss) attributable to common stockholders $ (301) (165) 34 (233)
======= ======= ======= =======
Net earnings (loss) attributable to common stockholders:
TCI Group Series A and Series B common stock $ (144) (171) 83 (255)
Liberty Media Group Series A and Series B common stock (65) 6 238 22
TCI Ventures Group Series A and Series B common stock (92) -- (287) --
------- ------- ------- -------
$ (301) (165) 34 (233)
======= ======= ======= =======
Basic earnings (loss) attributable to common stockholders per
common share (note 3):
TCI Group Series A and Series B common stock $ (.28) (.25) .16 (.38)
======= ======= ======= =======
Liberty Media Group Series A and Series B common stock $ (.18) .02 .67 .06
======= ======= ======= =======
TCI Ventures Group Series A and Series B common stock $ (.22) -- (.68) --
======= ======= ======= =======
Diluted earnings (loss) attributable to common stockholders per common and
potential common share (note 3):
TCI Group Series A and Series B common stock $ (.28) (.25) .15 (.38)
======= ======= ======= =======
Liberty Media Group Series A and Series B common stock $ (.18) .02 .61 .05
======= ======= ======= =======
TCI Ventures Group Series A and Series B common stock $ (.22) -- (.68) --
======= ======= ======= =======
Comprehensive earnings (loss) (note 1) $ 209 (127) 905 (210)
======= ======= ======= =======
</TABLE>
* Restated - see note 16.
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six months ended June 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 12) -- -- 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 7) -- 1 -- 7 -- 13 --
Repurchase of common stock to be held in
treasury -- -- -- -- -- -- --
Repurchase and retirement of common stock -- -- -- -- -- -- --
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
8 and 9) -- 14 -- 6 -- -- --
Payment of call premiums (note 12) -- -- -- -- -- -- --
Recognition of fees related to Exchange
(note 12) -- -- -- -- -- -- --
Reimbursement of fees related to Exchange
(note 12) -- -- -- -- -- -- --
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 June 30, 1998 $ -- 610 74 358 35 377 46
======== ======== ======== ======== ======== ======== ========
<CAPTION>
Treasury
stock and
common
Accumulated stock
Additional other held by Total
paid-in comprehensive Accumulated subsidiaries, stockholders'
capital earnings deficit * at cost equity *
-------- -------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 5,063 772 (812) (1,991) 4,506
Net earnings -- -- 47 -- 47
Exchange of common stock in connection with
the Magness Settlement (note 12) 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 (32) -- -- -- (32)
Premium received in connection with put
obligation 3 -- -- -- 3
Issuance of common stock for acquisitions
(note 7) 353 -- -- -- 374
Repurchase of common stock to be held in
treasury -- -- -- (5) (5)
Repurchase and retirement of common stock (8) -- -- -- (8)
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
8 and 9) 329 -- -- -- 349
Payment of call premiums (note 12) (274) -- -- -- (274)
Recognition of fees related to Exchange
(note 12) (20) -- -- -- (20)
Reimbursement of fees related to Exchange
(note 12) 11 -- -- -- 11
Accreted dividends on all classes of
preferred stock (13) -- -- -- (13)
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements 5 -- -- -- 5
Payment of preferred stock dividends (10) -- -- -- (10)
Foreign currency translation adjustment -- (3) -- -- (3)
Change in unrealized holding gains for
available-for-sale securities, net of
taxes -- 861 -- -- 861
-------- -------- -------- -------- --------
Balance at June 30, 1998 5,271 1,630 (765) (1,731) 5,905
======== ======== ======== ======== ========
</TABLE>
* Restated - see note 16.
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
1998 * 1997
------------ ------------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 47 (212)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 868 781
Stock compensation 412 71
Payments of obligation relating to stock compensation (136) (14)
Share of losses of affiliates, net 589 338
Loss on early extinguishment of debt 38 11
Minority interests in earnings of consolidated subsidiaries, net 65 94
Gain on issuance of equity interest by subsidiary (38) (21)
Gain on issuance of stock by equity investee (201) --
Gain on disposition of assets (1,099) (62)
Deferred income tax expense (benefit) 122 (147)
Payments of restructuring charges (5) (19)
Other noncash credits (1) --
Changes in operating assets and liabilities, net of
the effect of acquisitions:
Change in receivables (40) (125)
Change in prepaids (33) (92)
Change in other accruals and payables (46) 162
------------ ------------
Net cash provided by operating activities 542 765
------------ ------------
Cash flows from investing activities:
Cash paid for acquisitions (72) (206)
Capital expended for property and equipment (560) (215)
Investments in and loans to affiliates (788) (184)
Collections of loans to affiliates 952 72
Proceeds from disposition of assets 643 193
Change in restricted cash (274) (13)
Cash received in exchanges -- 15
Other investing activities (10) (14)
------------ ------------
Net cash used in investing activities (109) (352)
------------ ------------
Cash flows from financing activities:
Borrowings of debt 2,966 1,238
Repayments of debt (2,895) (2,030)
Prepayment penalties (34) (7)
Repurchase of common stock to be held in treasury (5) (13)
Repurchase and retirement of common stock (8) --
Repurchase of subsidiary common stock (7) (42)
Payment of preferred stock dividends (23) (23)
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (95) (85)
Payment of call premiums (274) --
Proceeds from issuance of subsidiary preferred stock -- 48
Proceeds from issuance of Trust Preferred Securities -- 490
Other financing activities (7) 10
------------ ------------
Net cash used in financing activities (382) (414)
------------ ------------
Net increase (decrease) in cash and cash equivalents 51 (1)
Cash and cash equivalents at beginning of period 244 355
------------ ------------
Cash and cash equivalents at end of period $ 295 354
============ ============
</TABLE>
* Restated - see note 16.
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 8
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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 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, (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." The Liberty/Ventures
Group following the Merger will be made up of the corporations,
partnerships and other entities and interests which comprise 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 held by 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") held by TCI Ventures Group and the assets and
business of the National Digital Television Center, Inc. ("NDTC")) will
be transferred to TCI Group in exchange for approximately $5.5 billion
in cash. Also, upon consummation of the Merger, 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 due to 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.
(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.
(continued)
I-13
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a) TCI Group Stock
The basic earnings (loss) attributable to TCI Group common stockholders
per common share for the three months and six months ended June 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 six months ended June 30, 1998 was computed by
dividing net earnings attributable to TCI Group common stockholders,
which is adjusted by the addition of preferred stock dividends and
interest accrued during the six months ended June 30, 1998 to net
earnings, assuming conversion of TCI Group convertible securities as of
the beginning of the period, by the weighted average number of common
shares outstanding of TCI Group Stock during the period. Shares
issuable upon conversion of the Convertible Preferred Stock, Series
C-TCI Group ("Series C-TCI Group Preferred Stock"), the Redeemable
Convertible TCI Group Preferred Stock, Series G ("Series G Preferred
Stock"), preferred stock of subsidiaries, convertible notes payable,
stock options and other performance awards have been included in the
computation of weighted average shares, as illustrated below. Shares of
TCI Group Stock issuable upon exercise of the Malone Right (as defined
in note 12), and issuable upon conversion of Convertible Preferred
Stock, Series D ("Series D Preferred Stock") and associated dividend
payments for the six months ended June 30, 1998 have been excluded as
adjustments in computing the diluted earnings attributable to TCI Group
common shareholders per common share as such potential common shares
are antidilutive for the six months ended June 30, 1998.
The diluted loss attributable to TCI Group common stockholders per
common share for the three months ended June 30, 1998 and the three
months and six months ended June 30, 1997 was computed by dividing net
loss attributable to TCI Group common stockholders by the weighted
average number of common shares outstanding of TCI Group Stock during
the period. Potential common shares were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti-dilutive. As a result of the TCI Ventures
Exchange, the earnings (loss) per share information of TCI Group for
the three and six months ended June 30, 1997 was 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.
No material changes in the weighted average outstanding shares or
potential common shares occurred after June 30, 1998.
(continued)
I-14
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to TCI Group Stock is presented below:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 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 $ (144) (171) 83 (255)
========== ========== ========== ==========
Weighted average common shares 523 683 520 680
========== ========== ========== ==========
Basic earnings (loss) per share
attributable to common
stockholders $ (.28) (.25) .16 (.38)
========== ========== ========== ==========
Diluted EPS:
Earnings (loss) attributable to
common stockholders $ (144) (171) 83 (255)
Add preferred dividend
requirements -- -- 6 --
Add interest expense -- -- 1 --
---------- ---------- ---------- ----------
Adjusted earnings (loss)
attributable to common
stockholders assuming
conversion of preferred
shares and notes payable $ (144) (171) 90 (255)
========== ========== ========== ==========
Weighted average common shares 523 683 520 680
---------- ---------- ---------- ----------
Add dilutive potential common
shares:
Employee and director
options and other
performance awards -- -- 9 --
Malone Right -- -- -- --
Convertible notes payable -- -- 24 --
Series C-TCI Group
Preferred Stock -- -- 7 --
Series D Preferred Stock -- -- -- --
Series G Preferred Stock -- -- 8 --
Preferred stock of
subsidiaries -- -- 45 --
---------- ---------- ---------- ----------
Dilutive potential
common shares -- -- 93 --
---------- ---------- ---------- ----------
Diluted weighted average common
shares 523 683 613 680
========== ========== ========== ==========
Diluted earnings (loss) per
share attributable to
common stockholders $ (.28) (.25) .15 (.38)
========== ========== ========== ==========
</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 months and six months ended
June 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 six months
ended June 30, 1998 and the three months and six months ended June 30,
1997 was computed by dividing earnings attributable to Liberty Media
Group common stockholders by the weighted average number of common and
potential common shares outstanding of Liberty Group Stock during the
period. Shares issuable upon conversion of the Convertible Preferred
Stock, Series C-Liberty Media Group ("Series C-Liberty Media Group
Preferred Stock"), the Series D Preferred Stock, the Redeemable
Convertible Liberty Media Group Preferred Stock, Series H (the "Series
H Preferred Stock"), convertible notes payable, stock options and other
performance awards have been included in the computation of weighted
average shares, as illustrated below. Numerator adjustments for
dividends and interest associated with the convertible preferred shares
and convertible notes payable, respectively, were not made to the
computation of diluted earnings per share as such dividends and
interest are paid or payable by TCI Group.
The diluted loss attributable to Liberty Media Group common
stockholders per common share for the three months ended June 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 June 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 June 30, Six months ended June 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 $ (65) 6 239 22
============ ============ ============ ============
Weighted average common shares 358 375 356 374
============ ============ ============ ============
Basic earnings (loss) per share
attributable to common
stockholders $ (.18) .02 .67 .06
============ ============ ============ ============
Diluted EPS:
Earnings (loss) attributable to
common stockholders $ (65) 6 239 22
============ ============ ============ ============
Weighted average common shares 358 375 356 374
------------ ------------ ------------ ------------
Add dilutive potential common
shares:
Employee and director
options -- 2 8 3
Convertible notes payable -- 20 19 20
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 -- 36 35 37
------------ ------------ ------------ ------------
Diluted weighted average common
shares 358 411 391 411
============ ============ ============ ============
Diluted earnings (loss) per
share attributable to
common stockholders $ (.18) .02 .61 .05
============ ============ ============ ============
</TABLE>
(c) TCI Ventures Group Stock
The basic and diluted loss attributable to TCI Ventures Group common
stockholders per common share for the three and six months ended June
30, 1998 was computed by dividing net loss attributable to TCI Ventures
Group common stockholders by the weighted average number of common
shares outstanding of TCI Ventures Group Stock during the period (422
million and 421 million for the three and six months ended June 30,
1998, respectively). Potential common shares were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
(continued)
I-17
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At June 30, 1998, there were 37 million potential common
shares consisting of stock options and other performance
awards, and convertible securities that could potentially
dilute future EPS calculations in periods of net earnings.
Such potential common share amount does not take into account
the assumed number of shares that would be repurchased by the
Company upon the exercise of the stock options and other
performance awards and the conversion of the convertible
securities. No material changes in the weighted average
outstanding shares or potential common shares occurred after
June 30, 1998.
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $538 million and $589 million for the six
months ended June 30, 1998 and 1997, respectively. Cash paid for income
taxes was $19 million and $22 million for the six months ended June 30,
1998 and 1997, respectively.
Significant noncash investing and financing activities are reflected in
the following table.
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------
1998* 1997
------ ------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Aggregate cost basis of assets acquired $ (729) (1,123)
Liabilities assumed, net of current assets 3 622
Deferred tax liability recorded in acquisitions 107 34
Acquisition of minority interests in equity of consolidated
subsidiaries (179) 3
Elimination of notes receivable from affiliates 350 --
Common stock and preferred stock issued in acquisitions 376 258
------ ------
Cash paid for acquisitions $ (72) (206)
====== ======
Cash received in exchanges:
Aggregate cost basis of assets acquired $ -- (395)
Historical cost of assets exchanged -- 399
Gain recorded on exchange of assets -- 11
------ ------
Cash received in exchanges $ -- 15
====== ======
Costs of distribution agreements $ 83 --
====== ======
</TABLE>
* Restated - see note 16.
For a description of certain non-cash transactions, see note 7.
The Company's restricted cash includes proceeds received in connection
with certain asset dispositions. Such proceeds, which aggregated $303
million and $34 million at June 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 $9
million and $5 million at June 30, 1998 and December 31, 1997,
respectively.
(continued)
I-18
<PAGE> 21
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 more significant investments:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Cablevision Systems Corporation ("CSC") $ 1,099 15
TCG 464 295
USA Networks, Inc. ("USAI") 717 229
Sprint Spectrum Holding Company, L.P., MinorCo, L.P.
and PhillieCo, L.P. 352 607
Various foreign equity investments (other than
Telewest Communications plc, Flextech p.l.c. and
Cablevision S.A.) 264 213
Telewest Communications plc ("Telewest") 263 324
Flextech p.l.c. ("Flextech") 259 261
InterMedia Capital Partners IV, L.P. and InterMedia
Capital Management IV, L.P. 254 262
Cablevision S.A. ("Cablevision") 232 239
QVC, Inc. 155 134
Home Shopping Network, Inc. ("HSN") 147 119
</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>
Six months ended
Combined Operations June 30,
---------------------------
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Revenue $ 8,209 3,586
Operating expenses (7,211) (3,472)
Depreciation and amortization (1,585) (620)
------------ ------------
Operating loss (587) (506)
Interest expense (1,110) (364)
Other, net (172) (262)
------------ ------------
Net loss $ (1,869) (1,132)
============ ============
</TABLE>
(continued)
I-19
<PAGE> 22
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 24.5 million newly issued CSC Class A common shares
(as adjusted for a stock dividend) (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
$511 million gain in the accompanying consolidated statement of
operations for the six months ended June 30, 1998. Such gain represents
the excess of the $1,161 million fair value of the CSC Class A common
shares received over the historical cost of the net assets transferred
by the Company to CSC. 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 June 30, 1998, the Company owned 24,991,286 shares of CSC Class A
common stock, which had a closing market price of $83.50 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 six months
ended June 30, 1998, CSC accounted for $80 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" or the "Sprint PCS Partnerships") and
PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS
Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and
the Company. The Company has a 30% partnership interest in each of the
Sprint PCS Partnerships and a 35% interest as a partner in PhillieCo.
During the six months ended June 30, 1998 and 1997, the PCS Ventures
accounted for $324 million and $157 million, respectively, of the
Company's share of affiliate losses.
(continued)
I-20
<PAGE> 23
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
From inception through June 1998, the four partners have contributed
$4.2 billion to the Sprint PCS Partnerships (of which the Company
contributed an aggregate of $1.3 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-21
<PAGE> 24
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 and the receipt of required Federal
Communications Commission ("FCC") approvals. 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. If the above-described transactions are consummated, the
Company would begin to use the cost method to account for its
investment in the Sprint PCS stock. No assurance can be given that the
above-described transactions will be consummated.
On June 30, 1998, TCI owned 1,011,528 shares of TCG's Class A common
stock and 48,779,000 shares of TCG's Class B common stock. TCG's Class
A common stock had a closing price on the Nasdaq financial market of
$54.25 per share on June 30, 1998.
On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG in the
ratio of .90909 share of TCG stock for each share of ACC stock. The
transaction was valued at approximately $1.1 billion. As a result of
such merger transaction, TCI's interest in TCG was reduced to
approximately 26%. In 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).
In January 1998, TCG entered into certain agreements pursuant to which
it agreed to be acquired by AT&T. Such merger was consummated on July
23, 1998. As a result of such merger, TCI received in exchange for all
of its interest in TCG, approximately 47 million shares of AT&T Common
Stock, which shares are attributed to TCI Ventures Group. TCI will
account for its ownership interest in AT&T Common Stock using the cost
method. See note 2.
(continued)
I-22
<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 1998, pursuant to an investment agreement among Universal
Studios, Inc. ("Universal"), HSN, Inc. ("HSNI"), HSN and Liberty Media
Group, dated as of October 1997 and amended and restated as of December
1997, HSNI consummated a transaction (the "Universal Transaction")
through which USA Networks Partners, Inc., a subsidiary of Universal,
sold its 50% interest in USA Networks, Inc., a New York general
partnership, 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 ("USANi LLC") formed to hold all of the businesses of
USAI and its subsidiaries, except for its broadcasting business and its
equity interest in Ticketmaster Group, Inc. and 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. (and 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. 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-23
<PAGE> 26
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the dilution of Liberty Media Group's ownership
interest that resulted from the issuance of common stock by USAI in the
Universal Transaction, the Company recorded a $33 million increase to
additional paid in capital (after deducting a deferred tax liability of
$21 million) and an increase to investments in affiliates of $54
million. 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 Ticketmaster Transaction, the Company
recorded a $32 million increase to additional paid-in capital (after
deducting a deferred tax liability of $20 million) and an increase to
investment in affiliates of $52 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 approximately 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. Including indirect ownership interests in USAI of 8% held
through BDTV, Liberty Media Group held direct and indirect ownership
interests in USAI as of June 30, 1998 of approximately 20%.
At June 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., 132,638,250 or 26.7% of
the issued and outstanding non-voting Telewest convertible preference
shares and 246,111,750 or 26.5% (assuming no conversion of the Telewest
convertible preference shares) of the issued and outstanding Telewest
ordinary shares. The reported closing price on the London Stock
Exchange of Telewest ordinary shares was (pound)1.41 ($2.35) per share
at June 30, 1998. Telewest is a company that is currently operating and
constructing cable television and telephone systems in the United
Kingdom ("UK"). Telewest accounted for $64 million and $73 million of
the Company's share of its affiliates' losses during the six months
ended June 30, 1998 and 1997, respectively.
(continued)
I-24
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On April 15, 1998, it was announced that Telewest and General Cable PLC
("General Cable") had agreed to the terms of a proposed merger (the
"Merger Offer") in which holders of General Cable will be offered 1.243
new Telewest shares and (pound)0.65 ($1.08) in cash for each share of
General Cable. In addition, holders of American Depository shares of
General Cable ("General Cable ADSs") (each representing five General
Cable shares) will be offered 6.215 new Telewest shares and (pound)3.25
($5.42) in cash for each share of General Cable ADSs. Based upon
Telewest's closing share price of (pound)0.89 ($1.48) on April 14,
1998, the Merger Offer is valued at approximately (pound)649 million
($1.1 billion).
The cash portion of the Merger Offer will be financed through an offer
to qualifying Telewest shareholders for the purchase of approximately
261 million new Telewest shares at a price of (pound)0.925 ($1.54) per
share. Mediaone Group, Inc. ("Mediaone") (formerly a division of U S
WEST, Inc.), TINTA and Cox have agreed to subscribe for their full
allocation of new Telewest shares (approximately 69 million shares in
the case of TINTA) and to subscribe on a pro rata basis for any new
Telewest shares not subscribed for by other Telewest shareholders.
Together, Mediaone, TINTA and Cox held 67.9% of the issued and
outstanding Telewest ordinary shares at June 30, 1998. In addition, it
is anticipated that Mediaone, TINTA, Cox and SBC Communications, Inc.
will convert their entire respective holdings of Telewest convertible
preference shares into new Telewest shares. Following the issuance of
new Telewest shares with respect to the above transactions, and
assuming the exercise of all options under General Cable's share option
schemes, it is anticipated that existing Telewest shareholders would
hold 79% and existing General Cable shareholders would hold 21% of the
then issued ordinary share capital of the combined group.
Consummation of the merger is subject to regulatory approval and other
conditions. There can be no assurance that such merger will be
consummated or consummated on the terms contemplated by the parties.
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision, a company engaged in the multi-channel video distribution
business in Buenos Aires, Argentina, to unaffiliated third parties (the
"Buyers") for cash proceeds of $120 million. In addition, on October 9,
1997, Cablevision issued 3,541,829 shares of stock in the aggregate to
the Buyers for $320 million. The above transactions, (collectively, the
"Cablevision Sale") reduced TINTA's interest in Cablevision to 26.2%.
TINTA recognized a gain of $49 million on the Cablevision Sale. As a
result of the Cablevision Sale, effective October 1, 1997, TINTA ceased
to consolidate Cablevision and began to account for Cablevision using
the equity method of accounting. Cablevision accounted for $8 million
of the Company's share of its affiliates' losses during the six months
ended June 30, 1998.
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 $39 million and $41 million of the Company's
share of its affiliates' losses during the six months ended June 30,
1998 and 1997, respectively.
(continued)
I-25
<PAGE> 28
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 approximately 57 million shares of a separate
series of Time Warner common stock with limited voting rights (the "TW
Exchange Stock"). Holders of the TW Exchange Stock are entitled to one
one-hundredth (l/100th) of a vote for each share with respect to the
election of directors. Holders of the TW Exchange Stock will not have
any other voting rights, except as required by law or with respect to
limited matters, including amendments of the terms of the TW Exchange
Stock adverse to such holders. Subject to the federal communications
laws, each share of the TW Exchange Stock will be convertible at any
time at the option of the holder on a one-for-one basis for a share of
Time Warner common stock. Holders of TW Exchange Stock are entitled to
receive dividends ratably with the Time Warner common stock and to
share ratably with the holders of Time Warner common stock in assets
remaining for common stockholders upon dissolution, liquidation or
winding up of Time Warner. See note 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") and received 6.4 million shares of TW
Exchange Stock valued at $306 million in consideration for the grant.
Such amount had been reflected as a deferred option premium in the
accompanying consolidated financial statements. Pursuant to the
Southern Option, Time Warner acquired the Southern Business, effective
January 1, 1998 for $213 million in cash. The Company recognized a $515
million pre-tax gain in connection with such transactions in the first
quarter of 1998.
(continued)
I-26
<PAGE> 29
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Acquisitions and Dispositions
During the first six months of 1998, the Company completed three
transactions whereby the Company contributed cable television systems
serving in the aggregate approximately 670,000 customers to three
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 $833
million. In connection with such transactions, the Company has agreed
to take certain steps to support compliance by each of the 1998 Joint
Ventures with their payment obligations under certain debt instruments,
up to an aggregate contingent commitment of $784 million. In light of
such contingent commitments, the Company has deferred any gains on the
formation of the 1998 Joint Ventures. Such deferred gains, which
aggregated $163 million, will not be recognized until such time as the
Company's contingent commitments with respect to the 1998 Joint
Ventures 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 July
31, 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.
(continued)
I-27
<PAGE> 30
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("Superstar/Netlink")
in exchange for an approximate 20% interest in Superstar/Netlink. As a
result of this transaction, the Company's ownership interest in
Superstar/Netlink decreased from 100% to approximately 80% and the
Company recognized a gain of $38 million (before deducting deferred
income tax expense of $15 million). Turner Vision's contribution to
Superstar/Netlink was accounted for as a purchase, and the $61 million
excess of the purchase price over the fair value of the assets acquired
was recorded as goodwill and is being amortized over five years.
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 30 million shares of UVSG's stock, including
11,251,706 shares of its Class A common stock and 18,748,294 shares of
its Class B common stock. As a result of the transaction, and certain
other pending transactions, 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.
(continued)
I-28
<PAGE> 31
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 9,727 9,017
Bank credit facilities (b) 3,540 5,233
Commercial paper 717 533
Convertible notes (c) 40 40
Capital lease obligations and other debt 398 427
------------ ------------
$ 14,422 15,250
============ ============
</TABLE>
(a) During the six months ended June 30, 1998, the Company
purchased certain notes payable which had an aggregate
principal balance of $299 million and fixed interest rates
ranging from 8.67% to 10.125% (the "1998 Purchases"). In
connection with the 1998 Purchases, the Company recognized a
loss on early extinguishment of debt of $38 million. Such loss
related to prepayment penalties amounting to $34 million and
the retirement of deferred loan costs.
During the six months ended June 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 June 30, 1998, subsidiaries of the Company had
approximately $3.6 billion in unused lines of credit,
excluding amounts related to lines of credit which provide
availability to support commercial paper.
As security for borrowings under one of the Company's credit
facilities, the Company has pledged a portion of its Time
Warner common stock with an estimated market value at June 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 a 30 year
non-convertible 9% preferred stock of Fox Kids Worldwide, Inc.
At June 30, 1998, the carrying value of such holdings
aggregated $595 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 from 1/4% to 1/2% per annum on
the average unborrowed portion of the total amount available
for borrowings under bank credit facilities.
(continued)
I-29
<PAGE> 32
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) The convertible notes, which are stated net of unamortized
discount of $166 million at June 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 June 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 June 30, 1998, the fair value of the Company's debt was
$15,083 million, as compared to a carrying value of $14,422 million on
such date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into variable and fixed interest
rate exchange agreements ("Interest Rate Swaps") pursuant to which it
(i) pays a fixed interest rate (the "Fixed Rate Agreement") of 6.2% and
receives variable interest rates on a notional amount of $10 million at
June 30, 1998 and (ii) pays variable interest rates (the "Variable Rate
Agreements") and receives fixed interest rates ranging from 4.8% to
9.7% on notional amounts of $2,400 million at June 30, 1998. During the
six months ended June 30, 1998 and 1997, the Company's net payments
pursuant to the Fixed Rate Agreement were less than $1 million and $4
million, respectively; and the Company's net receipts pursuant to the
Variable Rate Agreements were $4 million and $11 million, respectively.
(continued)
I-30
<PAGE> 33
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the Company's Variable Rate Agreements at June
30, 1998 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to be paid
Expiration Interest rate Notional (received) upon
date to be received amount termination (a)
--------------------------- -------------- -------------- -------------------------------
<S> <C> <C> <C>
September 1998 4.8%-5.4% $ 450 $ 2
April 1999 7.4% 50 (1)
September 1999 6.4% 350 (3)
February 2000 5.8%-6.6% 300 (3)
March 2000 5.8%-6.0% 675 (1)
September 2000 5.1% 75 1
March 2027 9.7% 300 (30)
December 2036 9.7% 200 (8)
----------- -----------
$ 2,400 $ (43)
=========== ===========
</TABLE>
- --------------------
(a) The estimated amount that the Company would pay or receive to
terminate the agreements at June 30, 1998, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
The Fixed Rate Agreement expires in August 1998. At June 30, 1998, the
Company would be required to pay less than $1 million to terminate the
Fixed Rate Agreement.
In addition to the Fixed Rate and Variable Rate Agreements, the Company
entered into Interest Rate Swaps pursuant to which it pays a variable
rate based on the London Interbank Offered Rate ("LIBOR") (6.1% at June
30, 1998) and receives a variable rate based on the Constant Maturity
Treasury Index ("CMT") (5.9% at June 30, 1998) on a notional amount of
$400 million through September 2000; and pays a variable rate based on
LIBOR (6.0% at June 30, 1998) and receives a variable rate based on CMT
(6.0% at June 30, 1998) on notional amounts of $95 million through
February 2000. During the six months ended June 30, 1998, the Company's
net payments pursuant to such agreements were less than $1 million. At
June 30, 1998, the Company would be required to pay an estimated $3
million to terminate such Interest Rate Swaps.
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties. Further, the Company does not anticipate material
near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of June 30, 1998.
(continued)
I-31
<PAGE> 34
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) 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.
(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 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 $71 million and $61 million during the six months
ended June 30, 1998 and 1997, respectively, and are included in
minority interests in earnings of consolidated subsidiaries in the
accompanying consolidated financial statements.
(11) Stockholders' Equity
Stock Repurchases
During the six months ended June 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 266,783 shares of Liberty Group
Series A Stock were repurchased at an aggregate cost of approximately
$13 million.
Treasury Stock and Common Stock Held by Subsidiaries, at Cost
<TABLE>
<CAPTION>
June 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 25,126,455 490 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
-------------- --------------
$ 1,731 $ 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 June 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
June 30, 1998, the Equity Swap Facility had acquired 4,935,780 shares
of TCI Group Series A Stock and 1,151,800 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $48 million
less than the fair value of such Equity Swap Shares at June 30, 1998.
At June 30, 1998, there were 98,598,176 shares of TCI Group Series A
Stock, 14,511,570 shares of TCI Group Series B Stock, 38,863,193 shares
of Liberty Group Series A Stock, 33,704,949 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
(12) 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 June 30, 1998. At June 30, 1998, the market value of
the Option Shares exceeded the Investment Bankers' cost by $275
million. Pursuant to a certain Letter Agreement, dated June 16, 1997,
between Dr. Malone, TCI's Chairman and Chief Executive Officer, and the
Magness Estate, Dr. Malone agreed to waive certain rights of first
refusal with respect to shares of Series B TCI Group Stock beneficially
owned by the Magness Estate. Such rights of first refusal arise from a
letter agreement, dated June 17, 1988, among Bob Magness,
Kearns-Tribune Corporation and Dr. Malone, pursuant to which Dr. Malone
was granted a right of first refusal to acquire any shares of TCI Group
Series B Stock which the other parties proposed to sell. As a result of
Dr. Malone's rights under such June 17, 1988 letter agreement, such
waiver was necessary in order for the Magness Estate to consummate the
Exchange and the Sale.
In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from
TCI up to 30,545,864 shares of the Series B TCI Group Stock acquired by
TCI from the Magness Estate pursuant to the Exchange. Such acquisition
may be made in exchange for either, or any combination of, shares of
Series A TCI Group Stock owned by Dr. Malone (exchanged on a one for
one basis), or cash in an amount equal to the average closing sale
price of the Series B TCI Group Stock for the five trading days
preceding the acquisition.
In connection with certain legal proceedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob
Magness' sons, Sharon Magness, Bob Magness' surviving second wife and
the original personal representatives of the Magness Estate advanced
various claims, causes of action, demands, complaints and requests
against one or more of the others. In addition, Kim Magness and Gary
Magness, in a Complaint And Request To Void Sale Of TCI Stock, And For
Damages And Surcharge, filed on October 29, 1997 (the "Voiding
Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal
representatives of the Magness Estate. Among other matters, the Voiding
Action challenged the June 16 Stock Transaction on various fiduciary
bases and requested recision of such transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon
Magness, the Magness Estate, the Estate of Betsy Magness (the first
wife of Bob Magness) and Dr. Malone agreed to settle their respective
claims against each other relating to the Magness Estate and the June
16 Stock Transaction, in each case without any of those parties
admitting any of the claims or allegations against that party (the
"Magness Settlement").
(continued)
I-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
shareholders' agreement (the "Shareholders' Agreement") with the
Malones and TCI under which (i) the Magness Family and the Malones
agree to consult with each other in connection with matters to be
brought to the vote of TCI's shareholders, subject to the proviso that
if they cannot mutually agree on how to vote the shares, Dr. Malone has
an irrevocable proxy to vote the High-Voting Shares owned by the
Magness Family, (ii) the Magness Family may designate a nominee for the
Board and Dr. Malone has agreed to vote his High Voting Shares for such
nominee and (iii) certain "tag along rights" have been created in favor
of the Magness Family and certain "drag along rights" have been created
in favor of the Malones. In addition, the Malone Right granted by TCI
to Dr. Malone to acquire 30,545,864 shares of TCI Group Series B Stock
was reduced to an option to acquire 14,511,570 shares of TCI Group
Series B Stock. Pursuant to the terms of the Shareholders' Agreement,
the Magness Family has the right to participate in the reduced Malone
Right on a proportionate basis with respect to 12,406,238 shares of the
14,511,570 shares subject to the Malone Right. On June 24, 1998, Dr.
Malone delivered notice to the Company exercising his right to purchase
up to 14,511,570 shares of TCI Group Series B Stock at a per share
price of $35.5875 pursuant to the Malone Right. In addition, a
representative of the Magness Family has advised Dr. Malone that the
Magness Family will participate in such purchase up to the Magness
Family's proportionate share. Subject to final verification and
agreement of each party's proportionate share, upon the closing of the
exercise of the Malone Right, Dr. Malone would acquire 8,718,770 and
the Magness Family would acquire 5,792,800 of the shares of TCI Group
Series B Stock that are subject to the Malone Right. Such exercises are
subject to any required regulatory approvals.
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 and a
limited partnership interest in another limited partnership with a
capital account of $1 million.
(13) At Home Corporation
In April 1997, @Home, a subsidiary of the Company, 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.
(continued)
I-36
<PAGE> 39
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
@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 June 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 16.
Pursuant to a shareholders' agreement among certain shareholders of
@Home, under certain circumstances, TCI could be required to sell a
portion of its common stock of @Home to such shareholders.
(14) Commitments and Contingencies
On October 5, 1992, the United States Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). In 1993 and 1994, the FCC adopted certain rate regulations
required by the 1992 Cable Act and imposed a moratorium on certain rate
increases. As a result of such actions, the Company's basic and tier
service rates and its equipment and installation charges (the
"Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. Basic and tier service rates are
evaluated against competitive benchmark rates as published by the FCC,
and equipment and installation charges are based on actual costs. Any
rates for Regulated Services that exceeded the benchmarks were reduced
as required by the 1993 and 1994 rate regulations. The rate regulations
do not apply to the relatively few systems which are subject to
"effective competition" or to services offered on an individual service
basis, such as premium movie and pay-per-view services.
The Company believes that it has complied in all material respects with
the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed by a
customer, or the appropriate franchise authority, if such authority has
been certified by the FCC to regulate rates. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate benchmark
and refund the excess portion of rates received. Any refunds of the
excess portion of tier service rates would be retroactive to the date
of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
(continued)
I-37
<PAGE> 40
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 June 30, 1998,
these agreements require minimum payments aggregating approximately
$680 million. The aggregate amount of the Film Licensing Obligations
under other license agreements is not currently estimable because such
amount is dependent upon the number of qualifying films released
theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying
films. Nevertheless, the Company anticipates that its aggregate
payments under the Film Licensing Obligations will be significant.
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 $585 million at June 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 7, 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.
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 $38 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.
(continued)
I-38
<PAGE> 41
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 June 30, 1998, owned TCI Music securities
representing 80.7% of TCI Music's common stock and 97.4% of the voting
power attributable to such TCI Music common stock. In connection with
the DMX Merger, the Company assumed a contingent obligation pursuant to
a Rights Agreement (the "Rights Agreement") to purchase up to
14,896,648 shares (6,812,393 of which are owned by subsidiaries of the
Company) of TCI Music common stock at a price of $8.00 per share. TCI
will settle its obligation under the Rights Agreement during the third
quarter of 1998 by paying $8.00 per share to all holders who tender TCI
Music common stock and the associated rights to TCI in accordance with
the terms of the Rights Agreement. The Company has recorded its
contingent obligation to purchase such shares as a component of
minority interest in equity of consolidated subsidiaries in the
accompanying consolidated financial statements.
Effective as of December 16, 1997, NDTC, a subsidiary of TCI which is
attributed to of the TCI Ventures Group, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital
Terminal Purchase Agreement") with General Instrument Corporation
(formerly NextLevel Systems, Inc., "GI") to purchase advanced digital
set-top devices. The hardware and software incorporated into these
devices will be designed and manufactured to be compatible and
interoperable with the OpenCable(TM) architecture specifications
adopted by CableLabs, the cable television industry's research and
development consortium, in November 1997. NDTC has agreed that Approved
Purchasers will purchase, in the aggregate, a minimum of 6.5 million
set-top devices during calendar years 1998, 1999 and 2000 at an average
price of $318 per set-top device. Through June 30, 1998, 525,000
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. It is anticipated that the value
associated with such equity interest would be attributed to TCI Group
upon purchase and deployment of the digital set-top devices. See note
2. NDTC has the right to terminate the Digital Terminal Purchase
Agreement if, among other reasons, GI fails to meet a material
milestone designated in the Digital Terminal Purchase Agreement with
respect to the development, testing and delivery of advanced digital
set-top devices.
On July 17, 1998, 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 technology 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 services to GI's set-top
authorization business.
(continued)
I-39
<PAGE> 42
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has 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
$400 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
June 30, 1998, the Company has sold and leased back advanced digital
set-top devices under the Lease with an aggregate cost of $107 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.
A TCI subsidiary attributed to TCI Ventures Group issued preferred
stock in connection with a previous acquisition. Such preferred stock
is exchangeable at the option of the holders into 1,084,056 shares of
TCI Group Series A Stock beginning in April 1999. The TCI Ventures
Group entered into a forward purchase contract in July 1998 with a
commercial bank to acquire 1,084,056 shares of TCI Group Series A Stock
for approximately $45 million on or before April 19, 1999. Such shares
will be used to satisfy the exchange requirements of the aforementioned
preferred stock.
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.
Estimates of compensation relating to phantom stock appreciation rights
granted to employees of a subsidiary of TCI have been recorded in the
accompanying combined financial statements, but are subject to future
adjustment based upon a valuation model derived from such subsidiary's
cash flow, working capital and debt.
During the six months ended June 30, 1998, the Company continued its
enterprise-wide comprehensive efforts to review and correct computer
systems, equipment and related software to ensure they properly
recognize, process and store business information. The computer
systems, equipment and software being evaluated include systems which
are integral to the distribution of the Company's products and
services, systems that support operations of the Company and protect
its assets, and all internal use software. The Company is utilizing
both internal and external resources, including the establishment of a
year 2000 enterprise program management office accountable to the
Company's executive management, to identify and remediate or replace
systems for year 2000 readiness.
(continued)
I-40
<PAGE> 43
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the six months ended June 30, 1998, the Company began the
process of testing and replacing or remediating critical components of
its cable systems' headend equipment. Although no assurance can be
given, the Company expects to conclude such testing by December 1998
with replacement or remediation completed by the end of the first
quarter of 1999. Also the Company began the process of remediating
systems that control the commercial advertising in its cable
operations. Although no assurance can be given, those remediation
efforts should be complete by mid-1999. The Company continued to assess
potential year 2000 issues of its affiliated companies and provided its
affiliates with remediation information on software products and
systems. The Company's business and financial systems and software
which will continue to be utilized by the Company beyond the year 1999
will be capable of recognizing the year 2000 and therefore should not
require material remediation or replacement.
Significant third party vendors whose systems are critical to the
Company's cable operations have been identified and surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to become ready.
During the six months ended June 30, 1998, the Company completed an
independent assessment of a key financial application externally
managed by a third party vendor and determined that such vendor's
systems and software should be compliant by the end of 1998. Also, the
Company has developed and initiated a plan with key suppliers who
provide systems which are integral to the distribution of the Company's
products and services to upgrade or replace non-year 2000 compliant
systems on a product-by-product and site-by-site basis by mid-1999.
Management of the Company intends to have further communication with
primary vendors identified as having systems that are not year 2000
compliant to assess those vendors' plans for remediating their own year
2000 issues and to assess the impact on the Company if such vendors
fail to remediate their year 2000 issues. The Company continues to
evaluate the level of validation it will require of third parties to
ensure their year 2000 readiness.
Management of the Company has not yet determined the full cost
associated with its year 2000 readiness efforts and the related
potential impact on the Company's financial position, results of
operations or cash flows but has identified certain cost elements that,
in the aggregate, are not expected to be less than $63 million, which
includes $3 million of program management expenses incurred during the
six months ended June 30, 1998. Although there can be no assurance, the
Company anticipates that the costs ultimately required to be paid to
ensure the Company's year 2000 readiness will not have a material
adverse effect on the Company's financial position, results of
operations or cash flows. However, there can be no assurance that the
Company's systems or the systems of other companies on which the
Company relies will be converted in time or that any such failure to
convert by the Company or other companies will not have a material
adverse effect on its financial position, results of operations or cash
flows.
(continued)
I-41
<PAGE> 44
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) 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 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.
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>
Six months ended June 30, 1998:
Revenue from external customers
including intersegment
revenue $ 3,081 322 436 3,839
Intersegment revenue (9) 141 22 154
Segment operating cash flow 1,283 44 45 1,372
Six months ended June 30, 1997:
Revenue from external customers
including intersegment
revenue $ 3,161 119 499 3,779
Intersegment revenue 7 47 22 76
Segment operating cash flow 1,327 38 89 1,454
</TABLE>
(continued)
I-42
<PAGE> 45
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of reportable segment operating cash flow to the
Company's consolidated earnings (loss) before income tax is as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1998 * 1997
------------ ------------
amounts in millions
<S> <C> <C>
Total operating cash flow for reportable segments $ 1,327 1,365
Other operating cash flow 45 89
Other items excluded from operating cash flow:
Depreciation and amortization (868) (781)
Stock compensation (412) (71)
Interest expense (536) (583)
Interest and dividend income 39 39
Share of losses of affiliates, net (589) (338)
Loss on early extinguishment of debt (38) (11)
Minority interest in earnings of consolidated
subsidiaries, net (65) (94)
Gain on issuance of equity interest by subsidiary 38 21
Gain on issuance of stock by equity investee 201 --
Gain on disposition of assets 1,099 62
Other, net (29) (6)
------------ ------------
Earnings (loss) before income taxes $ 212 (308)
============ ============
* Restated - see note 16.
</TABLE>
(16) Restatement Associated with Costs of Distribution Agreements
The Company has restated its consolidated financial statements to
record non-cash costs of certain distribution agreements as assets to
be amortized over the exclusivity periods set forth in the respective
distribution agreements. Such non-cash costs had originally been
expensed in the period that the underlying warrants had become
exercisable. This restatement resulted in a $222.0 million increase to
other assets and a $134.5 million increase to minority interests in
consolidated subsidiaries at June 30, 1998. In addition, the
restatement resulted in a $22.7 million increase to net earnings and a
$.05 decrease to basic and diluted net loss attributable to common
stockholders per share of TCI Ventures Group Stock for the six months
ended June 30, 1998. See note 13.
I-43
<PAGE> 46
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ 42 21
Restricted cash (note 4) 304 35
Trade and other receivables, net 439 394
Investment in Cablevision Systems Corporation
("CSC"), accounted for under the
equity method (note 5) 1,082 --
Investments in other affiliates, accounted for
under the equity method, and
related receivables (note 6) 367 414
Property and equipment, at cost:
Land 62 77
Distribution systems 9,332 9,933
Support equipment and buildings 1,388 1,411
------------ ------------
10,782 11,421
Less accumulated depreciation 4,483 4,479
------------ ------------
6,299 6,942
------------ ------------
Franchise costs 15,974 17,802
Less accumulated amortization 2,606 2,725
------------ ------------
13,368 15,077
------------ ------------
Other assets, net of amortization 618 695
------------ ------------
$ 22,519 23,578
============ ============
</TABLE>
(continued)
I-44
<PAGE> 47
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
Liabilities and Combined Deficit amounts in millions
<S> <C> <C>
Accounts payable $ 89 137
Accrued interest 248 250
Accrued programming expenses 264 243
Other accrued expenses 695 726
Debt (note 8) 12,647 14,106
Deferred income taxes 5,376 5,147
Other liabilities 934 563
------------ ------------
Total liabilities 20,253 21,172
------------ ------------
Minority interests in equity of attributed subsidiaries 914 1,048
Redeemable securities:
Preferred stock (note 9) 299 655
Common stock 18 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") 16 (276)
Accumulated other comprehensive earnings, net of taxes (note 1) 11 4
------------ ------------
27 (272)
Due from related parties (note 12) (492) (530)
------------ ------------
Total combined deficit (465) (802)
------------ ------------
Commitments and contingencies (notes 2, 7 and 15)
$ 22,519 23,578
============ ============
</TABLE>
See accompanying notes to combined financial statements.
I-45
<PAGE> 48
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997* 1998 1997*
------------ ------------ ------------ ------------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue (note 12) $ 1,504 1,606 3,081 3,161
Operating costs and expenses:
Operating:
Related party (note 12) 58 23 118 52
Other 469 581 996 1,127
Selling, general and administrative (note 12) 350 339 684 655
Stock compensation (note 11) 77 36 147 38
Depreciation and amortization 373 362 749 694
------------ ------------ ------------ ------------
1,327 1,341 2,694 2,566
------------ ------------ ------------ ------------
Operating income 177 265 387 595
Other income (expense):
Interest expense (227) (282) (500) (555)
Interest income 2 9 7 16
Intercompany interest, net 1 1 6 (1)
Share of losses of CSC (note 5) (48) -- (80) --
Share of earnings (losses) of other affiliates, net
(note 6) (5) (17) 47 (34)
Loss on early extinguishment of debt (note 8) (22) (11) (38) (11)
Minority interests in earnings of attributed
subsidiaries, net (note 10) (49) (47) (95) (81)
Gain on disposition of assets (note 7) 30 43 541 33
Other, net (14) (10) (28) (14)
------------ ------------ ------------ ------------
(332) (314) (140) (647)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (155) (49) 247 (52)
Income tax benefit (expense) 13 1 (151) 7
------------ ------------ ------------ ------------
Earnings (loss) before loss of TCI Ventures Group
(note 1) (142) (48) 96 (45)
Loss of TCI Ventures Group through the date of the TCI
Ventures Exchange (note 1) -- (112) -- (189)
------------ ------------ ------------ ------------
Net earnings (loss) (142) (160) 96 (234)
Dividend requirements on preferred stocks (2) (11) (13) (21)
------------ ------------ ------------ ------------
Net earnings (loss) attributable to common
stockholders $ (144) (171) 83 (255)
============ ============ ============ ============
Basic earnings (loss) attributable to common stockholders per
common share (note 3) $ (.28) (.25) .16 (.38)
============ ============ ============ ============
Diluted earnings (loss) attributable to common stockholders
per common share (note 3) $ (.28) (.25) .15 (.38)
============ ============ ============ ============
Comprehensive earnings (loss) (note 1) $ (136) (157) 103 (227)
============ ============ ============ ============
</TABLE>
*Restated - see note 1.
See accompanying notes to combined financial statements.
I-46
<PAGE> 49
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Statement of Combined Deficit
Six months ended June 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 96 -- -- 96
Change in due from related parties -- -- 38 38
Reclassification to redeemable securities of redemption
amount of TCI Group Stock subject to put obligations (13) -- -- (13)
Premium received in connection with put obligation 2 -- -- 2
Transfer of net liabilities from related party (50) -- -- (50)
Change in unrealized gains for available-for-sale
securities, net of taxes -- 7 -- 7
Accreted dividends on all classes of TCI preferred stock (13) -- -- (13)
Accreted dividends on all classes of TCI preferred stock
not subject to mandatory redemption requirements 5 -- -- 5
Payment of TCI preferred stock dividends (10) -- -- (10)
Payment of call premiums (note 13) (134) -- -- (134)
Recognition of fees related to Exchange (note 13) (20) -- -- (20)
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 June 30, 1998 $ 16 11 (492) (465)
============ ============ ============ ============
</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 Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------
1998 1997*
------------ ------------
amounts in millions
Cash flows from operating activities: (see note 4)
<S> <C> <C>
Earnings (loss) before loss of TCI Ventures Group** $ 96 (45)
Adjustments to reconcile earnings (loss) before loss of TCI Ventures
Group to net cash provided by operating activities:
Depreciation and amortization 749 694
Stock compensation 147 38
Payments of obligation relating to stock compensation (66) (14)
Share of losses of CSC 80 --
Share of losses (earnings) of other affiliates, net (47) 34
Loss on early extinguishment of debt 38 11
Minority interests in earnings of attributed subsidiaries, net 95 81
Gain on disposition of assets (541) (33)
Intergroup tax allocation -- 82
Deferred income tax expense (benefit) 121 (132)
Payments of restructuring charges (4) (19)
Other noncash charges 2 --
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (37) (123)
Change in accruals and payables (159) 189
------------ ------------
Net cash provided by operating activities 474 763
------------ ------------
Cash flows from investing activities:
Cash paid for acquisitions (60) (194)
Capital expended for property and equipment (493) (128)
Investments in and loans to affiliates (151) (20)
Collections of loans to affiliates 943 --
Proceeds from dispositions of assets 351 193
Change in restricted cash (269) (13)
Cash received in exchanges -- 15
Change in due from Liberty Media Group -- 11
Change in interest in TCI Ventures Group -- (78)
Other investing activities 12 (30)
------------ ------------
Net cash provided by (used in) investing activities 333 (244)
------------ ------------
Cash flows from financing activities:
Borrowings of debt 1,883 1,041
Repayments of debt (2,625) (1,822)
Payment of preferred stock dividends (23) (23)
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (95) (85)
Payment of call premiums (134) --
Change in amounts due from related parties 259 (123)
Proceeds from issuance of TCI Group Stock -- 3
Proceeds from issuance of Trust Preferred Securities -- 490
Other financing activities (51) --
------------ ------------
Net cash used in financing activities (786) (519)
------------ ------------
Net increase in cash and cash equivalents 21 --
Cash and cash equivalents at beginning of period 21 --
------------ ------------
Cash and cash equivalents at end of period $ 42 --
============ ============
</TABLE>
* Restated - see note 1.
** Loss of TCI Ventures Group does not use funds.
See accompanying notes to combined financial statements.
I-48
<PAGE> 51
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
June 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-49
<PAGE> 52
"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-50
<PAGE> 53
"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-51
<PAGE> 54
"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 consolidated with TCI Group for all periods in which
TCI Group held an Inter-Group Interest in Liberty Media Group or TCI
Ventures Group, respectively.
Dividends on TCI Group Stock are payable at the sole discretion of the
Board out of the lesser of assets of TCI legally available for
dividends or the available dividend amount with respect to TCI Group,
as defined. Determinations to pay dividends on TCI Group Stock are
based primarily upon the financial condition, results of operations and
business requirements of TCI Group and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
is (unless the Board otherwise provides) specifically attributed to and
reflected in the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred
stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., the TCI Group. The Board
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected in the combined financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
(continued)
I-52
<PAGE> 55
"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-53
<PAGE> 56
"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-54
<PAGE> 57
"TCI 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, (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-55
<PAGE> 58
"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." The Liberty/Ventures
Group following the Merger will be made up of the corporations,
partnerships and other entities and interests which comprise 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 held by 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 held by TCI Ventures Group and the assets and business of
the National Digital Television Center, Inc. ("NDTC")) will be
transferred to TCI Group in exchange for approximately $5.5 billion in
cash. Also upon consummation of the Merger, 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 due to 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-56
<PAGE> 59
"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 months and six months ended June 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 six months ended June 30, 1998 was computed by
dividing net earnings attributable to TCI Group common stockholders,
which is adjusted by the addition of preferred dividends and interest
expense accrued during the six months ended June 30, 1998 to net
earnings, assuming conversion of TCI Group convertible securities as of
the beginning of the period, by the weighted average number of common
shares outstanding of TCI Group Stock during the period. Shares
issuable upon conversion of the Convertible Preferred Stock, Series
C-TCI Group ("Series C-TCI Group Preferred Stock"), the Redeemable
Convertible TCI Group Preferred Stock, Series G ("Series G Preferred
Stock"), preferred stock of subsidiaries, convertible notes payable,
stock options and other performance awards have been included in the
computation of weighted average shares, as illustrated below. Shares of
TCI Group stock issuable upon exercise of the Malone Right (as defined
in note 13), and issuable upon conversion of Convertible Preferred
Stock, Series D ("Series D Preferred Stock"), and associated dividend
payments for the six months ended June 30, 1998 have been excluded as
adjustments in computing the diluted earnings attributable to TCI Group
common stockholders per common share as such potential common shares
are antidilutive for the six months ended June 30, 1998.
The diluted loss attributable to TCI Group common stockholders per
common share for the three months ended June 30, 1998 and the three
months and six months ended June 30, 1997 was computed by dividing net
loss attributable to TCI Group common stockholders by the weighted
average number of common shares outstanding of TCI Group Stock during
the period. Potential common shares were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
No material changes in the weighted average outstanding shares or
potential common shares occurred after June 30, 1998.
(continued)
I-57
<PAGE> 60
"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 Six months ended
June 30, June 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 $ (144) (171) 83 (255)
============ ============ ============ ============
Weighted average common shares 523 683 520 680
============ ============ ============ ============
Basic earnings (loss) per share
attributable to common
stockholders $ (.28) (.25) .16 (.38)
============ ============ ============ ============
Diluted EPS:
Earnings (loss) attributable to
common stockholders $ (144) (171) 83 (255)
Add preferred dividend requirements -- -- 6 --
Add interest expense -- -- 1 --
------------ ------------ ------------ ------------
Adjusted earnings (loss)
attributable to common
stockholders assuming
conversion of preferred shares $ (144) (171) 90 (255)
============ ============ ============ ============
Weighted average common shares 523 683 520 680
------------ ------------ ------------ ------------
Add dilutive potential common shares:
Employee and director options
and other performance awards -- -- 9 --
Malone Right -- -- -- --
Convertible notes payable -- -- 24 --
Series C-TCI Group Preferred
Stock -- -- 7 --
Series D Preferred Stock -- -- -- --
Series G Preferred Stock -- -- 8 --
Preferred stock of subsidiaries -- -- 45 --
------------ ------------ ------------ ------------
Dilutive potential common
shares -- -- 93 --
------------ ------------ ------------ ------------
Diluted weighted average common
shares 523 683 613 680
============ ============ ============ ============
Diluted earnings (loss) per share
attributable to common
stockholders $ (.28) (.25) .15 (.38)
============ ============ ============ ============
</TABLE>
(continued)
I-58
<PAGE> 61
"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 $502 million and $565 million for the six
months ended June 30, 1998 and 1997, respectively. Cash paid for income
taxes was not material for the six months ended June 30, 1998 and 1997.
Summary of cash paid for acquisitions and cash received in exchanges is
as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Aggregate cost basis of assets acquired $ (413) (1,073)
Liabilities assumed, net of current assets 2 584
Deferred tax liability recorded in acquisitions 107 34
Acquisition of minority interests in equity of consolidated
subsidiaries (130) 3
Elimination of notes receivable from affiliates 350 --
Common stock and preferred stock issued in acquisitions 24 258
------------ ------------
Cash paid for acquisitions $ (60) (194)
============ ============
Cash received in exchanges:
Aggregate cost basis of assets acquired $ -- (395)
Historical cost of assets disposed of -- 399
Gain recorded on exchange of assets -- 11
------------ ------------
Cash received in exchanges $ -- 15
============ ============
</TABLE>
For a description of certain non-cash transactions, see notes 6, 7 and
12.
TCI Group's restricted cash includes proceeds received in connection
with certain asset dispositions. Such proceeds, which aggregated $303
million and $34 million at June 30, 1998 and December 31, 1997,
respectively, are designated to be reinvested in certain identified
assets for income tax purposes.
(continued)
I-59
<PAGE> 62
"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 24.5 million newly issued CSC Class A common shares
(as adjusted for a stock dividend) (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 $511 million gain
in the accompanying combined statement of operations for the six months
ended June 30, 1998. Such gain represents the excess of the $1,161
million fair value of the CSC Class A common shares received over the
historical cost of the net assets transferred by 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 June 30, 1998, TCI Group owned 24,471,086 shares of CSC Class A
common stock, which had a closing market price of $83.50 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 June 30, 1998 (amounts in millions):
<TABLE>
<S> <C>
Revenue $ 1,041
Operating, selling, general and administrative expense (816)
Depreciation and amortization (228)
------------
Operating loss (3)
Interest expense (149)
Other, net (46)
------------
Net loss $ (198)
============
</TABLE>
(continued)
I-60
<PAGE> 63
"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>
Six months ended
Combined Operations June 30,
------------------- ---------------------------
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Revenue $ 526 512
Operating, selling, general and administrative expenses (277) (293)
Depreciation and amortization (182) (158)
------------ ------------
Operating income 67 61
Interest expense (125) (112)
Other, net 20 (28)
------------ ------------
Net loss $ (38) (79)
============ ============
</TABLE>
In January 1998, InterMedia Partners, a California limited partnership
("InterMedia Partners") 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-61
<PAGE> 64
"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 six months of 1998, three transactions whereby TCI
Group contributed cable television systems serving in the aggregate
approximately 670,000 customers to three 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 $833 million. In
connection with such transactions, TCI Group has agreed to take certain
steps to support compliance by each of the 1998 Joint Ventures with
their payment obligations under certain debt instruments, up to an
aggregate contingent commitment of $784 million. In light of such
contingent commitments, TCI Group has deferred any gains on the
formation of the 1998 Joint Ventures. Such deferred gains, which
aggregated $163 million, will not be recognized until such time as TCI
Group's contingent commitments with respect to the 1998 Joint Ventures
are eliminated. TCI Group uses the equity method of accounting to
account for its investments in 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."
Including the 1998 Contribution Transactions, TCI Group, as of July 31,
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-62
<PAGE> 65
"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>
June 30, December 31,
1998 1997
-------------- -------------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 9,382 8,672
Bank credit facilities (b) 2,311 4,842
Commercial paper 717 533
Convertible notes (c) 40 40
Capital lease obligations and other debt 197 19
-------------- -------------
$ 12,647 14,106
============== =============
</TABLE>
(a) During the six months ended June 30, 1998, TCI Group purchased
certain notes payable which had an aggregate principal balance
of $299 million and fixed interest rates ranging from 8.67% to
10.125% (the "1998 Purchases"). In connection with the 1998
Purchases, TCI Group recognized a loss on early extinguishment
of debt of $38 million. Such loss related to prepayment
penalties amounting to $34 million and the retirement of
deferred loan costs.
During the six months ended June 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 June 30, 1998, subsidiaries of TCI Group had approximately
$2.6 billion in unused lines of credit, excluding amounts
related to lines of credit which provide availability to
support commercial paper.
Certain subsidiaries attributed to TCI Group are required to
maintain unused availability under bank credit facilities to
the extent of outstanding commercial paper. Also, certain
subsidiaries attributed to TCI Group pay fees ranging from
1/4% to 1/2% per annum on the average unborrowed portion of
the total amount available for borrowings under bank credit
facilities.
(continued)
I-63
<PAGE> 66
"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 June 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 June 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 June 30, 1998, the fair value of TCI Group's debt was
$13,336 million, as compared to a carrying value of $12,647 million on
such date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into variable and fixed interest
rate exchange agreements ("Interest Rate Swaps") pursuant to which it
(i) pays a fixed interest rate (the "Fixed Rate Agreement") of 6.2% and
receives variable interest rates on a notional amount of $10 million at
June 30, 1998 and (ii) pays variable interest rates (the "Variable Rate
Agreements") and receives fixed interest rates ranging from 4.8% to
9.7% on notional amounts of $2,400 million at June 30, 1998. During the
six months ended June 30, 1998 and 1997, TCI Group's net payments
pursuant to the Fixed Rate Agreement were less than $1 million and $4
million, respectively; and TCI Group's net receipts pursuant to the
Variable Rate Agreements were $4 million and $11 million, respectively.
(continued)
I-64
<PAGE> 67
"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 June 30,
1998 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to
be paid
Expiration Interest rate Notional (received) upon
date to be received amount termination (a)
-------------------------------- -------------- ---------- ------------------
<S> <C> <C> <C>
September 1998 4.8%-5.4% $ 450 $ 2
April 1999 7.4% 50 (1)
September 1999 6.4% 350 (3)
February 2000 5.8%-6.6% 300 (3)
March 2000 5.8%-6.0% 675 (1)
September 2000 5.1% 75 1
March 2027 9.7% 300 (30)
December 2036 9.7% 200 (8)
---------- ----------
$ 2,400 $ (43)
========== ==========
</TABLE>
------------------
(a) The estimated amount that TCI Group would pay or receive to
terminate the agreements at June 30, 1998, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
The Fixed Rate Agreement expires in August 1998. At June 30, 1998, TCI
Group would be required to pay less than $1 million to terminate the
Fixed Rate Agreement.
In addition to the Fixed Rate and Variable Rate Agreements, TCI Group
entered into Interest Rate Swaps pursuant to which it pays a variable
rate based on the London Interbank Offered Rate ("LIBOR") (6.1% at June
30, 1998) and receives a variable rate based on the Constant Maturity
Treasury Index ("CMT") (5.9% at June 30, 1998) on a notional amount of
$400 million through September 2000; and pays a variable rate based on
LIBOR (6.0% at June 30, 1998) and receives a variable rate based on CMT
(6.0% at June 30, 1998) on notional amounts of $95 million through
February 2000. During the six months ended June 30, 1998, TCI Group's
net payments pursuant to such agreements were less than $1 million. At
June 30, 1998, TCI Group would be required to pay an estimated $3
million to terminate such Interest Rate Swaps.
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, as of
June 30, 1998, 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.
(continued)
I-65
<PAGE> 68
"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 $71 million and $61 million for the six months
ended June 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 June 30, 1998,
the Equity Swap Facility had acquired 4,935,780 shares of TCI Group
Series A Stock and 1,151,800 shares of TCI Ventures Group Series A
Stock at an aggregate cost that was approximately $48 million less than
the fair value of such Equity Swap Shares at June 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-66
<PAGE> 69
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock Repurchases
During the six months ended June 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 June 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
options and/or stock appreciation rights 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>
June 30, December 31,
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Notes receivable from Liberty Media Group,
including accrued interest (a) $ (84) (378)
TINTA Note Payable (b) 5 89
Intercompany account (c) (458) (241)
------------ ------------
$ (537) (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 six months ended June 30, 1998 aggregated
approximately $301 million.
(b) Amounts outstanding under TCI's note payable to TINTA (the
"TINTA Note Payable") bear interest at variable rates based on
TCI's weighted average cost of bank borrowings of similar
maturities (6.4% at June 30, 1998). Principal and interest is
due and payable as mutually agreed from time to time by TCI
and TINTA. During the six months ended June 30, 1998 and 1997,
interest expense related to the TINTA Note Payable aggregated
$2 million and $4 million, respectively.
(continued)
I-67
<PAGE> 70
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) The non-interest bearing intercompany account includes certain
income tax and stock compensation allocations that are to be
settled at some future date. All other amounts included in the
intercompany account are to be settled within thirty days
following notification. 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 TCI pays pursuant to its contingent
obligation pursuant to a Rights Agreement (the "Rights Agreement") to
purchase up to 14,896,648 shares (6,812,393 of which are owned by
subsidiaries of TCI) of TCI Music common stock at a price of $8.00 per
share. TCI will settle its obligation under the Rights Agreement during
the third quarter of 1998 by paying $8.00 per share to all holders who
tender TCI Music common stock and the associated rights to TCI in
accordance with the terms of the Rights Agreement. Liberty Media Group
will reimburse TCI Group for the amount required to satisfy such
obligation. The Music Note may be reduced by the payment of cash or the
issuance by TCI of shares of Liberty Group Stock for the benefit of
entities included within TCI Group. Additionally, Liberty Media Group
may elect to pay $50 million of the Music Note by delivery of a Stock
Appreciation Rights Agreement that will give TCI Group the right to
receive 20% of the appreciation in value of Liberty Media Group's
investment in TCI Music, to be determined at July 11, 2002.
TCI Group has provided a revolving loan facility (the "Ventures
Intergroup Credit Facility") to TCI Ventures Group for a five-year
period commencing on September 10, 1997. Such facility permits
aggregate 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 six months ended June 30, 1998.
The maximum amount of borrowings permitted under the Ventures
Intergroup Credit Facility will be reduced on a dollar-for-dollar basis
by up to $300 million if and to the extent that the aggregate amount of
any additional capital that TCI Ventures Group is required to
contribute to certain specified partnerships subsequent to the
September 10, 1997 consummation of the Exchange Offers is less than
$300 million. No borrowings were outstanding pursuant to the Ventures
Intergroup Credit Facility at June 30, 1998.
(continued)
I-68
<PAGE> 71
"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. The
utilization-based charges are set at levels that management believes to
be reasonable and that approximate the costs Liberty Media Group and
TCI Ventures Group would incur for comparable services on a stand-alone
basis. During the six months ended June 30, 1998 and 1997, Liberty
Media Group was allocated $2 million and $1 million, respectively, and
TCI Ventures Group was allocated $6 million and $4 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 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 six months ended
June 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 $2 million.
Through June 30, 1997, TCI Group had a 50.1% partnership interest in
QE+Ltd. ("QE+"), a limited partnership interest which distributes
"STARZ!," a first-run movie premium programming service. Entities
attributed to Liberty Media Group held the remaining 49.9% partnership
interest. Also prior to July 1, 1997, Encore Media Corporation ("EMC")
(at the time a 90%-owned subsidiary of TCI and a member of Liberty
Media Group) earned management fees from QE+ equal to 20% of managed
costs, as defined. In addition, Liberty Media Group earned a fee for
certain services provided to QE+ equal to 4% of the gross revenue of
QE+ ("STARZ Content Fees"). Such management fees and STARZ Content Fees
aggregated $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, 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-69
<PAGE> 72
"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 through 2022.
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.
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 six months ended June 30, 1998,
the aggregate amount paid by TCI Group to TCI Music pursuant to such
arrangement was $9 million. Such amount is included as a reduction of
revenue in the accompanying combined statements of operations.
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 $110 million and $31 million for the six months ended June
30, 1998 and 1997, respectively. Such amounts are included in operating
costs and expenses in the accompanying combined statements of
operations.
Entities included in TCI Group lease satellite transponder facilities
and receive video transport services from entities included in TCI
Ventures Group. Charges by TCI Ventures Group for such arrangements and
other related operating expenses for the six months ended June 30, 1998
and 1997, aggregated $6 million and $14 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 $4 million for each of the six months ended June
30, 1998 and 1997, and are included in operating costs and expenses in
the accompanying 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 $3 million in each of the six month periods
ended June 30, 1998 and 1997. Amounts received by TCI Group pursuant to
this agreement are included in operating costs and expenses in the
accompanying combined financial statements.
(continued)
I-70
<PAGE> 73
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to 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 June 30, 1998. At June 30, 1998, the market value of
the Option Shares exceeded the Investment Bankers' cost by $275
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-71
<PAGE> 74
"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 issued 1,339,415 shares of TCI Group Series B Stock to
the Estate of Betsy Magness in exchange for an equal number of shares
of TCI Group Series A Stock and issued 1,531,834 shares of TCI Ventures
Group Series B Stock for an equal number of shares of TCI Ventures
Group Series A Stock.
On February 9, 1998, in connection with the Magness Settlement, TCI
Group entered into a call agreement (the "Malone Call Agreement") with
Dr. Malone and Dr. Malone's wife (together with Dr. Malone, the
"Malones"), under which the Malones granted to TCI Group the right to
acquire any shares of TCI stock which are entitled to cast more than
one vote per share (the "High-Voting Shares") owned by the Malones,
which currently consist of an aggregate of approximately 60 million
High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third
persons. In either such event, TCI Group has the right to acquire the
shares at a maximum price equal to the then relevant market price of
shares of "low-voting" Series A Stock plus a ten percent premium. The
Malones also agreed that if TCI were ever to be sold to another entity,
then the maximum premium that the Malones would receive on their
High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid $150
million to the Malones in consideration of them entering into the
Malone Call Agreement.
(continued)
I-72
<PAGE> 75
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Also, on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness and the Magness Estate
(collectively, the "Magness Family") also entered into a call agreement
with TCI (with substantially the same terms as the one entered into by
the Malones, including a call on the shares owned by the Magness Family
upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness
Family's aggregate of approximately 49 million High-Voting Shares. The
Magness Family was paid $124 million by TCI Group in consideration of
them entering into the Magness Call Agreement.
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.
Additionally, on February 9, 1998, the Magness Family entered into a
shareholders' agreement (the "Shareholders' Agreement") with the
Malones and TCI under which (i) the Magness Family and the Malones
agree to consult with each other in connection with matters to be
brought to the vote of TCI's shareholders, subject to the proviso that
if they cannot mutually agree on how to vote the shares, Dr. Malone has
an irrevocable proxy to vote the High-Voting Shares owned by the
Magness Family, (ii) the Magness Family may designate a nominee for
TCI's Board of Directors and Dr. Malone has agreed to vote his High
Voting Shares for such nominee and (iii) certain "tag along rights"
have been created in favor of the Magness Family and certain "drag
along rights" have been created in favor of the Malones. In addition,
the Malone Right granted by TCI Group to Dr. Malone to acquire
30,545,864 shares of TCI Group Series B Stock was reduced to an option
to acquire 14,511,570 shares of TCI Group Series B Stock. Pursuant to
the terms of the Shareholders' Agreement, the Magness Family has the
right to participate in the reduced Malone Right on a proportionate
basis with respect to 12,406,238 shares of the 14,511,570 shares
subject to the Malone Right. On June 24, 1998, Dr. Malone delivered
notice to TCI exercising his right to purchase up to 14,511,570 shares
of TCI Group Series B Stock at a per share price of $35.5875 pursuant
to the Malone Right. In addition, a representative of the Magness
Family has advised Dr. Malone that the Magness Family will participate
in such purchase up to the Magness Family's proportionate share.
Subject to final verification and agreement of each party's
proportionate share, upon the closing of the exercise of the Malone
Right, Dr. Malone would acquire 8,718,770 and the Magness Family would
acquire 5,792,800 of the shares of TCI Group Series B Stock that are
subject to the Malone Right. Such exercises are subject to any required
regulatory approvals.
(continued)
I-73
<PAGE> 76
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
(14) Income Taxes
TCI files a consolidated federal income tax return with all of its 80%
or more owned subsidiaries. Consolidated subsidiaries in which TCI owns
less than 80% each file a separate income tax return. TCI and such
subsidiaries calculate their respective tax liabilities on a separate
return basis which are combined in the accompanying combined financial
statements.
A tax sharing agreement (as amended, the "Old Tax Sharing Agreement")
among TCI and certain subsidiaries of TCI was implemented effective
July 1, 1995. The Old Tax Sharing Agreement formalized certain of the
elements of a pre-existing tax sharing arrangement and contains
additional provisions regarding the allocation of certain consolidated
income tax attributes and the settlement procedures with respect to the
intercompany allocation of current tax attributes. Under the Old Tax
Sharing Agreement, TCI Group was responsible to TCI for its share of
consolidated income tax liabilities (computed as if TCI were not liable
for the alternative minimum tax) determined in accordance with the Old
Tax Sharing Agreement, and TCI was responsible to TCI Group to the
extent that the income tax attributes generated by TCI Group and its
attributed entities were utilized by TCI to reduce its consolidated
income tax liabilities (computed as if TCI were not liable for the
alternative minimum tax). The tax liabilities and benefits of such
entities so determined were charged or credited to an intercompany
account between TCI and TCI Group. Such intercompany account is
required to be settled only upon the date that an entity ceases to be a
member of TCI's consolidated group for federal income tax purposes.
Under the Old Tax Sharing Agreement, TCI retains the burden of any
alternative minimum tax and has the right to receive the tax benefits
from an alternative minimum tax credit attributable to any tax period
beginning on or after July 1, 1995 and ending on or before October 1,
1997.
(continued)
I-74
<PAGE> 77
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective October 1, 1997 (the "Effective Date"), the Old Tax Sharing
Agreement was replaced by a new tax sharing agreement, as amended by
the First Amendment thereto (the "New Tax Sharing Agreement"), which
governs the allocation and sharing of income taxes by TCI Group,
Liberty Media Group and TCI Ventures Group. Effective for periods on
and after the Effective Date, federal income taxes will be computed
based upon the type of tax paid by TCI (on a regular tax or alternative
minimum tax basis) on a separate basis for each Group. Based upon these
separate calculations, an allocation of tax liabilities and benefits
will be made such that each Group will be required to make cash
payments to TCI based on its allocable share of TCI's consolidated
federal income tax liabilities (on a regular tax or alternative minimum
tax basis, as applicable) attributable to such Group and actually used
by TCI in reducing its consolidated federal income tax liability. Tax
attributes and tax basis in assets would be inventoried and tracked for
ultimate credit to or charge against each Group. Similarly, in each
taxable period that TCI pays alternative minimum tax, the federal
income tax benefits of each Group, computed as if such Group were
subject to regular tax, would be inventoried and tracked for payment to
or payment by each Group in years that TCI utilizes the alternative
minimum tax credit associated with such taxable period. The Group
generating the utilized tax benefits would receive a cash payment only
if, and when, the unutilized taxable losses of the other Group are
actually utilized. If the unutilized taxable losses expire without ever
being utilized, the Group generating the unutilized tax benefits will
never receive payment for such benefits. Pursuant to the New Tax
Sharing Agreement, state and local income taxes are calculated on a
separate return basis for each Group (applying provisions of state and
local tax law and related regulations as if the Group were a separate
unitary or combined group for tax purposes), and TCI's combined or
unitary tax liability is allocated among the Groups based upon such
separate calculation.
Notwithstanding the foregoing, items of income, gain, loss, deduction
or credit resulting from certain specified transactions that are
consummated after the Effective Date pursuant to a letter of intent or
agreement that was entered into prior to the Effective Date will be
shared and allocated pursuant to the terms of the Old Tax Sharing
Agreement, as amended.
In connection with the creation of TCI Ventures Group, the net amount
of the balance of each TCI Group intercompany account under the Old Tax
Sharing Agreement that is attributable to entities included in TCI
Ventures Group for the period beginning July 1, 1995 and ending on
September 10, 1997 (the consummation date of the TCI Ventures Exchange)
has been included in TCI Group's combined deficit. Tax liabilities and
benefits, as determined under the Old Tax Sharing Agreement, that were
generated by the entities comprising TCI Ventures Group for the period
beginning on September 10, 1997 and ending on September 30, 1997 were
credited or debited to an intercompany account between TCI Group and
TCI Ventures Group in accordance with the Old Tax Sharing Agreement.
(continued)
I-75
<PAGE> 78
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At December 31, 1997, TCI Group had net operating loss carryforwards
for income tax purposes aggregating approximately $1,425 million of
which, if not utilized to reduce taxable income in future periods, $134
million expires in 2003, $117 million in 2004, $344 million in 2005,
$245 million in 2006, $19 million in 2009, $147 million in 2010, $231
million in 2011 and $188 million in 2012. Certain subsidiaries of TCI
Group had additional net operating loss carryforwards for income tax
purposes aggregating approximately $232 million and these net operating
losses are subject to certain rules limiting their usage. Pursuant to
the Old and New Tax Sharing Agreements, TCI Group has 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-76
<PAGE> 79
"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 $203 million at June 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 June 30, 1998, the amount of such
obligations or guarantees was approximately $272 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 June 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 June 30, 1998 to make minimum revenue payments through
2017 and minimum license fee payments through 2007 aggregating
approximately $419 million to TCI Music. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it
is reasonably possible TCI Group may incur losses upon conclusion of
such matters, an estimate of any loss or range of loss cannot be made.
In the opinion of management, it is expected that amounts, if any,
which may be required to satisfy such contingencies will not be
material in relation to the accompanying combined financial statements.
(continued)
I-77
<PAGE> 80
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective as of December 16, 1997, NDTC, on behalf of TCI Group and
other cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital
Terminal Purchase Agreement") with General Instrument Corporation
(formerly NextLevel Systems, Inc., "GI") to purchase advanced digital
set-top devices. The hardware and software incorporated into these
devices will be designed and manufactured to be compatible and
interoperable with the OpenCable(TM) architecture specifications
adopted by CableLabs, the cable television industry's research and
development consortium, in November 1997. NDTC has agreed that Approved
Purchasers will purchase, in the aggregate, a minimum of 6.5 million
set-top devices during calendar years 1998, 1999 and 2000 at an average
price of $318 per basic set-top device. Through June 30, 1998,
approximately 525,000 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. It is anticipated that the value
associated with such equity interest would be attributed to TCI Group
upon purchase and deployment of the digital set-top devices. 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.
TCI Group has 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
$400 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 June 30, 1998, TCI
Group has sold and leased back advanced digital set-top devices under
the Lease with an aggregate cost of $107 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.
During the six months ended June 30, 1998, TCI continued its
enterprise-wide comprehensive efforts to review and correct computer
systems, equipment and related software to ensure they properly
recognize, process and store business information. The computer
systems, equipment and software being evaluated include systems which
are integral to the distribution of TCI Group's products and services,
systems that support operations of TCI Group and protect its assets,
and all internal use software. TCI Group is utilizing both internal and
external resources, including the establishment of a year 2000
enterprise program management office accountable to TCI's executive
management, to identify and remediate or replace systems for year 2000
readiness.
(continued)
I-78
<PAGE> 81
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the six months ended June 30, 1998, TCI Group began the process
of testing and replacing or remediating critical components of its
cable systems' headend equipment. Although no assurance can be given,
TCI Group expects to conclude such testing by December 1998 with
replacement or remediation completed by the end of the first quarter of
1999. Also, TCI Group began the process of remediating systems that
control the commercial advertising in its cable operations. Although no
assurance can be given, those remediation efforts should be complete by
mid-1999. TCI Group continued to assess potential year 2000 issues of
its affiliated companies and provided its affiliates with remediation
information on software products and systems. TCI Group's business and
financial systems and software which will continue to be utilized by
TCI Group beyond the year 1999 will be capable of recognizing the year
2000 and therefore should not require material remediation or
replacement.
Significant third party vendors whose systems are critical to TCI
Group's cable operations have been identified and surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to become ready.
During the six months ended June 30, 1998, TCI Group completed an
independent assessment of a key financial application externally
managed by a third party vendor and determined that such vendor's
systems and software should be compliant by the end of 1998. Also, TCI
Group has developed and initiated a plan with key suppliers who provide
systems which are integral to the distribution of TCI Group's products
and services to upgrade or replace non-year 2000 compliant systems on a
product-by-product and site-by-site basis by mid-1999.
Management of TCI Group intends to have further communication with
primary vendors identified as having systems that are not year 2000
compliant to assess those vendors' plans for remediating their own year
2000 issues and to assess the impact on TCI Group if such vendors fail
to remediate their year 2000 issues. TCI Group continues to evaluate
the level of validation it will require of third parties to ensure
their year 2000 readiness.
Management of TCI has not yet determined the full cost associated with
its year 2000 readiness efforts and the related potential impact on
TCI's financial position, results of operations or cash flows but has
identified certain cost elements that, in the aggregate, are not
expected to be less than $63 million, which includes $3 million of
program management expenses incurred during the six months ended June
30, 1998. TCI Group's allocable share of such cost elements is
estimated to be not less than $47 million. Although there can be no
assurance, TCI Group anticipates that the costs ultimately required to
be paid to ensure TCI Group's year 2000 readiness will not have a
material adverse effect on TCI Group's financial position, results of
operations or cash flows. However, 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>
June 30, December 31,
1998 1997
------------ ------------
Assets amounts in thousands
<S> <C> <C>
Cash and cash equivalents $ 33,679 40,871
Restricted cash (note 8) 9,466 4,527
Trade and other receivables, net 53,074 39,963
Prepaid program rights 119,774 104,219
Committed film inventory 132,422 114,658
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 5) 1,258,285 538,149
Investment in Time Warner, Inc. ("Time Warner") (note 6) 4,875,230 3,537,841
Other investments, at cost, and related
receivables (note 7) 400,822 401,810
Property and equipment, at cost:
Land -- 39
Support equipment and buildings 44,267 41,478
------------ ------------
44,267 41,517
Less accumulated depreciation 14,968 13,954
------------ ------------
29,299 27,563
------------ ------------
Excess cost over acquired net assets 212,817 203,300
Less accumulated amortization 18,375 9,057
------------ ------------
194,442 194,243
------------ ------------
Other assets, at cost, net of amortization 28,731 24,371
------------ ------------
$ 7,135,224 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>
June 30, December 31,
1998 1997
------------ ------------
Liabilities and Combined Equity amounts in thousands
<S> <C> <C>
Accounts payable and accrued liabilities $ 90,252 69,367
Accrued stock compensation (note 10) 82,875 68,846
Program rights payable 177,005 156,351
Deferred option premium (note 6) -- 305,742
Debt (note 8) 981,395 348,590
Deferred income taxes 1,571,355 1,042,762
Other liabilities 2,064 2,060
------------ ------------
Total liabilities 2,904,946 1,993,718
------------ ------------
Minority interests in equity of attributed subsidiaries 103,501 101,000
Obligation to redeem Liberty Group Stock (note 9) 16,222 --
Combined equity (note 9):
Combined equity 2,082,249 1,690,256
Accumulated other comprehensive earnings, net of
taxes (note 1) 1,543,100 734,649
------------ ------------
3,625,349 2,424,905
Due to related parties 485,206 508,592
------------ ------------
Total combined equity 4,110,555 2,933,497
------------ ------------
Commitments and contingencies (notes 2, 9 and 10) $ 7,135,224 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 Six months ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
amounts in thousands,
except per share amounts
<S> <C> <C> <C> <C>
Revenue:
Related parties (note 9) $ 69,700 24,127 141,408 46,638
Others 95,325 35,545 180,287 72,393
------------ ------------ ------------ ------------
165,025 59,672 321,695 119,031
------------ ------------ ------------ ------------
Operating costs and expenses:
Operating 89,961 19,903 169,700 39,429
Selling, general and administrative 52,069 24,768 94,143 37,232
Charges from related parties (note 9) 6,536 2,354 13,886 4,433
Stock compensation (notes 9 and 10) 62,306 14,466 138,436 20,040
Depreciation and amortization 8,119 776 15,907 1,555
------------ ------------ ------------ ------------
218,991 62,267 432,072 102,689
------------ ------------ ------------ ------------
Operating income (loss) (53,966) (2,595) (110,377) 16,342
Other income (expense):
Interest expense to related party (note 9) (1,143) -- (6,874) --
Other interest expense (9,787) (306) (13,329) (611)
Dividend and interest income 13,393 8,212 26,755 19,247
Share of earnings (losses) of affiliates, net (note 5) (49,021) 5,739 (71,020) 12,975
Minority interests in earnings of attributed subsidiaries (1,601) (2,295) (762) (11,909)
Gain on disposition of assets (note 6) 789 581 515,307 581
Gain on issuance of equity interests by
affiliate (note 5) -- -- 23,460 --
Loss on early extinguishment of debt -- (320) -- (320)
Other, net (8) 6 (115) 115
------------ ------------ ------------ ------------
(47,378) 11,617 473,422 20,078
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (101,344) 9,022 363,045 36,420
Income tax benefit (expense) 36,727 (2,481) (124,521) (14,267)
------------ ------------ ------------ ------------
Net earnings (loss) $ (64,617) 6,541 238,524 22,153
============ ============ ============ ============
Basic earnings (loss) attributable to common
stockholders per common share (note 3) $ (.18) .02 .67 .06
============ ============ ============ ============
Diluted earnings (loss) attributable to common stockholders
per common share (note 3) $ (.18) .02 .61 .05
============ ============ ============ ============
Comprehensive earnings (note 1) $ 405,149 6,593 1,046,975 22,205
============ ============ ============ ============
</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
Six months ended June 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 238,524 -- -- 238,524
Payments for call agreements (63,521) -- -- (63,521)
Purchase of Liberty Group Stock (8,265) -- -- (8,265)
Issuance of Liberty Group Stock 173,164 -- (5,074) 168,090
Gain, net of taxes, in connection with the
issuance of common shares by USA Networks,
Inc. ("USAI"), formerly HSN, Inc. ("HSNI")
(note 5) 64,522 -- -- 64,522
Gain in connection with the issuance of common
shares by TCI Music, Inc. ("TCI Music") 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)
Change in due to related parties -- -- (18,312) (18,312)
Change in unrealized holding gains on
available-for-sale securities -- 808,451 -- 808,451
------------ ------------ ------------ ------------
Balance at June 30, 1998 $ 2,082,249 1,543,100 485,206 4,110,555
============ ============ ============ ============
</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)
Notes to Combined Financial Statements
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1998 1997
------------ ------------
amounts in thousands
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 238,524 22,153
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 15,907 1,555
Stock compensation 138,436 20,040
Payments of stock compensation (2,062) --
Share of losses (earnings) of affiliates, net 71,020 (12,975)
Deferred income tax benefit (42,172) (8,638)
Intergroup tax allocation 166,467 21,992
Minority interests in earnings of attributed subsidiaries 762 11,909
Gain on disposition of assets (515,307) (581)
Gain on issuance of equity interests by affiliate (23,460) --
Loss on early extinguishment of debt -- 320
Noncash interest expense 2,480 --
Changes in operating assets and liabilities, net of acquisitions:
Change in receivables (13,934) 1,882
Change in inventories (608) --
Change in prepaid expenses (34,439) 1,449
Change in payables and accruals 24,904 9,954
------------ ------------
Net cash provided by operating activities 26,518 69,060
------------ ------------
Cash flows from investing activities:
Cash proceeds from dispositions 215,265 581
Cash paid for acquisitions (10,112) --
Capital expended for property and equipment (7,163) (705)
Investments in and loans to affiliates and others (498,207) (15,405)
Return of capital from affiliates 5,326 11,700
Other investing activities (3,457) 650
------------ ------------
Net cash used by investing activities (298,348) (3,179)
------------ ------------
Cash flows from financing activities:
Borrowings of debt 878,920 2,020
Repayments of debt (247,293) (3,640)
Change in restricted cash (4,939) --
Contribution for issuance of Liberty Group Stock -- 2,054
Purchase of Liberty Group Stock (8,265) (13,256)
Premium received on put contracts 1,283 --
Cash transfers to related parties (291,514) (10,750)
Payments for call agreements (63,521) --
Contributions by minority shareholders of attributed subsidiaries -- 8
Distributions to minority shareholders of attributed subsidiaries (33) (35)
------------ ------------
Net cash provided (used) by financing activities
264,638 (23,599)
Net increase (decrease) in cash and cash equivalents (7,192) 42,282
Cash and cash equivalents at beginning of period 40,871 317,359
Cash and cash equivalents at end of period $ 33,679 359,641
============ ============
</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
June 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 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, (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 (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), (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
(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 the "Liberty/Ventures Group." The Liberty/Ventures
Group following the Merger will be made up of the corporations,
partnerships and other entities and interests which comprise 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 held by 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
held by TCI Ventures Group and the assets and business of the National
Digital Television Center, Inc.) will be transferred to TCI Group in
exchange for approximately $5.5 billion in cash. Also, upon
consummation of the Merger, 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 due to 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.
(3) Earnings Per Common and Potential Common Share
Basic earnings per share ("EPS") is measured as the income or loss
available to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of
potential common shares as if they had been converted at the beginning
of the periods presented. Potential common shares that have an
anti-dilutive effect are excluded from diluted EPS.
(continued)
I-91
<PAGE> 94
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The basic earnings (loss) attributable to Liberty Media Group common
stockholders per common share for the three months and six months ended
June 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 six months
ended June 30, 1998 and the three months and six months ended June 30,
1997 was computed by dividing earnings attributable to Liberty Media
Group common stockholders by the weighted average number of common and
potential common shares outstanding of Liberty Group Stock during the
period. Shares issuable upon conversion of the 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 computation of weighted average shares, as illustrated
below. Numerator adjustments for dividends and interest associated with
the convertible preferred shares and convertible notes payable,
respectively, were not made to the computation of diluted earnings per
share as such dividends and interest are paid or payable by TCI Group.
The diluted loss attributable to Liberty Media Group common
stockholders per common share for the three months ended June 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 June 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 June 30, Six months ended June 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 $ (64,617) 6,541 238,524 22,153
============== ============== ============== ==============
Weighted average common shares 357,751 374,504 356,296 374,435
============== ============== ============== ==============
Basic earnings (loss) per share
attributable to common stockholders $ (.18) .02 .67 .06
============== ============== ============== ==============
Diluted EPS:
Earnings (loss) attributable to
common stockholders $ (64,617) 6,541 238,524 22,153
============== ============== ============== ==============
Weighted average common shares 357,751 374,504 356,296 374,435
============== ============== -------------- --------------
Add dilutive potential common shares:
Employee and director options and
other performance awards -- 3,635 7,719 3,436
Convertible notes payable -- 19,605 19,417 19,605
Series C-Liberty Media Group
Preferred Stock -- 3,970 3,970 3,970
Series D Preferred Stock -- 5,599 -- 5,599
Series H Preferred Stock -- 3,953 3,879 3,953
-------------- -------------- -------------- --------------
Dilutive potential common shares -- 36,762 34,985 36,563
-------------- -------------- -------------- --------------
Diluted weighted average common shares 357,751 411,266 391,281 410,998
============== ============== ============== ==============
Diluted earnings (loss) per share
attributable to common stockholders $ (.18) .02 .61 .05
============== ============== ============== ==============
</TABLE>
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $17,649,000 and $612,000 for the six months
ended June 30, 1998 and 1997, respectively. Cash paid for income taxes
during the six months ended June 30, 1998 and 1997 was not material.
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1998 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Cash paid for acquisitions is as follows:
Fair value of assets acquired $ 14,617 --
Net liabilities assumed (1,718) --
Minority interests in equity of acquired entities (279) --
Gain in connection with the issuance of common
shares by TCI Music (2,508) --
------------ ------------
Cash paid for acquisitions $ 10,112 --
============ ============
</TABLE>
(continued)
I-93
<PAGE> 96
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six months ended
June 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
$ 2,425 --
================ ================
</TABLE>
(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:
Combined Operations
<TABLE>
<CAPTION>
Six Months ended June 30,
-----------------------------------
1998 1997
---------------- ----------------
amounts in thousands
<S> <C> <C>
Revenue $ 5,046,869 2,552,690
Operating selling, general and administrative expenses (4,156,502) (2,287,382)
Depreciation and amortization (554,377) (121,990)
---------------- ---------------
Operating income 335,990 143,318
Interest expense (387,020) (66,510)
Other, net (51,106) (108,489)
---------------- ---------------
Net loss $ (102,136) (31,681)
================ ===============
</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>
June 30, December 31,
1998 1997
---------------- ----------------
amounts in thousands
<S> <C> <C>
Discovery Communications, Inc. ("Discovery") $ 69,851 88,251
QVC, Inc. ("QVC") 154,760 133,920
BET Holdings, Inc. ("BET") 30,257 26,466
Courtroom Television Network ("Court") (3,157) (3,286)
Fox/Liberty Networks LLC ("Fox Sports")(a) (21,366) (21,608)
Liberty/TINTA LLC ("Liberty/TINTA") (14,927) (14,532)
Superstar/Netlink Group LLC ("Superstar/Netlink")(b) (12,514) (40,161)
Home Shopping Network, Inc. ("HSN") 146,773 118,653
USAI(c) 716,874 228,522
Your Choice TV, LLC ("YCTV") 8,609 9,316
United Video Satellite Group, Inc. ("UVSG")(d) 166,507 --
Other 16,618 12,608
---------------- ----------------
$ 1,258,285 538,149
================ ================
</TABLE>
(continued)
I-94
<PAGE> 97
"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>
Six months ended
June 30,
-----------------------------
1998 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Discovery $ (18,400) 188
QVC 20,840 12,382
BET 3,791 2,813
Court 129 (3,151)
Fox Sports (a) (76,610) --
Liberty/TINTA (4,983) --
Superstar/Netlink (b) 7,492 8,014
HSN 2,036 2,295
USAI (c) 6,702 1,319
YCTV (3,299) --
UVSG (d) (1,583) --
Other (7,135) (10,885)
------------ ------------
$ (71,020) 12,975
============ ============
</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 six months ended June 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 Superstar/Netlink in exchange for an
approximate 20% interest in Superstar/Netlink. As a result of
this transaction, Liberty Media Group's ownership interest in
Superstar/Netlink decreased from 50% to approximately 40%. In
connection with the dilution of Liberty Media Group's
ownership interest in Superstar/Netlink, Liberty Media Group
recognized a gain of $23 million (before deducting deferred
income tax expense of $9 million).
(continued)
I-95
<PAGE> 98
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) In February 1998, pursuant to an Investment Agreement among
Universal Studios, Inc. ("Universal"), HSNI, HSN and Liberty
Media Group, dated as of October 1997 and amended and restated
as of December 1997 (the "Investment Agreement"), HSNI
consummated a transaction (the "Universal Transaction")
through which USA Networks Partners, Inc., a subsidiary of
Universal, sold its 50% interest in USAI, a New York general
partnership, to HSNI and Universal contributed the remaining
50% interest in USAI and its domestic television production
and distribution operations to HSNI. Subsequent to these
transactions, HSNI was renamed USAI. In connection with the
Universal Transaction, Universal, USAI, HSN and Liberty Media
Group became parties to a number of other agreements relating
to, among other things, (i) the management of USAI, (ii) the
purchase and sale or other transfer of voting securities of
USAI, including securities convertible or exchangeable for
voting securities of USAI, and (iii) the voting of such
securities.
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 ("USANi
LLC") formed to hold all of the businesses of USAI and its
subsidiaries, except for its broadcasting business and its
equity interest in Ticketmaster Group, Inc. and 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
(the "Contingent Right"). Of such shares, 800,000 shares of
Class B Common Stock were contributed to BDTV IV Inc.
("BDTV-IV" and 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. 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-96
<PAGE> 99
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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, Liberty Media
Group recorded a $33 million increase to combined equity
(after deducting a deferred tax liability of $21 million) and
an increase to investments in affiliates of $54 million. 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
Ticketmaster Transaction, Liberty Media Group recorded a $32
million increase to combined equity (after deducting a
deferred tax liability of $20 million) and an increase to
investment in affiliates of $52 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.
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. Including indirect ownership interests in
USAI of 8% held through BDTV, Liberty Media Group held direct
and indirect ownership interests in USAI as of June 30, 1998
of approximately 20%.
(d) On January 12, 1998, TCI acquired from a minority stockholder
of UVSG 12.4 million shares of UVSG Class A common stock in
exchange for 12.7 million shares of TCI Ventures Group Series
A Stock and 7.3 million shares of Liberty Group Series A
Stock. The aggregate value assigned to the shares issued by
TCI was based upon the market value of such shares at the time
the transaction was announced. As a result of such
transactions, TCI increased its ownership in the equity of
UVSG to approximately 73%, of which 17% is attributed to
Liberty Media Group.
Certain of Liberty Media Group's affiliates are general partnerships
and any subsidiary of Liberty Media Group that is a general partner in
a general partnership is, as such, liable as a matter of partnership
law for all debts (other than non-recourse debts) of that partnership
in the event liabilities of that partnership were to exceed its assets.
(continued)
I-97
<PAGE> 100
"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 shares of a separate series of Time Warner
common stock with limited voting rights (the "TW Exchange Stock").
Holders of the TW Exchange Stock are entitled to one one-hundredth
(l/100th) of a vote for each share with respect to the election of
directors. Holders of the TW Exchange Stock will not have any other
voting rights, except as required by law or with respect to limited
matters, including amendments of the terms of the TW Exchange Stock
adverse to such holders. Subject to the federal communications laws,
each share of the TW Exchange Stock will be convertible at any time at
the option of the holder on a one-for-one basis for a share of Time
Warner common stock. Holders of TW Exchange Stock are entitled to
receive dividends ratably with the Time Warner common stock and to
share ratably with the holders of Time Warner common stock in assets
remaining for common stockholders upon dissolution, liquidation or
winding up of Time Warner.
As security for borrowings under one of its credit facilities, Liberty
Media Group has pledged a portion of its TW Exchange Stock. At June 30,
1998, such pledged portion had an aggregate fair value of approximately
$1.9 billion based upon the market value of the marketable common stock
into which it is convertible. 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>
June 30, December 31,
1998 1997
---------------- -----------------
amounts in thousands
<S> <C> <C>
Investment in preferred stock, at cost, including premium $ 370,688 370,791
Other investments, at cost, and related receivables 30,134 31,019
---------------- -----------------
$ 400,822 401,810
================ =================
</TABLE>
(continued)
I-98
<PAGE> 101
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Management of Liberty Media Group estimates that the market value,
calculated utilizing a variety of approaches including multiple of cash
flow, per subscriber value, a value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty Media
Group's other investments aggregated $469 million and $458 million at
June 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>
June 30, December 31,
1998 1997
------------- ------------
amounts in thousands
<S> <C> <C>
Bank credit facilities:
Communications Capital Corp. (a) $ 298,000 292,000
LMC Capital LLC (b) 305,000 --
TCI Music (c) 77,736 53,200
Encore Media Group LLC (d) 300,000 --
Other 659 3,390
------------- ------------
$ 981,395 348,590
============= ============
</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. Additionally, the
agreement provides for a three-month interest reserve to be
held by an administrative agent. At June 30, 1998, $4.6
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-99
<PAGE> 102
"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 June 30, 1998, $4.9 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 June
30, 1998 were Liberty Media Group's holdings in Discovery, QVC
and a 30 year non-convertible 9% preferred stock of Fox Kids
Worldwide, Inc. with a stated value of $345 million. The
carrying value of the Designated Assets as of June 30, 1998
was $595 million. Recourse to the banks for payment of LMC
Capital's obligations is limited solely to the Designated
Assets.
(c) Payable by TCI Music
On December 30, 1997 TCI Music entered into a revolving loan
agreement (the "TCI Music Revolving Loan Agreement") which
provides for borrowings up to $100 million. Interest on
borrowings under the agreement is tied to LIBOR plus an
applicable margin or at the banks base rate dependent on TCI
Music's leverage ratio, as defined, for the preceding quarter.
The TCI Music Revolving Loan Agreement matures on June 30,
2005 with principal reductions beginning semi-annually on June
30, 2000 based on a scheduled percentage of the total
commitment. A commitment fee is charged on the unborrowed
portion of the TCI Music Revolving Loan Agreement commitment
ranging from .25% to .375% based upon the leverage ratio for
the preceding quarter.
(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.
The fair market value of Liberty Media Group's debt approximated its
carrying value at June 30, 1998.
(continued)
I-100
<PAGE> 103
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(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 six months ended June 30, 1998, pursuant to the stock
repurchase program, 266,783 shares of Liberty Group Stock were
repurchased at an aggregate cost of approximately $8 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 TCI International, Inc. ("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, will be considered by
TINTA's board of directors. TINTA, on behalf of the board of directors,
has engaged an investment banking firm to render its opinion concerning
the fairness to TINTA's public shareholders of the consideration
offered by Liberty Media Group.
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 June 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 $124 million and $15 million for the six months ended June
30, 1998 and 1997, respectively. In addition, for the six months ended
June 30, 1998, Liberty Media Group made cash payments relating to its
share of TCI's stock compensation obligations of $2 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 six months ended June 30,
1998 and 1997, Liberty Media Group was allocated $2,451,000 and
$526,000, respectively, in corporate general and administrative costs
by TCI.
(continued)
I-101
<PAGE> 104
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Entities included in Liberty Media Group lease satellite transponder
facilities from TCI Ventures Group. Charges by TCI Ventures Group for
such arrangements and other related operating expenses for the six
months ended June 30, 1998 and 1997, aggregated $10,990,000 and
$3,907,000, respectively.
In connection with the formation of Encore Media Group during 1997, TCI
Group entered into a 25 year affiliation agreement with Encore Media
Group (the "EMG Affiliation Agreement") pursuant to which TCI Group
pays monthly fixed amounts in exchange for unlimited access to all of
the existing Encore and STARZ! services. Such amounts are included in
revenue from related parties. Additionally, certain other subsidiaries
attributed to Liberty Media Group produce and/or distribute programming
to cable television operators (including TCI Group) and others
(including TCI Ventures Group). Charges to TCI Group and TCI Ventures
Group are based upon customary rates charged to others.
On July 11, 1997, TCI Music merged with DMX, Inc. (the "DMX Merger").
In connection with the DMX Merger, TCI assumed a contingent obligation
to purchase 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 are 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 assuming the obligation of the Rights Agreement and
issuing an $80 million promissory note (the "Music Note") to TCI.
Liberty Media Group has recorded its contingent obligation to purchase
such shares as a component of minority interest in equity of attributed
subsidiaries in the accompanying combined financial statements.
Including rights held by subsidiaries of TCI that are not members of
Liberty Media Group, the obligation under the Rights Agreement could be
as high as $86 million and will be satisfied by Liberty Media Group in
the third quarter of 1998.
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.
Due to Related Parties
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Notes payable to TCI Group, including accrued interest $ 84,240 378,348
Intercompany account 400,966 130,244
------------ ------------
$ 485,206 508,592
============ ============
</TABLE>
(continued)
I-102
<PAGE> 105
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Amounts outstanding under the notes payable to TCI Group bear interest
at 6.5%. Payments of principal and interest on notes payable to TCI
Group during the first six months of 1998 aggregated approximately $301
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 Series A Stock plus a ten
percent premium. The Malones also agreed that if TCI were ever to be
sold to another entity, then the maximum premium that the Malones would
receive on their High-Voting Shares would be no greater than a ten
percent premium over the price paid for the relevant shares of Series A
Stock. TCI paid $150 million to the Malones in consideration of them
entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness (the first wife of Bob
Magness) and the Magness Estate (collectively, the "Magness Family")
also entered into a call agreement with TCI (with substantially the
same terms as the one entered into by the Malones, including a call on
the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of
approximately 49 million High-Voting Shares. The Magness Family was
paid $124 million by TCI in consideration of them entering into the
Magness Call Agreement. Additionally, on February 9, 1998, the Magness
Family entered into a shareholders' agreement with the Malones and TCI
under which (i) the Magness Family and the Malones agreed to consult
with each other in connection with matters to be brought to the vote of
TCI's shareholders, subject to the proviso that if they cannot mutually
agree on how to vote the shares, Dr. Malone has an irrevocable proxy to
vote the High-Voting Shares owned by the Magness Family, (ii) the
Magness Family may designate a nominee for 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.
(continued)
I-103
<PAGE> 106
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was
allocated to each of the Groups based upon the number of shares of each
Group (before giving effect to stock dividends) that are subject to the
Malone Call Agreement and the Magness Call Agreement. 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 June 30,
1998, these agreements require minimum payments aggregating
approximately $680 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.
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.
During the six months ended June 30, 1998, TCI continued its
enterprise-wide comprehensive efforts to review and correct computer
systems, equipment and related software to ensure they properly
recognize, process and store business information. The computer
systems, equipment and software being evaluated include systems which
are integral to the distribution of Liberty Media Group's products and
services, systems that support operations of Liberty Media Group and
protect its assets, and all internal use software. Liberty Media Group
is utilizing both internal and external resources, including the
establishment of a year 2000 enterprise program management office
accountable to TCI's executive management, to identify and remediate or
replace systems for year 2000 readiness.
During the six months ended June 30, 1998, TCI began the process of
testing and replacing or remediating critical components of its cable
systems' headend equipment, which is critical to the ability of Liberty
Media Group and its affiliates to earn revenue from the distribution of
programming services. Although no assurance can be given, TCI expects
to conclude such testing by December 1998 with replacement or
remediation completed by the end of the first quarter of 1999. Also,
TCI began the process of remediating systems that control the
commercial advertising in its cable operations, including the
advertisement of programming services distributed by Liberty Media
Group and its affiliates. Although no assurance can be given, those
remediation efforts should be complete by mid-1999. Liberty Media Group
continued to assess potential year 2000 issues of its affiliated
companies and provided its affiliates with remediation information on
software products and systems. Liberty Media Group's business and
financial systems and software which will continue to be utilized by
Liberty Media Group beyond the year 1999 will be capable of recognizing
the year 2000 and therefore should not require material remediation or
replacement.
Significant third party vendors whose systems are critical to the
Liberty Media Group's operations have been identified and surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to become ready.
Also, Liberty Media Group has developed and initiated a plan with key
suppliers who provide systems which are integral to the distribution of
Liberty Media Group's products and services to upgrade or replace
non-year 2000 compliant systems on a product-by-product and
site-by-site basis by mid-1999.
Management of Liberty Media Group intends to have further communication
with primary vendors identified as having systems that are not year
2000 compliant to assess those vendors' plans for remediating their own
year 2000 issues and to assess the impact on Liberty Media Group if
such vendors fail to remediate their year 2000 issues. Liberty Media
Group continues to evaluate the level of validation it will require of
third parties to ensure their year 2000 readiness.
(continued)
I-104
<PAGE> 107
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Management of TCI has not yet determined the full cost associated with
its year 2000 readiness efforts and the related potential impact on
TCI's financial position, results of operations or cash flows but has
identified certain cost elements that, in the aggregate, are not
expected to be less than $63 million, which includes $3 million of
program management expenses incurred during the six months ended June
30, 1998. Liberty Media Group's allocable share of such cost elements
is estimated to be not less than $1 million. Although there can be no
assurance, Liberty Media Group anticipates that the costs ultimately
required to be paid to ensure Liberty Media Group's year 2000 readiness
will not have a material adverse effect on Liberty Media Group's
financial position, results of operations or cash flows. However, 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-105
<PAGE> 108
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 * 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Assets
Cash and cash equivalents $ 193,567 161,495
Trade and other receivables, net 86,967 86,856
Investment in Teleport Communications Group, Inc. ("TCG"), accounted for
under the equity method (note 9) 464,193 294,851
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 10) 351,648 607,333
Investment in Telewest Communications plc ("Telewest"), accounted for
under the equity method (note 11) 263,381 324,417
Investment in Cablevision S.A. ("Cablevision"), accounted for under the
equity method (note 5) 231,957 239,379
Investments in other affiliates, accounted for under the equity method,
and related receivables (note 12) 616,805 631,918
Deferred tax asset (note 15) 13,882 85,737
Property and equipment, at cost:
Land 7,893 7,893
Distribution systems 713,177 851,145
Support equipment and buildings 118,036 116,088
------------ ------------
839,106 975,126
Less accumulated depreciation 290,847 265,945
------------ ------------
548,259 709,181
------------ ------------
Franchise costs and other intangible assets (note 8) 807,937 506,107
Less accumulated amortization 133,555 85,753
------------ ------------
674,382 420,354
------------ ------------
Other assets, net of amortization 433,010 381,726
------------ ------------
$ 3,878,051 3,943,247
============ ============
</TABLE>
* Restated - see note 17.
(continued)
I-106
<PAGE> 109
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 * 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Liabilities and Combined Equity
Accounts payable $ 32,021 31,825
Accrued liabilities 94,548 109,549
Customer prepayments 133,398 133,479
Capital lease obligations 200,458 386,808
Debt (note 13) 594,000 408,532
Other liabilities 22,250 18,683
------------ ------------
Total liabilities 1,076,675 1,088,876
------------ ------------
Minority interests in equity of attributed subsidiaries 546,967 518,739
Obligation to redeem TCI Ventures Group Stock (note 14) 2,963 --
Combined equity (notes 6 and 14):
Combined equity 2,167,415 2,280,466
Accumulated other comprehensive earnings, net of taxes (note 1) 75,902 33,661
------------ ------------
2,243,317 2,314,127
Due to related parties (note 14) 8,129 21,505
------------ ------------
Total combined equity 2,251,446 2,335,632
------------ ------------
Commitments and contingencies (notes 2, 8, 10, 11, 12, 14 and 16) $ 3,878,051 3,943,247
============ ============
</TABLE>
* Restated - see note 17.
See accompanying notes to combined financial statements.
I-107
<PAGE> 110
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
1998 * 1997 1998 * 1997
----------- ------------ ------------ ------------
amounts in thousands,
except per share amounts
<S> <C> <C> <C> <C>
Revenue:
Related parties (note 14) $ 10,666 9,665 21,449 24,065
Other 214,465 242,455 414,680 475,075
----------- ------------ ------------ ------------
225,131 252,120 436,129 499,140
----------- ------------ ------------ ------------
Operating costs and expenses:
Operating:
Related parties (note 14) 12,726 14,369 24,970 30,219
Other 131,709 131,988 257,430 249,222
General and administrative:
Related parties (note 14) 4,076 2,212 6,270 4,424
Other 53,502 63,562 102,569 125,995
Stock compensation (note 14) 44,696 4,663 126,786 12,925
Depreciation and amortization 49,425 44,020 95,677 85,164
----------- ------------ ------------ ------------
296,134 260,814 613,702 507,949
----------- ------------ ------------ ------------
Operating loss (71,003) (8,694) (177,573) (8,809)
Other income (expense):
Share of losses of the PCS Ventures (note 10) (168,588) (93,849) (323,790) (157,385)
Share of losses of Telewest (note 11) (33,498) (31,750) (63,717) (73,458)
Share of losses of TCG (note 9) (14,337) (14,049) (32,043) (27,817)
Share of losses of Cablevision (note 5) (4,386) -- (7,591) --
Share of losses of other affiliates (note 12) (25,072) (27,301) (49,712) (50,409)
Interest expense (14,495) (15,348) (23,599) (29,544)
Interest income:
Related parties (note 14) 595 2,726 1,637 3,752
Other 2,429 1,893 4,697 3,901
Gain on disposition of assets, net 4,109 -- 41,897 28,893
Gain on issuance of stock by equity investee (note 9) 201,385 21,251 201,385 21,251
Gain on issuance of equity interest by attributed entity
(note 7) -- -- 14,700 --
Minority interests in (earnings) losses of attributed
subsidiaries, net 9,092 (9,076) 17,421 (8,460)
Other, net (1,947) 3,984 132 6,250
----------- ------------ ------------ ------------
(44,713) (161,519) (218,583) (283,026)
----------- ------------ ------------ ------------
Loss before income taxes (115,716) (170,213) (396,156) (291,835)
Income tax benefit 24,779 58,307 109,973 102,677
----------- ------------ ------------ ------------
Net loss $ (90,937) (111,906) (286,183) (189,158)
=========== ============ ============ ============
Basic and diluted loss attributable to common stockholders
per common share subsequent to TCI Ventures Exchange
(note 3) $ (0.22) (0.68)
=========== ===========
Comprehensive loss (note 1) $ (58,612) (87,405) (243,942) (194,035)
=========== ============ ============ ============
</TABLE>
* Restated - see note 17.
See accompanying notes to combined financial statements.
I-108
<PAGE> 111
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Statement of Combined Equity
Six months ended June 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 loss (286,183) -- -- (286,183)
Repurchases of TCI Ventures Group Stock (3,857) -- -- (3,857)
Issuance of TCI Ventures Group Stock for
acquisition of minority interest (note 6) 177,661 -- -- 177,661
Payment of call premiums (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 7) 24,524 -- -- 24,524
Excess of earnings over distributions to
minority interest in joint venture 3,969 -- -- 3,969
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
Interest on equity swap (242) -- -- (242)
Foreign currency translation adjustment -- (3,580) -- (3,580)
Change in unrealized holding gains for
available-for-sale securities -- 45,821 -- 45,821
Change in due to related parties -- -- (13,376) (13,376)
------------ ------------ ------------ ------------
Balance at June 30, 1998 $ 2,167,415 75,902 8,129 2,251,446
============ ============ ============ ============
</TABLE>
* Restated - see note 17.
See accompanying notes to combined financial statements.
I-109
<PAGE> 112
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1998 * 1997
------------ ------------
amounts in thousands
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (286,183) (189,158)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 95,677 85,164
Stock compensation 126,786 12,925
Payment of obligation relating to stock compensation (69,020) (57)
Share of losses of affiliates, net 476,853 309,069
Gain on disposition of assets, net (41,897) (28,893)
Gain on issuance of stock by equity investee (201,385) (21,251)
Gain on issuance of equity interest by attributed entity (14,700) --
Minority interests' share of losses (earnings), net (17,421) 8,460
Other noncash charges (credits) (236) 2,304
Deferred income tax expense (benefit) 42,546 (5,690)
Intergroup tax allocation (166,467) (104,621)
Changes in operating assets and liabilities, net of the effect of
acquisitions and the deconsolidation of Flextech p.l.c.:
Change in receivables 804 (4,297)
Change in payables, accruals, customer prepayments and
other liabilities (1,370) (20,919)
------------ ------------
Net cash provided by (used in) operating activities
$ (56,013) 43,036
------------ ------------
</TABLE>
(continued)
I-110
<PAGE> 113
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1998 * 1997
------------ ------------
amounts in thousands
(see note 4)
<S> <C> <C>
Cash flows from investing activities:
Investments in and loans to affiliates $ (160,887) (145,997)
Capital expended for property and equipment (59,770) (87,052)
Proceeds from dispositions of assets 82,951 --
Maturities (purchases) of marketable securities, net 32,667 (35,419)
Collections of loans to affiliates 13,012 70,430
Effect of the deconsolidation of Flextech p.l.c. on cash and cash
equivalents -- (38,142)
Cash paid for acquisitions, net -- (11,993)
Other, net (6,527) (7,574)
------------ ------------
Net cash used in investing activities (98,554) (255,747)
------------ ------------
Cash flows from financing activities:
Borrowings of debt 204,000 195,290
Repayments of debt and capital lease obligations (22,814) (214,242)
Payment of call premiums (75,836) --
Repurchase of common stock by attributed entities (6,947) (42,014)
Repurchase of TCI Ventures Group Stock (3,857) --
Proceeds from issuance of preferred stock -- 48,245
Repayments received on loan to TCI 83,356 122,782
Change in amounts due to related parties 11,969 --
Change in combined equity -- 78,599
Distribution to minority interest owners (3,704) (7,000)
Other, net 472 (950)
------------ ------------
Net cash provided by financing activities 186,639 180,710
------------ ------------
Net increase (decrease) in cash and cash equivalents 32,072 (32,001)
Cash and cash equivalents: Beginning of period 161,495 105,527
------------ ------------
End of period $ 193,567 73,526
============ ============
</TABLE>
* Restated - see note 17.
See accompanying notes to combined financial statements.
I-111
<PAGE> 114
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
June 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-112
<PAGE> 115
"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.
As further described in notes 5 and 12, TINTA ceased to consolidate
Flextech p.l.c. ("Flextech") and Cablevision and began to account for
Flextech and Cablevision using the equity method of accounting,
effective January 1, 1997 and October 1, 1997, respectively.
Unless otherwise indicated, convenience translations of foreign
currencies into U.S. dollars are calculated using the applicable spot
rate at June 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-113
<PAGE> 116
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
As of June 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 26% equity interest (representing a 40% voting
interest) in TCG, a competitive local exchange carrier, and Western
Tele-Communications, Inc. ("WTCI"), a wholly-owned subsidiary of TCI
that provides long distance transport of video, voice and data traffic
and other telecommunications services to interexchange carriers on a
wholesale basis using primarily a digital broadband microwave network
located throughout a 12 state region, (iii) a 56% equity interest
(representing a 89% voting interest) in United Video Satellite Group,
Inc. ("UVSG"), which provides satellite-delivered video, audio, data
and program promotion services to cable television systems, satellite
dish owners, radio stations and private network users, primarily
throughout North America, (iv) TCI's 39% equity interest (representing
a 72% voting interest) in At Home Corporation ("@Home"), a provider of
high speed multimedia Internet services, and TCI's interest in other
Internet-related assets and (v) other assets, including ETC w/tci, Inc.
("ETC"), a wholly-owned subsidiary of TCI which is a developer and
distributor of for-profit education, training and communications
services and products, and National Digital Television Center, Inc. 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,
TCG, @Home and UVSG are publicly traded.
The TCI Ventures Group does not include any business that uses TCI's
domestic cable network to distribute services to customers (e.g.,
cable, telephony and Internet services). Such domestic "distribution"
businesses will continue to be attributed to the TCI Group.
The TCI Ventures Group may also include such other assets and
liabilities of the TCI Group as the Board may in the future determine
to attribute or sell to the TCI Ventures Group and such other
businesses, assets and liabilities that TCI or any of its subsidiaries
may in the future acquire for the TCI Ventures Group, as determined by
the Board. It is currently the intention of TCI that any businesses,
assets and liabilities so attributed to the TCI Ventures Group in the
future would not include assets and liabilities of TCI's domestic
programming businesses and investments or its domestic cable operations
(including its businesses which utilize its cable network to distribute
telephony and Internet services).
(continued)
I-114
<PAGE> 117
"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
business which produces and distributes programming services) and TCI
Ventures Group. Collectively, TCI Group, Liberty Media Group and TCI
Ventures Group are referred to as the "Groups" and individually may be
referred to herein as a "Group". The Tele-Communications, Inc. Series A
TCI Group Common Stock, par value $1.00 per share (the "TCI Group
Series A Stock"), TCI Ventures Group Series A Stock and the
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") are
sometimes collectively referred to herein as the "Series A Stock," and
the Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share (the "TCI Group Series B Stock"), TCI Ventures
Group Series B Stock and Tele-Communications, Inc. Series B Liberty
Media Group Common Stock, par value $1.00 per share ("Liberty Group
Series B Stock") are sometimes collectively referred to herein as the
"Series B Stock."
The common stockholders' equity value of TCI attributable to TCI
Ventures Group that, at any relevant time, is attributed to TCI Group,
and accordingly, not represented by outstanding TCI Ventures Group
Stock is referred to as "Inter-Group Interest". Prior to the issuance
of shares of TCI Ventures Group Stock, the Inter-Group Interest of TCI
Group in TCI Ventures Group was 100%. Following consummation of the TCI
Ventures Exchange, TCI Group no longer has an Inter-Group Interest in
TCI Ventures Group. Following consummation of the TCI Ventures
Exchange, an Inter-Group Interest would be created with respect to TCI
Ventures Group only if a subsequent transfer of cash or other property
from TCI Group to TCI Ventures Group is specifically designated by the
Board as being made to create an Inter-Group Interest or if outstanding
shares of TCI Ventures Stock are purchased with funds attributable to
TCI Group.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures Group Stock did not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect
the rights of holders of TCI's or any of its subsidiaries' debt.
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-115
<PAGE> 118
"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-116
<PAGE> 119
"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-117
<PAGE> 120
"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-118
<PAGE> 121
"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 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, (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-119
<PAGE> 122
"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." The Liberty/Ventures
Group following the Merger will be made up of the corporations,
partnerships and other entities and interests which comprise 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 held by TCI Ventures Group (including, among others,
the shares of AT&T Common Stock received in the merger of AT&T and TCG,
the stock of @Home held by TCI Ventures Group and the assets and
business of NDTC) will be transferred to TCI Group in exchange for
approximately $5.5 billion in cash. Also, upon consummation of the
Merger, 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 due to 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-120
<PAGE> 123
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Loss Per 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 (e.g., convertible securities, options, etc.)
as if they had been converted at the beginning of the periods
presented. Potential common shares that have an anti-dilutive effect
are excluded from diluted EPS.
The basic and diluted loss attributable to TCI Ventures Group
stockholders per common share for the three and six month periods ended
June 30, 1998 was computed by dividing the net loss attributable to TCI
Ventures Group stockholders by the weighted average number of common
shares outstanding of TCI Ventures Group Stock for the period (422
million and 421 million for the three and six month periods ended June
30, 1998, respectively). Potential common shares were not included in
the computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
At June 30, 1998, there were 37 million potential common shares
consisting of stock options and other performance awards and
convertible securities that could potentially dilute future earnings
per share calculations in periods of net earnings. Such potential
common share amount does not take into account the assumed number of
shares that would be repurchased by the Company upon the exercise of
the stock options and other performance awards and the conversion of
the convertible securities. No material changes in the weighted average
outstanding shares or potential common shares occurred after June 30,
1998.
(4) Supplemental Disclosures to Statements of Cash Flows
Cash paid for interest was $23.1 million and $28.0 million for the six
months ended June 30, 1998 and 1997, respectively. Cash paid for income
taxes was $12.8 million and $17.4 million during the six months ended
June 30, 1998 and 1997, respectively.
Significant noncash investing activities are as follows:
<TABLE>
<S> <C>
Six months ended
June 30,
------------------
1998* 1997
----- ----
Costs of distribution agreements $ 83,320 --
======== ========
</TABLE>
* Restated -- See note 17.
The effects of changing the method of accounting for the TCI Ventures
Group's ownership interest in Flextech from the consolidation method to
the equity method (see note 12) are summarized below (amounts in
thousands):
<TABLE>
<S> <C>
Assets reclassified to equity investments $ 177,003
Liabilities reclassified to equity investments (72,512)
Minority interests in equity of subsidiaries
reclassified to equity investments (142,633)
-----------------
Decrease in cash and cash equivalents $ (38,142)
-----------------
</TABLE>
For information concerning additional non-cash transactions see notes
6, 7 and 14.
(continued)
I-121
<PAGE> 124
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) 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 1997 transactions, (collectively, the "Cablevision
Sale") reduced TINTA's interest in Cablevision to 26.2%. TINTA
recognized a gain of $49 million on the Cablevision Sale (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.
Prior to 1997, none of Cablevision's operating results had been
allocated to Cablevision's 49% minority interest because (i) the
minority interest had no obligation to provide any funding to
Cablevision and (ii) Cablevision's liabilities exceeded the minority
interest's historical cost basis in Cablevision's assets. During the
second quarter of 1997, Cablevision's net earnings caused the minority
interest's historical cost basis in Cablevision's net assets to become
positive. Accordingly, TINTA began allocating 49% of such net earnings
to the minority interest during the second quarter of 1997. If the
minority interest's historical cost basis had been positive since
January 1, 1997, TINTA would have allocated an additional $4.3 million
during the six months ended June 30, 1997 of Cablevision's net earnings
to the minority interest.
Summarized unaudited results of operations for Cablevision are as
follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 1998
-----------------
Consolidated Operations amounts in thousands
<S> <C>
Revenue $ 127,620
Operating, selling, general and
administrative expenses (80,047)
Depreciation and amortization (29,921)
-----------------
Operating income 17,652
Interest expense, net (42,879)
Other, net 11,106
-----------------
Net loss $ (14,121)
=================
</TABLE>
(continued)
I-122
<PAGE> 125
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Acquisitions
On January 12, 1998, TCI acquired from a minority shareholder of UVSG
12.4 million shares of UVSG Class A common stock in exchange for 12.7
million shares of TCI Ventures Group Series A Stock and 7.3 million
shares of Liberty Group Series A Stock. The aggregate value assigned to
the shares issued by TCI was based upon the market value of such shares
at the time the transaction was announced. As a result of such
transaction TCI increased its ownership in the equity of UVSG to
approximately 73%, of which 56% is attributed to the TCI Ventures Group
and 17% is attributed to Liberty Media Group. In addition, TCI's
collective voting power increased to 93%. In connection with such
transaction, during the first quarter of 1998, TCI Ventures Group
recorded a $154.2 million increase to intangible assets, a $23.5
million decrease to minority interests in equity of attributed
subsidiaries and a $177.7 million increase to combined equity.
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 30 million shares
of UVSG's stock, including 11,251,706 shares of its Class A common
stock and 18,748,294 shares of its Class B common stock. As a result of
the transaction, and certain other pending transactions, 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.
On July 23, 1998, TINTA agreed to purchase 100% of the issued and
outstanding common stock of Pramer S.A., an Argentine programming
company, for $80 million in cash and the assumption of certain
liabilities. Consummation of such transaction is expected to occur in
the third quarter of 1998. No assurance can be given that such
transaction will be consummated or consummated on the terms
contemplated by the parties.
(7) Dispositions
On January 16, 1998, TINTA sold its interest in TeleCable Nacional, CXA
for cash proceeds of $10.0 million. TINTA recognized a gain on such
sale of $9.2 million.
On February 12, 1998, TCI Ventures Group sold its (i) 79% interest in
New Jersey Fiber Technologies, L.P., (ii) 40% interest in NHT
Partnership and (iii) 50% interest in Louisville Lightwave for
aggregate cash proceeds of $44.1 million. TCI Ventures Group recognized
a gain of $28.6 million on such transactions.
TCI Ventures Group sold its interest in Acclaim Entertainment, Inc.
("Acclaim") in February 1998 for cash proceeds of $17.0 million. The
loss on such sale was not significant as the sales price approximated
TCI Ventures Group's carrying value in Acclaim.
(continued)
I-123
<PAGE> 126
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("Superstar/Netlink")
in exchange for an approximate 20% interest in Superstar/Netlink. As a
result of such transaction, each of UVSG's and Liberty Media Group's
ownership interest in Superstar/Netlink decreased from 50% to
approximately 40%. Turner Vision's contribution to Superstar/Netlink
was accounted for as a purchase and the $61.2 million excess of the
purchase price over the fair value of the assets acquired was recorded
as goodwill and is being amortized over five years.
In connection with the dilution of UVSG's ownership interest in
Superstar/Netlink, UVSG recognized a gain of $14.7 million (before
deducting deferred income tax expense of $5.9 million). The minority
interest deficit in Superstar/Netlink attributable to Liberty Media
Group has been included in combined equity in the accompanying combined
financial statements. Accordingly, the effect of the change in Liberty
Media Group's ownership in the underlying equity of Superstar/Netlink
of $24.5 million has been credited to combined equity in the
accompanying combined financial statements.
In February 1998, TCI, Liberty Media Group and UVSG announced an
agreement in principal for UVSG to acquire Liberty Media Group's 40%
interest in Superstar/Netlink and its 100% interest in certain
businesses conducted by Netlink USA ("Netlink") (the "Netlink
Business") in exchange for 6.4 million shares of UVSG's common stock.
In April 1998, UVSG, Liberty Media Group and Turner Vision entered into
a memorandum of understanding with PRIMESTAR, Inc. ("PRIMESTAR") for
the sale of Superstar/Netlink to PRIMESTAR for shares of a new series
of convertible preferred stock of PRIMESTAR and the assumption of
liabilities (the "PRIMESTAR Transaction"). Liberty Media Group and UVSG
have agreed in principal to restructure their transaction to provide
for UVSG to acquire any shares of PRIMESTAR preferred stock received by
Liberty Media Group in the PRIMESTAR Transaction and Liberty Media
Group's Netlink Business for 6.4 million shares of UVSG Class B common
stock. Consummation of the transaction between Liberty Media Group and
UVSG is subject to UVSG stockholder approval and certain regulatory
approvals. Consummation of the PRIMESTAR Transaction is subject to a
number of conditions, including negotiation of a definitive agreement
and receipt of applicable regulatory approvals. No definitive agreement
with respect to the PRIMESTAR Transaction has been reached, however,
and there can be no assurance that any such agreement will be entered
into or that the terms of any such agreement would be the same as the
terms previously disclosed.
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. The TCI Ventures Group held a 50%
interest in KC Fiber and the remaining 50% was held by Kansas City
Cable Partners, a partnership in which the TCI Group holds a 50%
interest. TCI Ventures Group received proceeds of approximately $20
million in connection with such sale.
(continued)
I-124
<PAGE> 127
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(8) @Home
In April 1997, @Home issued 240,000 shares of convertible preferred
stock resulting in cash proceeds of $48 million, less issuance costs.
On July 11, 1997 @Home completed its initial public offering (the
"@Home IPO"), in which 10,350,000 shares of @Home common stock were
sold for net cash proceeds of approximately $100 million. As a result
of the @Home IPO, the TCI Ventures Group's economic interest in @Home
decreased from 43% to 39% which economic interest represents an
approximate 72% voting interest. In connection with the associated
dilution of TCI Ventures Group's ownership interest in @Home, TCI
Ventures Group recognized a gain of $60 million.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home
has issued warrants to such cable operators to purchase 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 June 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 17.
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 common stock of @Home to such
shareholders.
(9) Investment in TCG
On June 30, 1998, TCI Ventures Group owned 1,011,528 shares of TCG's
Class A common stock and 48,779,000 shares of TCG's Class B common
stock. TCG's Class A common stock had a closing market value of $54.25
per share on June 30, 1998.
On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG in the
ratio of .90909 share of TCG stock for each share of ACC stock. The
transaction was valued at approximately $1.1 billion. As a result of
such merger transaction, TCI 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 (before deducting deferred income tax
expense of $70.5 million).
(continued)
I-125
<PAGE> 128
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In January 1998, TCG entered into certain agreements pursuant to which
it agreed to be acquired by AT&T. Such merger was consummated on July
23, 1998. As a result of such merger, TCI Ventures Group received in
exchange for all of its interest in TCG, approximately 46.95 million
shares of AT&T Common Stock. TCI Ventures Group will account for its
ownership interest in AT&T Common Stock using the cost method. See
note 2.
Summarized unaudited results of operations for TCG are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
Operations 1998 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Revenue $ 455,380 212,508
Operating, selling, general and
administrative expenses (404,589) (197,698)
Depreciation and amortization (115,391) (67,011)
------------ ------------
Operating loss (64,600) (52,201)
Interest expense, net (52,824) (40,210)
Other, net (636) (3,949)
------------ ------------
Net loss $ (118,060) (96,360)
============ ============
</TABLE>
(10) Investments in the PCS Ventures
TCI Telephony is a partner in a series of partnerships formed to engage
in the business of providing wireless communications services, using
the radio spectrum for broadband personal communications services
("PCS"), to residential and business customers nationwide, using the
"Sprint" brand. The PCS Ventures include Sprint Spectrum Holding
Company, L. P. ("Sprint Spectrum") and MinorCo, L.P. (collectively,
"Sprint PCS") and PhillieCo, L.P. ("PhillieCo"). The partners of Sprint
PCS are subsidiaries of Sprint Corporation ("Sprint"), Comcast, Cox and
TCI. The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI.
TCI Ventures Group has a 30% partnership interest in Sprint PCS and a
35% partnership interest in PhillieCo.
From inception through June 1998, the four partners have contributed
$4.2 billion to Sprint PCS (of which TCI Telephony contributed an
aggregate of $1.3 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-126
<PAGE> 129
"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 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 and the receipt of required FCC approvals.
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.
If the above-described transactions are consummated, the Company would
begin to use the cost method to account for its investment in the
Sprint PCS stock. No assurance can be given that the above-described
transactions will be consummated.
(continued)
I-127
<PAGE> 130
"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>
Six months ended
June 30,
-----------------------------
Combined Operations 1998 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Revenue $ 350,526 35,300
Operating, selling, general and
administrative expenses (854,505) (410,327)
Depreciation and amortization (275,822) (102,642)
------------ ------------
Operating loss (779,801) (477,669)
Interest expense (182,958) (13,784)
Other, net (110,540) (64,335)
------------ ------------
Net loss $ (1,073,299) (555,788)
============ ============
</TABLE>
(11) Investment in Telewest
At June 30, 1998, TINTA indirectly owned through its 50% ownership
interest in TW Holdings, L.L.C., 132,638,250 or 26.7% of the issued and
outstanding non-voting Telewest convertible preference shares and
246,111,750 or 26.5% (assuming no conversion of the Telewest
convertible preference shares) of the issued and outstanding Telewest
ordinary shares. The reported closing price on the London Stock
Exchange of Telewest ordinary shares was (pound)1.41 ($2.35) per share
at June 30, 1998.
On April 15, 1998, it was announced that Telewest and General Cable PLC
("General Cable") had agreed to the terms of a proposed merger (the
"Merger Offer") in which holders of General Cable will be offered 1.243
new Telewest shares and (pound)0.65 ($1.08) in cash for each share of
General Cable. In addition, holders of American Depository shares of
General Cable ("General Cable ADSs") (each representing five General
Cable shares) will be offered 6.215 new Telewest shares and (pound)3.25
($5.42) in cash for each share of General Cable ADSs. Based upon
Telewest's closing share price of (pound)0.89 ($1.48) on April 14,
1998, the Merger Offer is valued at approximately (pound)649 million
($1.1 billion).
The cash portion of the Merger Offer will be financed through an offer
to qualifying Telewest shareholders for the purchase of approximately
261 million new Telewest shares at a price of (pound)0.925 ($1.54) per
share. Mediaone Group, Inc. ("Mediaone") (formerly a division of U S
WEST, Inc.), TINTA and Cox Communications, Inc. ("Cox") have agreed to
subscribe for their full allocation of new Telewest shares
(approximately 69 million shares in the case of TINTA) and to subscribe
on a pro rata basis for any new Telewest shares not subscribed for by
other Telewest shareholders. Together, Mediaone, TINTA and Cox held
67.9% of the issued and outstanding Telewest ordinary shares at June
30, 1998. In addition, it is anticipated that Mediaone, TINTA, Cox and
SBC Communications, Inc. ("SBC") will convert their entire respective
holdings of Telewest convertible preference shares into new Telewest
shares. Following the issuance of new Telewest shares with respect to
the above transactions, and assuming the exercise of all options under
General Cable's share option schemes, it is anticipated that existing
Telewest shareholders would hold 79% and existing General Cable
shareholders would hold 21% of the then issued ordinary share capital
of the combined group.
(continued)
I-128
<PAGE> 131
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Consummation of the merger is subject to regulatory approval and other
conditions. There can be no assurance that such merger will be
consummated or consummated on the terms contemplated by the parties.
As a result of Telewest's issuance of U.S. dollar denominated
debentures (the "Telewest Debentures"), changes in the exchange rate
used to translate the U.S. dollar into the UK pound sterling will cause
Telewest to experience realized and unrealized foreign currency
transaction gains and losses throughout the term of the Telewest
Debentures, which mature in 2006 and 2007, if not redeemed earlier.
During the six months ended June 30, 1998 and 1997, Telewest
experienced unrealized foreign currency transaction losses of $2.4
million and $40.0 million respectively, with respect to the Telewest
Debentures.
The functional currency of Telewest is the UK pound sterling. The
average exchange rate used to translate the TCI Ventures Group's share
of Telewest's operating results from UK pounds to U.S. dollars was
1.6530 to 1 and 1.6447 to 1 during the six months ended June 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 1.6677 to 1 and 1.6508 to 1 at June 30, 1998 and December
31, 1997, respectively.
Summarized unaudited results of operations for Telewest are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------------------
1998 1997
--------------- ----------------
Consolidated Operations in thousands
<S> <C> <C>
Revenue $ 373,912 298,357
Operating, selling, general and administrative expenses (284,078) (271,437)
Depreciation and amortization (177,578) (147,267)
--------------- ----------------
Operating loss (87,744) (120,347)
Interest expense, net (132,937) (97,215)
Share of losses of affiliates (18,318) (16,974)
Foreign currency transaction loss (2,413) (40,006)
Other, net 1,210 242
--------------- ----------------
Net loss $ (240,202) (274,300)
=============== ================
</TABLE>
(12) Investments in Other Affiliates
The TCI Ventures Group's affiliates other than the PCS Ventures,
Telewest, TCG and Cablevision (the "Other Affiliates") generally are
engaged in the cable and/or programming businesses in the U.S. and in
various foreign countries.
The TCI Ventures Group has guaranteed notes payable and other
obligations of certain of the Other Affiliates (the "Guaranteed
Obligations"). At June 30, 1998, the U.S. dollar equivalent of the
amounts borrowed pursuant to the Guaranteed Obligations aggregated
approximately $101 million.
(continued)
I-129
<PAGE> 132
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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>
June 30, December 31,
1998 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Flextech (a) $ 259,058 261,453
Liberty/TINTA LLC ("Liberty/TINTA") (b) 134,407 127,574
MultiThematiques S.A. ("MultiThematiques") 70,977 68,335
Jupiter Telecommunications
Co., Ltd. ("Jupiter") 51,225 49,197
United International Investments ("UII") (c) 25,101 26,966
Bresnan International Partners (Poland), L.P. ("BIP
Poland") 21,345 26,110
Jupiter Programming Co., Ltd. ("JPC") 17,403 15,582
Bresnan International Partners (Chile), L.P. 15,071 22,863
Other 22,218 33,838
------------ ------------
$ 616,805 631,918
============ ============
</TABLE>
---------------------
(a) Flextech
TINTA owned, at June 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)5.53 ($9.22) 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)320 million ($534
million) at June 30, 1998.
(continued)
I-130
<PAGE> 133
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In January 1997, TINTA reduced its voting interest in Flextech
to 50% by issuing to a nominee an irrevocable proxy (the
"Proxy") to vote 960,850 Flextech Ordinary Shares at any
shareholder meeting to be held through December 31, 1997. In
April 1997, Flextech and BBC Worldwide Limited ("BBC
Worldwide") formed two separate joint ventures (the "Principal
Joint Venture" and the "Second Joint Venture", collectively
the "BBC Joint Ventures") and entered into certain related
transactions. The consummation of the BBC Joint Ventures and
related transactions resulted in, among other things, a
reduction of TINTA's ownership interest in Flextech to 35.9%
and the issuance to TINTA by Flextech of a special voting
share (the "Special Voting Share"). The Special Voting Share
when combined with TINTA's other share capital in Flextech,
allows TINTA to cast 50% of the votes on most matters brought
to the shareholders of Flextech for vote. The Special Voting
Share will terminate upon the occurrence of the earlier of (i)
the third anniversary of issuance or (ii) any transfer of
Flextech shares by TINTA outside a specified affiliated group.
In light of TINTA's decreased voting interest in Flextech,
TINTA, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity
method of accounting.
Flextech has undertaken to finance the working capital
requirements of the Principal Joint Venture and is obligated
to provide the Principal Joint Venture with a primary credit
facility of (pound)88 million ($147 million) and subject to
certain restrictions, a standby credit facility of (pound)30
million ($50 million). As of June 30, 1998, the Principal
Joint Venture had borrowed (pound) 6.6 million ($11.0 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 June
30, 1998, Flextech had funded (pound) 7.5 million ($12.5
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-131
<PAGE> 134
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
So long as TINTA is contingently obligated under the Standby
Commitment, it has been agreed that (i) Flextech will not sell
any of its direct or indirect interests in the Principal Joint
Venture, (ii) Flextech will not conduct its business in such a
way as is likely to cause it to be in material breach of any
material contracts or to have insufficient working capital to
meet its funding obligation to the Principal Joint Venture,
and (iii) Flextech will use its available resources to
subscribe for any outstanding loan stock of the Principal
Joint Venture, if and to the extent required by TINTA at any
time after December 31, 2011.
(b) Liberty/TINTA LLC
Subsidiaries of TINTA and Liberty Media Group own equal parts
of Liberty/TINTA. During 1996, Liberty/TINTA and News
Corporation Limited ("News Corp.") formed a joint venture
including a number of partnerships or other entities under
common ownership, ("Fox Sports International"), to operate
currently existing sports services in Latin America and
Australia and a variety of new sports services throughout the
world, excluding the United States, Canada and certain other
defined geographic areas.
During the third quarter of 1997, Fox Sports International
distributed (i) its 35% interest in Torneos y Competencias
S.A. ("Torneos") to Liberty/TINTA and (ii) certain Australian
sports rights to News Corp. On October 2, 1997, TINTA
purchased a 5% direct interest in Torneos from an unaffiliated
third party for $12 million. As of June 30, 1998, TINTA had
made cash contributions to Torneos on the behalf of
Liberty/TINTA of $48 million.
(c) UII
At June 30, 1998, UII owned approximately 50.0%, 46.6% and
45.0% of Melita Cable TV Limited ("Melita"), Tevel Israel
International Communications Ltd. ("Tevel") and Princes
Holding Limited ("PHL"), respectively. Through UII, TINTA
owned 50.0%, 50.0% and 55.6% of the foregoing Melita, Tevel
and PHL ownership interests. Melita and Tevel operate cable
television systems in Malta and Israel, respectively. PHL is
an Irish cable and microwave-multichannel distribution
operator.
TINTA has signed a memorandum of understanding with United
International Holdings, Inc. ("UIH") for the sale of TINTA's
ownership interests in Tevel and Melita to UIH. Concurrently,
TINTA will purchase an additional 25% interest in PHL from
UIH. The parties have agreed that, net of its purchase of
UIH's 25% interest in PHL, TINTA will receive $71 million for
its interests in Tevel and Melita. Such proceeds are subject
to adjustment.
Consummation of such transactions is contingent on the consent
of certain third parties and regulatory bodies, as well as on
the completion of financing by UIH. There can be no assurance
that such transactions will be consummated or consummated on
the terms contemplated by the parties.
(continued)
I-132
<PAGE> 135
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Asia Business News (Singapore) PTE Ltd.
On December 31, 1997, TINTA surrendered all of its shares of Asia
Business News (Singapore) PTE Ltd. ("ABN") in exchange for a $25
million unsecured note receivable from ABN (the "ABN Note"). The ABN
Note is due on December 31, 2012. Due to uncertainty regarding
collection of the ABN Note, TINTA recorded the ABN Note at an amount
equal to its investment in ABN as of the date of conversion. No gain
was recognized on the above transaction.
The following table reflects the TCI Ventures Group's share of losses
of the Other Affiliates:
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1998 1997
------------- -----------
amounts in thousands
<S> <C> <C>
Jupiter $ 12,007 10,638
MultiThematiques 10,481 4,134
JPC 6,670 7,513
Liberty/TINTA 6,664 7,432
Flextech 6,181 10,615
BIP Poland 3,754 750
ABN -- 6,230
Other 3,955 3,097
------------- -----------
$ 49,712 50,409
============= ===========
</TABLE>
Summarized unaudited results of operations of the Other Affiliates by
geographic region for the periods in which the TCI Ventures Group used
the equity method to account for its investments in the Other
Affiliates are as follows:
<TABLE>
<CAPTION>
Six months ended June 30, 1998
--------------------------------------------------------------------------------
Latin
America
Asia and and The United
Europe Australia(a) Caribbean(b) States Total
------------ ------------ ------------ ------------ ------------
Combined Operations amounts in thousands
<S> <C> <C> <C> <C> <C>
Revenue $ 176,241 104,010 -- 5,152 285,403
Operating expenses (193,241) (139,435) -- (4,003) (336,679)
Depreciation and amortization (6,486) (11,308) (170) (2,724) (20,688)
------------ ------------ ------------ ------------ ------------
Operating loss (23,486) (46,733) (170) (1,575) (71,964)
Interest expense, net (5,796) (1,130) (3,311) (1,211) (11,448)
Other, net 4,802 3,212 (12,489) (175) (4,650)
------------ ------------ ------------ ------------ ------------
Net loss $ (24,480) (44,651) (15,970) (2,961) (88,062)
============ ============ ============ ============ ============
</TABLE>
(continued)
I-133
<PAGE> 136
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Six months ended June 30, 1997
------------------------------------------------------------------------------
Latin
America
Asia and and The United
Europe Australia (a) Caribbean (b) States Total
------------ ------------- ------------- ------------ ------------
Combined Operations amounts in thousands
<S> <C> <C> <C> <C> <C>
Revenue $ 130,458 111,101 6,559 5,272 253,390
Operating expenses (159,370) (129,664) (5,233) (4,749) (299,016)
Depreciation and amortization (14,422) (7,205) (1,191) (2,855) (25,673)
------------ ------------- ------------- ------------ ------------
Operating income (loss) (43,334) (25,768) 135 (2,332) (71,299)
Interest expense, net (922) (5,498) (2,784) (993) (10,197)
Other, net (4,815) (13,579) (14,807) (4,990) (38,191)
------------ ------------- ------------- ------------ ------------
Net loss $ (49,071) (44,845) (17,456) (8,315) (119,687)
=========== ============= ============= ============ ============
</TABLE>
------------------
(a) The summarized operating results of ABN are included in the
combined operations through December 31, 1997, the date TINTA
surrendered all of its shares of ABN in exchange for the ABN
Note. See related discussion above. The summarized operating
results of Sky Network Television New Zealand, Ltd. ("Sky")
are included in the combined operations through September 26,
1997, the date that TINTA sold its interest in Sky.
(b) The summarized operating results of Caguas/Humacao Cable
Systems ("Caguas") are included in the combined operations
through May 1, 1997, the date TINTA acquired the 50% ownership
in Caguas which TINTA did not already own.
(13) Debt
The components of debt are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- ----------------
amounts in thousands
<S> <C> <C>
Debentures (a) $ 345,000 345,000
Ventures Group Bank Facility (b) 204,000 --
Puerto Rico Bank Facility (c) 45,000 45,000
Other -- 18,532
-------------- ----------------
$ 594,000 408,532
============== ================
</TABLE>
--------------------
(a) On February 8, 1996, TINTA received net cash proceeds of
approximately $336 million from the issuance of 4-1/2%
Convertible Subordinated Debentures (the "Debentures") due
2006 having an aggregate principal amount of $345 million. The
Debentures are convertible into shares of TINTA Series A
common stock at a price of $27.30 per share of TINTA Series A
common stock, subject to anti-dilution adjustments. Interest
on the Debentures is payable on February 15 and August 15 of
each year. The Debentures may be redeemed by TINTA in whole or
in part, at any time on or after February 15, 1999.
(continued)
I-134
<PAGE> 137
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(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 (6.05% at June
30, 1998). TCI Ventures Group is required to pay a commitment
fee equal to 0.15% on the average daily unused portion of the
maximum borrowing commitments. The Ventures Group Bank
Facility contains restrictive covenants which require, among
other things, the maintenance of certain financial ratios, and
includes limitations on indebtedness, liens and encumbrances,
acquisitions, dispositions and dividends.
(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 (6.15% at June 30, 1998). In
addition, the Puerto Rico Subsidiary is required to pay a
commitment fee equal to 0.375% on the average daily unused
portion of the maximum borrowing commitments, payable
quarterly in arrears and at maturity. The Puerto Rico Bank
Facility contains restrictive covenants which require, among
other things, the maintenance of certain financial ratios
(primarily the ratios of cash flow to total debt and cash flow
to debt service, as defined), and includes certain limitations
on indebtedness, investments, guarantees, acquisitions,
dispositions, dividends, liens and encumbrances, and
transactions with affiliates. If TCI's ownership interest in
TINTA were to fall below 50.1%, borrowings under the Puerto
Rico Bank Facility would be secured by the assets of the
Puerto Rico Subsidiary and the variable interest rates on such
borrowings would be increased.
With the exception of the Debentures, which had a fair value of $317
million at June 30, 1998, the TCI Ventures Group believes that the fair
value and the carrying value of the TCI Ventures Group's debt were
approximately equal at June 30, 1998.
(continued)
I-135
<PAGE> 138
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(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, the Company is required to periodically
pay the Counterparty a fee equal to a LIBOR-based rate on the
Counterparty's cost to acquire the Equity Swap Shares. Due to TCI's
ability to issue shares to settle periodic price fluctuation and fees
under the Equity Swap Facility, TCI records all amounts received or
paid under this arrangement as increases or decreases, respectively, to
equity. As of June 30, 1998, the Equity Swap Facility had acquired
4,935,780 shares of TCI Group Series A Stock and 1,151,800 shares of
TCI Ventures Group Series A Stock at an aggregate cost that was
approximately $48 million less than the fair value of such Equity Swap
Shares at June 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.
(continued)
I-136
<PAGE> 139
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On January 5, 1998, TCI announced that a settlement (the "Magness
Settlement") had been reached in the litigation brought against it and
other parties in connection with the administration of the Estate of
Bob Magness (the "Magness Estate"), the late founder and former
Chairman of the Board of TCI.
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 (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.
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.
During the six months ended June 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.
(continued)
I-137
<PAGE> 140
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock Based Compensation
TCI Ventures Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights
(collectively, "Awards") granted (i) by TCI to certain TCI employees
and/or directors who are involved with the TCI Ventures Group and (ii)
by TINTA, UVSG, and @Home to employees and/or directors of such
entities. Stock compensation with respect to Awards granted by TCI
includes amounts related to TCI common stock and to common stock of
certain non-public subsidiaries of TCI and is allocated to TCI Ventures
Group based on the Awards held by TCI employees and/or directors who
are involved with TCI Ventures Group. Estimated compensation relating
to the Awards has been recorded in the accompanying combined financial
statements through June 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 $121.7 million and $12.8 million for the six months ended
June 30, 1998 and 1997, respectively. In addition, for the six months
ended June 30, 1998, TCI Ventures Group made cash payments relating to
its share of TCI's stock compensation obligations of $68.9 million. The
payable arising from the compensation related to the Awards granted by
TCI is included in the amount due to related parties.
Transactions with Related Parties
The components of due to (from) related parties are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ------------------
amounts in thousands
<S> <C> <C>
TCI Note Receivable (a) $ (5,351) (88,707)
Intercompany account (b) 13,480 110,212
---------------- ------------------
$ 8,129 21,505
================ ==================
</TABLE>
--------------------
(a) Amounts outstanding under a note agreement between the TCI
Ventures Group and TCI (the "TCI Note Receivable") bear
interest at variable rates based on TCI's weighted average
cost of bank borrowings of similar maturities (6.4% at June
30, 1998). Principal and interest is due and payable as
mutually agreed from time to time by TCI and the TCI Ventures
Group. During the six months ended June 30, 1998 and 1997,
interest income related to the TCI Note Receivable aggregated
$1.6 million and $3.8 million, respectively.
(b) The non-interest bearing intercompany account includes certain
income tax and stock compensation allocations that are to be
settled at some future date. All other amounts included in the
intercompany account are to be settled within thirty days
following notification. 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-138
<PAGE> 141
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The TCI Group has provided a revolving loan facility (the "Ventures
Intergroup Credit Facility") to the TCI Ventures Group for a five-year
period commencing on September 10, 1997. Such facility permits
aggregate 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 the TCI Ventures Group to the TCI Group on a quarterly basis. Such
commitment fee was $950,000 for the six months ended June 30, 1998. The
maximum amount of borrowings permitted under the Ventures Intergroup
Credit Facility will be reduced on a dollar-for-dollar basis by up to
$300 million if and to the extent that the aggregate amount of any
additional capital that TCI Telephony is required to contribute to
Sprint PCS Partnerships subsequent to the TCI Ventures Exchange is less
than $300 million. No borrowings were outstanding pursuant to the
Ventures Intergroup Credit Facility at June 30, 1998.
During 1996, TCI Group transferred, subject to regulatory approval,
certain distribution equipment to a subsidiary of TINTA in exchange for
a (pound)15 million ($23 million using the applicable exchange rate)
principal amount promissory note (the "TVG LLC Promissory Note"). The
TVG LLC Promissory Note was contributed by TCI Group to 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 six months ended
June 30, 1997, (i) the U.S. dollar equivalent of interest expense with
respect to the TVG LLC Promissory Note was $789,000, (ii) the U.S.
dollar equivalent of the lease revenue under the above-described lease
agreement aggregated $1.7 million and (iii) TINTA experienced foreign
currency transaction losses of $589,000, 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
$6.3 million and $4.4 million in corporate general and administrative
costs by the TCI Group during the six months ended June 30, 1998 and
1997, respectively.
During the six months ended June 30, 1998 and 1997, programming revenue
earned by UVSG from TCI Group was $4.1 million and $4.3 million,
respectively. UVSG purchases programming from Liberty Media Group and,
during the six months ended June 30, 1997, also purchased programming
from TCI Group. These purchases totaled $22.2 million and $18.3 million
for the six months ended June 30, 1998 and 1997, respectively, and are
included in operating costs in the accompanying combined statements of
operations.
(continued)
I-139
<PAGE> 142
"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 $17.3 million and $18.1 million for the six months
ended June 30, 1998 and 1997, respectively.
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.
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 $2.8 million and $2.9 million during the six
months ended June 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 six months ended June 30, 1997, such
charges aggregated $7.4 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 $1.6 million
during the six months ended June 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
The TCI Ventures Group and its 80%-or-more-owned domestic businesses
which have been attributed to the TCI Ventures Group (the "TCI Ventures
Tax Group") are included in the consolidated federal and state income
tax returns of TCI. The TCI Ventures Group's income taxes include those
items in the consolidated calculation applicable to the TCI Ventures
Tax Group ("intercompany tax allocation") and any income taxes of
attributed entities that are excluded from the consolidated federal and
state income tax returns of TCI. Intercompany tax allocation represents
an apportionment of tax expense or benefit (other than deferred taxes)
among subsidiaries of TCI in relation to their respective amounts of
taxable earnings or losses.
(continued)
I-140
<PAGE> 143
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI,
TCI Ventures Group and certain subsidiaries of TCI was implemented
effective July 1, 1995. The Old Tax Sharing Agreement formalized
certain of the elements of a pre-existing tax sharing arrangement and
contains additional provisions regarding the allocation of certain
consolidated income tax attributes and the settlement procedures with
respect to the intercompany allocation of current tax attributes. Under
the Old Tax Sharing Agreement, the TCI Ventures Group was responsible
to TCI for its share of consolidated income tax liabilities (computed
as if TCI were not liable for the alternative minimum tax) determined
in accordance with the Old Tax Sharing Agreement, and TCI was
responsible to the TCI Ventures Group to the extent that the income tax
attributes generated by the TCI Ventures Tax Group were utilized by TCI
to reduce its consolidated income tax liabilities (computed as if TCI
were not liable for the alternative minimum tax). The tax liabilities
and benefits of such entities so determined were charged or credited to
an intercompany account between TCI and the TCI Ventures Group. Such
intercompany account is required to be settled only upon the date that
an entity ceases to be a member of TCI's consolidated group for federal
income tax purposes. Under the Old Tax Sharing Agreement, TCI retains
the burden of any alternative minimum tax and has the right to receive
the tax benefits from any alternative minimum tax credit attributable
to any tax period beginning on or after July 1, 1995 and ending on or
before October 1, 1997.
Effective October 1, 1997, (the "Effective Date"), the Old Tax Sharing
Agreement was replaced by a new tax sharing agreement, as amended by
the First Amendment thereto (the "New Tax Sharing Agreement"), which
governs the allocation and sharing of income taxes by the TCI Group,
the Liberty Media Group and the TCI Ventures Group. Effective for
periods on and after the Effective Date, federal income taxes will be
computed based upon the type of tax paid by TCI (on a regular tax or
alternative minimum tax basis) on a separate basis for each Group.
Based upon these separate calculations, an allocation of tax
liabilities and benefits will be made such that each Group will be
required to make cash payments to TCI based on its allocable share of
TCI's consolidated federal income tax liabilities (on a regular tax or
alternative minimum tax basis, as applicable) attributable to such
Group and actually used by TCI in reducing its consolidated federal
income tax liability. Tax attributes and tax basis in assets would be
inventoried and tracked for ultimate credit to or charge against each
Group. Similarly, in each taxable period that TCI pays alternative
minimum tax, the federal income tax benefits of each Group, computed as
if such Group were subject to regular tax, would be inventoried and
tracked for payment to or payment by each Group in years that TCI
utilizes the alternative minimum tax credit associated with such
taxable period. The Group generating the unutilized tax benefits would
receive a cash payment only if, and when, the unutilized taxable losses
of the other Group are actually utilized. If the unutilized taxable
losses expire without ever being utilized, the Group generating the
utilized tax benefits will never receive payment for such benefits.
Pursuant to the New Tax Sharing Agreement, state and local income taxes
are calculated on a separate return basis for each Group (applying
provisions of state and local tax law and related regulations as if the
Group were a separate unitary or combined group for tax purposes), and
TCI's combined or unitary tax liability is allocated among the Groups
based upon such separate calculation.
(continued)
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"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Notwithstanding the foregoing, items of income, gain, loss, deduction
or credit resulting from certain specified transactions that were
consummated after the Effective Date pursuant to a letter of intent or
agreement that was entered into prior to the Effective Date will be
shared and allocated pursuant to the terms of the Old Tax Sharing
Agreement as amended.
The net amount of the balance of each TCI Group intercompany account
under the Old Tax Sharing Agreement that is attributable to entities
included in the TCI Ventures Group for the period beginning July 1,
1995 and ending on September 10, 1997 (the consummation date of the
Exchange Offers) has been included in TCI Ventures Group's combined
equity. Tax liabilities and benefits, as determined under the Old Tax
Sharing Agreement, that were generated by the entities comprising the
TCI Ventures Group for the period beginning on September 10, 1997 and
ending on September 30, 1997 were credited or debited to an
intercompany account between the TCI Group and the TCI Ventures Group
in accordance with the Old Tax Sharing Agreement. The intercompany tax
account existing between TCI and TINTA for the period beginning July 1,
1995 and ending September 30, 1997 will be required to be settled
between the TCI Ventures Group and TINTA if and when TINTA ceases to be
a member of TCI's consolidated group for federal income tax purposes.
For periods subsequent to September 30, 1997 TINTA and TCI Ventures
Group have followed a tax sharing arrangement with terms similar to
those contained in the New Tax Sharing Agreement.
At December 31, 1997, the TCI Ventures Group had federal net operating
loss carryforwards for income tax purposes aggregating approximately
$504 million which, if not utilized to reduce taxable income in future
periods, will begin to expire at various dates beginning in the year
2004. Pursuant to the Old and New Tax Sharing Agreements, TCI Ventures
Group has already received benefit for approximately $37 million of
such net operating loss carryforwards. TCI Ventures Group is
responsible to TCI to the extent this amount of net operating loss
carryforwards is utilized by TCI in future periods.
(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, 8, 10, 11, 12 and 14.
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 $38 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.
(continued)
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"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TINTA has formed strategic partnerships with News Corp., Organizacoes
Globo and Group Televisa S.A. to develop and operate a direct-to-home
satellite service for Latin America, Mexico, and various Central and
South American countries (collectively, the "DTH Ventures"). Through
June 30, 1998, TINTA had contributed $44.8 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
June 30, 1998, TINTA had guaranteed approximately $93 million of the
DTH Ventures' financial obligations.
Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital
Terminal Purchase Agreement") with General Instrument Corporation
("GI") to purchase advanced digital set-top devices. The hardware and
software incorporated into these devices will be designed and
manufactured to be compatible and interoperable with the OpenCable(TM)
architecture specifications adopted by CableLabs, the cable television
industry's research and development consortium, in November 1997. NDTC
has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices during calendar years 1998, 1999
and 2000 at an average price of $318 per set-top device. Through June
30, 1998, 525,000 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. It is anticipated that the value
associated with such equity interest would be attributed to TCI Group
upon purchase and deployment of the digital set-top devices. See note
2. NDTC has the right to terminate the Digital Terminal Purchase
Agreement if, among other reasons, GI fails to meet a material
milestone designated in the Digital Terminal Purchase Agreement with
respect to the development, testing and delivery of advanced digital
set-top devices.
On July 17, 1998, 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 technology 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 services to GI's set-top
authorization business.
(continued)
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"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A TCI subsidiary attributed to TCI Ventures Group issued preferred
stock in connection with a previous acquisition. Such preferred stock
is exchangeable at the option of the holders into 1,084,056 shares of
TCI Group Series A Stock beginning in April 1999. The TCI Ventures
Group entered into a forward purchase contract in July 1998 with a
commercial bank to acquire 1,084,056 shares of TCI Group Series A Stock
for approximately $45 million on or before April 19, 1999. Such shares
will be used to satisfy the exchange requirements of the aforementioned
preferred stock.
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.
During the six months ended June 30, 1998, TCI continued its
enterprise-wide comprehensive efforts to review and correct computer
systems, equipment and related software to ensure they properly
recognize, process and store business information. The computer
systems, equipment and software being evaluated include systems which
are integral to the distribution of TCI Ventures Group's products and
services, systems that support operations of TCI Ventures Group and
protect its assets, and all internal use software. TCI Ventures Group
is utilizing both internal and external resources, including the
establishment of a year 2000 enterprise program management office
accountable to TCI's executive management, to identify and remediate or
replace systems for year 2000 readiness.
During the six months ended June 30, 1998, TCI began the process of
testing and replacing or remediating critical components of its cable
systems' headend equipment, which is critical to both the cable
operations of the Puerto Rico Subsidiary and to the ability of TCI
Ventures Group and its affiliates to earn revenue from the distribution
of programming services. Although no assurance can be given, TCI
Ventures Group expects to conclude such testing by December 1998 with
replacement or remediation completed by the end of the first quarter of
1999. Also, TCI Ventures Group began the process of remediating systems
that control the commercial advertising in its cable operations,
including the advertisement of programming services distributed by TCI
Ventures Group and its affiliates. Although no assurance can be given,
those remediation efforts should be complete by mid-1999. TCI Ventures
Group continued to assess potential year 2000 issues of its affiliated
companies and provided its affiliates with remediation information on
software products and systems. TCI Ventures Group's business and
financial systems and software which will continue to be utilized by
TCI Ventures Group beyond the year 1999 will be capable of recognizing
the year 2000 and therefore should not require material remediation or
replacement.
(continued)
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"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Significant third party vendors whose systems are critical to TCI
Ventures Group's operations have been identified and surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to become ready.
During the six months ended June 30, 1998, TCI Ventures Group completed
an independent assessment of a key financial application externally
managed by a third party vendor and determined that such vendor's
systems and software should be compliant by the end of 1998. Also, TCI
Ventures Group has developed and initiated a plan with key suppliers
who provide systems which are integral to the distribution of TCI
Ventures Group's products and services to upgrade or replace non-year
2000 compliant systems on a product-by-product and site-by-site basis
by mid-1999.
Management of TCI Venture's Group intends to have further communication
with primary vendors identified as having systems that are not year
2000 compliant to assess those vendors' plans for remediating their own
year 2000 issues and to assess the impact on TCI Ventures Group if such
vendors fail to remediate their year 2000 issues. TCI Ventures Group
continues to evaluate the level of validation it will require of third
parties to ensure their year 2000 readiness.
Management of TCI has not yet determined the full cost associated with
its year 2000 readiness efforts and the related potential impact on
TCI's financial position, results of operations or cash flows but has
identified certain cost elements that, in the aggregate, are not
expected to be less than $63 million, which includes $3 million of
program management expenses incurred during the six months ended June
30, 1998. TCI Ventures Group's allocable share of such cost elements is
estimated to be not less than $15 million. Although there can be no
assurance, TCI Ventures Group anticipates that the costs ultimately
required to be paid to ensure TCI Ventures Group's year 2000 readiness
will not have a material adverse effect on TCI Ventures Group's
financial position, results of operations or cash flows. However, 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.
(17) Restatement Associated with Costs of Distribution Agreements
TCI Ventures Group has restated its combined financial statements to
record non-cash costs of certain distribution agreements as assets to
be amortized over the exclusivity periods set forth in the respective
distribution agreements. Such non-cash costs had originally been
expensed in the period that the underlying warrants had become
excercisable. This restatement resulted in a $222.0 million increase
to other assets and a $134.5 million increase to minority interests in
attributed subsidiaries at June 30, 1998. In addition, the restatement
resulted in a $22.7 million decrease to net loss and a $.05 decrease to
basic and diluted net loss attributable to common stockholders per
share of TCI Venture Group Stock for the six months ended June 30,
1998. See note 8.
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<PAGE> 148
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
Company's and its major vendors' year 2000 remediation efforts (including
uncertainties with respect to the availability of equipment and skilled
personnel), new product launches and development plans; rapid technological
changes; the acquisition, development and/or financing of telecommunications
networks and services; the development and provision of programming for new
television and telecommunications technologies; future financial performance,
including availability, terms and deployment of capital; the ability of vendors
to deliver required equipment, software and services; availability of qualified
personnel; changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and joint
venturers; competitor responses to the Company's products and services, and the
products and services of the entities in which the Company has interests, and
the overall market acceptance of such products and services; and other factors.
These forward-looking statements (and such risks, uncertainties and other
factors) speak only as of the date of this Report, and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein, to reflect any change in the
Company's expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based.
Targeted Stock
TCI 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.
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<PAGE> 149
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 London Interbank
Offered Rate ("LIBOR") plus 1% on the Sale Price, as adjusted for payments made
by the Company pursuant to any quarterly settlement with the Investment Bankers.
Due to the Company's ability to settle quarterly price fluctuations and fees
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock,
the Company records all amounts received or paid under this arrangement as
increases or decreases, respectively, to equity. During the fourth quarter of
1997, the Company repurchased 4 million shares of TCI Group Series A Stock from
one of the Investment Bankers for an aggregate cash purchase price of $66
million. Additionally, as a result of the Exchange Offers and certain open
market transactions that were completed to obtain the desired weighting of TCI
Group Series A Stock and TCI Ventures Group Series A Stock, the Investment
Bankers disposed of 4,210,308 shares of TCI Group Series A Stock and acquired
23,407,118 shares of TCI Ventures Group Series A Stock during the last half of
1997. As a result of the foregoing transactions and certain transactions related
to the January 5, 1998 settlement of litigation involving the Magness Estate, as
described below, the Option Shares were comprised of 6,201,042 shares of TCI
Group Series A Stock and 11,740,610 shares of TCI Ventures Group Series A Stock
at June 30, 1998. At June 30, 1998, the market value of the Option Shares
exceeded the Investment Bankers' cost by $275 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> 151
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.
Additionally, on February 9, 1998, the Magness Family entered into a
shareholders' agreement (the "Shareholders' Agreement") with the Malones and TCI
under which (i) the Magness Family and the Malones agree to consult with each
other in connection with matters to be brought to the vote of TCI's
shareholders, subject to the proviso that if they cannot mutually agree on how
to vote the shares, Dr. Malone has an irrevocable proxy to vote the High-Voting
Shares owned by the Magness Family, (ii) the Magness Family may designate a
nominee for the Board and Dr. Malone has agreed to vote his High Voting Shares
for such nominee and (iii) certain "tag along rights" have been created in favor
of the Magness Family and certain "drag along rights" have been created in favor
of the Malones. In addition, the Malone Right granted by TCI to Dr. Malone to
acquire 30,545,864 shares of TCI Group Series B Stock was reduced to an option
to acquire 14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms
of the Shareholders' Agreement, the Magness Family has the right to participate
in the reduced Malone Right on a proportionate basis with respect to 12,406,238
shares of the 14,511,570 shares subject to the Malone Right. On June 24, 1998,
Dr. Malone delivered notice to TCI Group exercising his right to purchase up to
14,511,570 shares of TCI Group Series B Stock at a per share price of $35.5875
pursuant to the Malone Right. In addition, a representative of the Magness
Family has advised Dr. Malone that the Magness Family will participate in such
purchase up to the Magness Family's proportionate share. Subject to final
verification and agreement of each party's proportionate share, upon the closing
of the exercise of the Malone Right, Dr. Malone would acquire 8,718,770 and the
Magness Family would acquire 5,792,800 of the shares of TCI Group Series B Stock
that are subject to the Malone Right. Such exercises are subject to any required
regulatory approvals.
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<PAGE> 152
Year 2000
During the six months ended June 30, 1998, the Company continued its
enterprise-wide comprehensive efforts to review and correct computer systems,
equipment and related software to ensure they properly recognize, process and
store business information. The computer systems, equipment and software being
evaluated include systems which are integral to the distribution of the
Company's products and services, systems that support operations of the Company
and protect its assets, and all internal use software. The Company is utilizing
both internal and external resources, including the establishment of a year 2000
enterprise program management office accountable to the Company's executive
management, to identify and remediate or replace systems for year 2000
readiness.
During the six months ended June 30, 1998, the Company began the
process of testing and replacing or remediating critical components of its cable
systems' headend equipment. Although no assurance can be given, the Company
expects to conclude such testing by December 1998 with replacement or
remediation completed by the end of the first quarter of 1999. Also, the Company
began the process of remediating systems that control the commercial advertising
in its cable operations. Although no assurance can be given, those remediation
efforts should be complete by mid-1999. The Company continued to assess
potential year 2000 issues of its affiliated companies and provided its
affiliates with remediation information on software products and systems. The
Company's business and financial systems and software which will continue to be
utilized by the Company beyond the year 1999 will be capable of recognizing the
year 2000 and therefore should not require material remediation or replacement.
Significant third party vendors whose systems are critical to the
Company's cable operations have been identified and surveyed and confirmations
from such parties have been received indicating that they are either year 2000
ready or have plans in place to become ready. During the six months ended June
30, 1998, the Company completed an independent assessment of a key financial
application externally managed by a third party vendor and determined that such
vendor's systems and software should be compliant by the end of 1998. Also, the
Company has developed and initiated a plan with key suppliers who provide
systems which are integral to the distribution of the Company's products and
services to upgrade or replace non-year 2000 compliant systems on a
product-by-product and site-by-site basis by mid-1999.
Management of the Company intends to have further communication with
primary vendors identified as having systems that are not year 2000 compliant to
assess those vendors' plans for remediating their own year 2000 issues and to
assess the impact on the Company if such vendors fail to remediate their year
2000 issues. The Company continues to evaluate the level of validation it will
require of third parties to ensure their year 2000 readiness.
Management of the Company has not yet determined the full cost
associated with its year 2000 readiness efforts and the related potential impact
on the Company's financial position, results of operations or cash flows but has
identified certain cost elements that, in the aggregate, are not expected to be
less than $63 million, which includes $3 million of program management expenses
incurred during the six months ended June 30, 1998. Although there can be no
assurance, the Company anticipates that the costs ultimately required to be paid
to ensure the Company's year 2000 readiness will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
However, 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.
I-150
<PAGE> 153
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 Six months ended
June 30, June 30,
---------------------------- --------------------------------
1998 * 1997 1998 * 1997
------------ ------------ ------------- ---------------
amounts in millions
<S> <C> <C> <C> <C>
Revenue $ 1,813 1,882 3,685 3,703
Operating, selling, general and administrative
expenses 1,147 1,166 2,313 2,249
Stock compensation 183 56 412 71
Depreciation and amortization 434 407 868 781
------------ ------------ ------------- ---------------
Operating income 49 253 92 602
Interest expense (251) (294) (536) (583)
Share of losses of affiliates, net (351) (182) (589) (338)
Minority interests in earnings of consolidated
subsidiaries (35) (56) (65) (94)
Gain on dispositions of assets 237 64 1,338 83
Other, net (23) 3 (28) 22
------------ ------------ ------------- ---------------
(423) (465) 120 (910)
------------ ------------ ------------- ---------------
Earnings (loss) before income taxes (374) (212) 212 (308)
Income tax benefit (expense) 75 58 (165) 96
------------ ------------ ------------- ---------------
Net earnings (loss) $ (299) (154) 47 (212)
============ ============ ============= ===============
</TABLE>
* Restated - see note 16 to the accompanying consolidated financial statements
of TCI.
The operating results of each of TCI Group, Liberty Media Group and
TCI Ventures Group are separately discussed below.
I-151
<PAGE> 154
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 June 30, Six months ended June 30,
---------------------------------------------- ----------------------------------------------
1998 1997 (a) 1998 1997 (a)
--------------------- --------------------- --------------------- ---------------------
dollar amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue 100% $ 1,504 100% $ 1,606 100% $ 3,081 100% $ 3,161
Operating expenses (35) (527) (37) (604) (36) (1,114) (37) (1,179)
Selling, general and
administrative expenses (23) (350) (21) (339) (22) (684) (21) (655)
Stock compensation (5) (77) (2) (36) (5) (147) (1) (38)
Depreciation and amortization (25) (373) (23) (362) (24) (749) (22) (694)
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 12% $ 177 17% $ 265 13% $ 387 19% $ 595
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
(a) Restated - see note 1 to the accompanying combined financial statements
of TCI Group.
The operation of TCI Group's cable television systems is regulated at
the federal, state and local levels. The Cable Television Consumer Protection
and Competition Act of 1992 and the Telecommunications Act of 1996 (the "Cable
Acts") established rules under which Regulated Services are regulated if a
complaint is filed by a customer or if the appropriate franchise authority is
certified by the Federal Communications Commission to regulate rates. At June
30, 1998, approximately 67% of TCI Group's basic customers were served by cable
television systems that were subject to such rate regulation.
During the six months ended June 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 six 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 six months
ended June 30, 1998 and 1997. For additional information see note 7 to the
accompanying combined financial statements of TCI Group.
TCI Group's revenue decreased $102 million or 6% for the three months
ended June 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 5%. Revenue from TCI Group's customers
accounted for 2% of such increase in revenue, primarily as a result of a 6%
increase in basic revenue that was partially offset by a 10% decrease in premium
revenue. TCI Group experienced a 5% increase in its average basic rate, an
increase in the number of average basic customers of 1%, a 5% decrease in its
average premium rate and a 5% decrease in the number of average premium
subscriptions. Additionally, the December 31, 1997 termination of an agreement
pursuant to which TCI Group provided fulfillment services to a third party
resulted in a 1% decrease in revenue. Advertising sales and other revenue
accounted for the remaining 4% increase in revenue.
I-152
<PAGE> 155
TCI Group's revenue decreased $80 million or 3% for the six months
ended June 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 1% of such increase in revenue, primarily as a result of a 5%
increase in basic revenue that was partially offset by a 12% decrease in premium
revenue. TCI Group experienced a 5% increase in its average basic rate, a
decrease in the number of average basic customers of less than 1%, a 3% decrease
in its average premium rate and a 9% decrease in the number of average premium
subscriptions. Additionally, the December 31, 1997 termination of an agreement
pursuant to which TCI Group provided fulfillment services to a third party
resulted in a 1% decrease in revenue. Advertising sales and other revenue
accounted for the remaining 3% increase in revenue.
Operating expenses decreased $77 million or 13% for the three months
ended June 30, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the 1998 Contribution Transactions and
other dispositions, such expenses decreased 2%, as higher programming and labor
costs were more than offset by reductions attributable to higher capitalized
labor and overhead resulting from increased installation and construction
activities.
Operating expenses decreased $65 million or 6% for the six months ended
June 30, 1998, as compared to the corresponding prior year period. Exclusive of
the effects of acquisitions, the 1998 Contribution Transactions and other
dispositions, such expenses increased 9%. Such increase relates primarily to
higher programming and labor costs, which were partially offset by reductions
attributable to higher capitalized labor and overhead resulting from increased
installation and construction activities.
TCI Group cannot determine whether and to what extent increases in the
cost of programming will affect its future operating costs. However, due to TCI
Group's obligations under the EMG Affiliation Agreement with Encore Media Group,
it is anticipated that TCI Group's programming costs with respect to the
"STARZ!" and "Encore" premium services will increase in 1998 and future periods.
See note 12 to the accompanying combined financial statements of TCI Group.
Selling, general and administrative expenses increased $11 million or
3% for the three months ended June 30, 1998, as compared to the corresponding
prior year period. Exclusive of the effects of acquisitions, the 1998
Contribution Transactions and other dispositions, such expenses increased 20%.
Such increase was due primarily to general increases in expenses relating to the
launch of digital products and other initiatives, increased data processing
costs, lower launch and other incentives from programming suppliers and other
individually insignificant increases in general and administrative expenses in
1998.
Selling, general and administrative expenses increased $29 million or
4% for the six months ended June 30, 1998, as compared to the corresponding
prior year period. Exclusive of the effects of acquisitions, the 1998
Contribution Transactions and other dispositions, such expenses increased 15%.
Such increase was due primarily to general increases in expenses relating to the
launch of digital products and other initiatives, increased data processing
costs and other individually insignificant increases in general and
administrative expenses in 1998.
TCI Group records stock compensation relating to restricted stock
awards, options and/or stock appreciation rights granted by TCI to certain TCI
Group employees and directors who are involved with TCI Group. Estimated
compensation relating to stock appreciation rights has been recorded through
June 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.
I-153
<PAGE> 156
Depreciation and amortization expense increased $11 million or 3% and
$55 million or 8% for the three and six months ended June 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
increases represent the net effects of decreases due to the 1998 Contribution
Transactions and other dispositions that were more than offset by increases
attributable to acquisitions and capital expenditures.
Other Income and Expenses
TCI Group's interest expense decreased $55 million or 20% and $55
million or 10% for the three and six months ended June 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 $48 million and
$80 million for the three months ended June 30, 1998 and for the period from
March 4, 1998 through June 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 $(5 million) and $47 million for the three and
six months ended June 30, 1998, respectively, as compared to $(17 million) and
$(34 million) for the corresponding prior year periods. A significant portion of
the change from the six months ended June 30, 1997 to the six months ended June
30, 1998 is attributable to TCI Group's share of a 1998 gain recognized by
InterMedia Partners on the sale of certain cable television systems. Such gain
was recognized by InterMedia Partners prior to the time that TCI Group began to
consolidate InterMedia Partners. See note 6 to the accompanying combined
financial statements of TCI Group.
During the six months ended June 30, 1998 and 1997, TCI Group purchased
notes payable which had aggregate principle balances of $299 million and $190
million, respectively. In connection with such purchases, TCI Group recognized
losses on early extinguishment of debt of $38 million and $11 million for the
six months ended June 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
$49 million and $95 million for the three and six months ended June 30, 1998,
respectively, as compared to $47 million and $81 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 $541 million for the six months ended
June 30, 1998 relates primarily to the March 4, 1998 contribution of cable
television systems by TCI Group to CSC. Such gain represents the excess of the
$1,161 million fair value of CSC Class A common shares received by TCI Group
over the historical cost of the net assets transferred by TCI Group to CSC. See
note 5 to the accompanying combined financial statements of TCI Group.
I-154
<PAGE> 157
Net Earnings
As a result of the above-described fluctuations in the Company's
results of operations, (i) TCI Group's net loss (before preferred stock dividend
requirements) of $142 million for the three months ended June 30, 1998 changed
by $94 million, as compared to TCI Group's net loss (before loss of TCI Ventures
Group and preferred stock dividend requirements) of $48 million for the three
months ended June 30, 1997, and (ii) TCI Group's net earnings (before preferred
stock dividend requirements) of $96 million for the six months ended June 30,
1998 changed by $141 million, as compared to TCI Group's net loss (before loss
of TCI Ventures Group and preferred stock dividend requirements) of $45 million
for the six months ended June 30, 1997.
LIBERTY MEDIA GROUP
Liberty Media Group's assets include businesses which provide
programming services including production, acquisition and distribution through
all available formats and media of branded entertainment, educational and
informational programming and software, including multimedia products. Liberty
Media Group's assets also include businesses engaged in electronic retailing,
direct marketing, advertising sales relating to programming services,
infomercials and transaction processing. A significant portion of Liberty Media
Group's operations are conducted through corporations and partnerships in which
Liberty Media Group holds a 20%-50% ownership interest. As Liberty Media Group
generally accounts for such ownership interests using the equity method of
accounting, the financial condition and results of operations of such entities
are not reflected on a combined basis within Liberty Media Group's combined
financial statements.
On June 24, 1997 Liberty Media Group granted Time Warner the Southern
Option. Liberty Media Group received 6.4 million shares of TW Exchange Stock
valued at $306 million in consideration for the grant. In September 1997, Time
Warner exercised the Southern Option. Pursuant to the Southern Option, Time
Warner acquired the Southern Business, effective January 1, 1998, for $213
million, which was paid in cash, together with the assumption of certain
liabilities on January 2, 1998. Effective January 1, 1998, the Southern Business
is no longer included in the combined financial statements of Liberty Media
Group.
Subsequent to June 30, 1997, Liberty Media Group and TCI Group entered
into a series of transactions pursuant to which the businesses of "Encore," a
movie premium programming service, and "STARZ!," a first-run movie premium
programming service, were contributed to Encore Media Group, a subsidiary of TCI
that is attributed to the Liberty Media Group. Upon the July 1997 formation of
Encore Media Group, the operations of STARZ! were included in the combined
financial statements of Liberty Media Group.
Simultaneously with the July 1997 DMX Merger, substantially all of
TCI's controlling ownership interest in TCI Music was transferred to Liberty
Media Group in exchange for 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-155
<PAGE> 158
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 June 30,
------------------------------------------------------
1998 1997
--------------------------- -------------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
Programming Services
Revenue 100% $ 165,025 100% $ 59,672
Operating, selling, general and administrative 88% (145,987) 76% (45,245)
Stock compensation 4% (6,239) -- --
Depreciation and amortization 5% (8,090) 1% (747)
------ -------------- ----- -------------
Operating income 3% $ 4,709 23% $ 13,680
====== ============== ===== =============
Corporate expenses
Selling, general and administrative $ (2,579) $ (1,780)
Stock compensation (56,067) (14,466)
Depreciation and amortization (29) (29)
-------------- -------------
Operating loss $ (58,675) $ (16,275)
============== =============
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------------------
1998 1997
--------------------------- -------------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
Programming Services
Revenue 100% $ 321,695 100% $ 119,031
Operating, selling, general and administrative 85% (272,420) 66% (78,295)
Stock compensation 4% (14,030) 4% (4,576)
Depreciation and amortization 5% (15,847) 1% (1,498)
------ -------------- ----- -------------
Operating income 6% $ 19,398 29% $ 34,662
====== ============== ===== =============
Corporate expenses
Selling, general and administrative $ (5,309) $ (2,799)
Stock compensation (124,406) (15,464)
Depreciation and amortization (60) (57)
-------------- -------------
Operating loss $ (129,775) $ (18,320)
============== =============
</TABLE>
I-156
<PAGE> 159
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 six months
and three months ended June 30, 1998 and 1997. The following table presents
adjustments to remove the effects of such acquisitions and dispositions.
<TABLE>
<CAPTION>
Three months ended June 30, 1998
---------------------------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
------------------- --------------------- ----------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 165,025 (95,933) 69,092
Operating, selling, general and
administrative expenses (145,987) 105,247 (40,740)
Stock compensation (6,239) 199 (6,040)
Depreciation and amortization (8,090) 6,372 (1,718)
------------------- --------------------- ----------------
Operating income $ 4,709 15,885 20,594
=================== ===================== ================
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1997
-----------------------------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
------------------- -------------------- -------------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 59,672 (7,853) 51,819
Operating, selling, general and
administrative expenses (45,245) 1,788 (43,457)
Depreciation and amortization (747) 136 (611)
------------------- -------------------- -------------------
Operating income $ 13,680 (5,929) 7,751
=================== ==================== ===================
</TABLE>
I-157
<PAGE> 160
<TABLE>
<CAPTION>
Six months ended June 30, 1998
----------------------------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
------------------- --------------------- ----------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 321,695 (185,289) 136,406
Operating, selling, general and
administrative expenses (272,420) 195,954 (76,466)
Stock compensation (14,030) 241 (13,789)
Depreciation and amortization (15,847) 12,453 (3,394)
------------------- --------------------- ----------------
Operating income $ 19,398 23,359 42,757
=================== ===================== ================
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1997
----------------------------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
------------------- -------------------- ----------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 119,031 (15,522) 103,509
Operating, selling, general and
administrative expenses (78,295) 3,545 (74,750)
Stock compensation (4,576) -- (4,576)
Depreciation and amortization (1,498) 271 (1,227)
------------------- -------------------- ----------------
Operating income $ 34,662 (11,706) 22,956
=================== ==================== ================
</TABLE>
Excluding the effect of acquisitions and dispositions, revenue from
Entertainment and Information Programming Services increased 33% or $17 million
for the quarter ended June 30, 1998, as compared to the quarter ended June 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 June 30, 1998, revenue from Encore
services distributed to TCI Group increased due to the EMG Affiliation
Agreement, when compared to the three months ended June 30, 1997. Additionally,
Netlink had increased revenue during the second quarter of 1998 compared to the
same period in 1997 of approximately $2 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, decreased 6% or $3 million for the quarter
ended June 30, 1998 compared to the quarter ended June 30, 1997. Operating,
selling, general and administrative expenses related to Encore services
decreased by $5 million during the second quarter of 1998 compared to the second
quarter of 1997 primarily due to decreased national consumer marketing during
1998. Such decrease was offset by increased operating, selling,
general and administrative expenses at Netlink of approximately $2 million which
is primarily attributable to an increase in the copyright fee rate from
approximately $.06 per subscriber to $.27 per subscriber.
I-158
<PAGE> 161
Excluding the effect of acquisitions and dispositions, revenue from
Entertainment and Information Programming Services increased 32% or $33 million
during the six months ended June 30, 1998 compared to the six months ended June
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 six months
of 1998 compared to the same period in 1997 of approximately $4 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 2% or $2 million for the six months
ended June 30, 1998 compared to the same period of 1997. Decreased marketing
support and national consumer marketing related to Encore services of $6 million
was offset by increased programming costs of $2 million for Encore services and
increased copyright fees at Netlink of $5 million for the six months ended June
30, 1998 compared to 1997. Additionally, Liberty Media Group incurred start up
costs of approximately $1 million during the six months ended June 30, 1998 for
a new package of Spanish language channels.
The increase in stock compensation of Entertainment and Information
Programming Services for the quarter and six months ended June 30, 1998 as
compared to the corresponding periods in 1997 is due to an increase in Encore
Media Group's stock compensation of $6 million and $9 million, respectively. See
note 10 to the accompanying combined financial statements of Liberty Media
Group.
Revenue from TCI Music contributed $21 million and $40 million to
revenue from Entertainment and Information Programming Services for the quarter
and six months ended June 30, 1998, respectively. Additionally, revenue from
STARZ! contributed $72 million and $140 million and ICCP contributed $3 million
and $5 million to revenue for three months and six months ended June 30, 1998,
respectively. As discussed above, operations for TCI Music, STARZ! and ICCP 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 quarter
and six months ended June 30, 1998 included $21 million and $38 million,
respectively, from the operations of TCI Music, $81 million and $151 million,
respectively, from the operations of STARZ! and $4 million and $7 million,
respectively, 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 $20 million and less than $1 million during the
six months ended June 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 six months ended June 30, 1998 compared to
the six months ended June 30, 1997.
I-159
<PAGE> 162
Liberty Media Group's share of losses of affiliates for the quarter
ended June 30, 1998 was $49 million compared to earnings of $6 million for the
second quarter of 1997. Liberty Media Group's share of losses of affiliates was
$71 million for the six months ended June 30, 1998 compared to earnings of $13
million for the corresponding period in 1997.
Liberty Media Group's share of earnings of affiliates attributable to
its interest in Discovery decreased $9 million and $18 million during the
quarter and six months ended June 30, 1998 compared to the quarter and six
months ended June 30, 1997, respectively. While Discovery's revenue increased by
25% and 24% during the first quarter and six months of 1998, respectively, its
earnings before interest, taxes, depreciation and amortization decreased by 32%
and 23%, principally because of costs associated with launching new digital
services, continuing investments in the retail business as well as new joint
ventures such as YCTV and the joint venture with the British Broadcasting
Corporation. Interest expense for Discovery was 77% and 123% higher in the
second quarter and six 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.
Liberty Media Group's share of earnings of affiliates attributable to
its interest in QVC increased approximately $4 million and $8 million during the
quarter and six months ended June 30, 1998, respectively, compared to the same
period in 1997. QVC's revenue increased by 13% for each of the quarter and six
months ended June 30, 1998, contributing to a 23% and 22% increase in earnings
before interest, taxes, depreciation and amortization over the corresponding
periods in 1997. In the aggregate, interest expense, taxes, depreciation and
amortization for QVC increased by 11% for each of the second quarter and first
six months of 1998 resulting in a 75% and 68% increase in net income for QVC for
the quarter and six months ended June 30, 1998, respectively, compared to the
quarter and six months ended June 30, 1997.
The share of losses of Fox Sports was responsible for approximately $41
million and $77 million of the decrease in share of earnings of affiliates for
the second quarter and first six months of 1997 to 1998, respectively. 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 six months ended June 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.
I-160
<PAGE> 163
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 in exchange for an approximate 20%
interest in Superstar/Netlink. As a result of this transaction, Liberty Media
Group's ownership interest in Superstar/Netlink decreased from 50% to
approximately 40%. In connection with such dilution, Liberty Media Group
recognized a $23 million gain (before deducting deferred income tax expense of
$9 million). See note 5 to the accompanying combined financial statements of
Liberty Media Group.
TCI VENTURES GROUP
The following table sets forth certain financial information for the
TCI Ventures Group and the businesses attributed to it during the six months
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------------------------------
1998 (5) 1997
------------------------------ --------------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Revenue:
UVSG $ 289,545 66% $ 250,977 50%
NDTC (1) 44,275 10 46,881 9
ETC 41,495 10 45,721 9
TINTA (2) 25,672 6 134,156 27
WTCI 17,390 4 17,468 4
@Home 14,993 3 1,833 --
Corporate and other 2,759 1 2,104 1
--------------- -------- -------------- ------
$ 436,129 100% $ 499,140 100%
=============== ======== ============== ======
Operating, selling, general,
administrative:
UVSG $ 233,093 60% $ 203,588 50%
NDTC 36,237 9 27,090 7
ETC 45,021 11 53,326 13
TINTA (2) 20,296 5 84,368 20
WTCI 11,378 3 11,288 3
@Home 33,830 9 21,628 5
Corporate and other 11,384 3 8,572 2
--------------- -------- -------------- ------
$ 391,239 100% $ 409,860 100%
=============== ======== ============== ======
Depreciation, amortization, stock
compensation and other non-cash
charges
UVSG $ 29,565 13% $ 9,164 9%
NDTC 19,645 9 14,738 15
ETC 2,964 1 3,221 3
TINTA (2) 15,305 7 33,967 35
WTCI 6,442 3 4,360 5
@Home 30,704 14 3,347 3
Corporate and other (3) 117,838 53 29,292 30
--------------- -------- -------------- ------
$ 222,463 100% $ 98,089 100%
=============== ======== ============== ======
Operating income (loss):
UVSG $ 26,887 (4) $ 38,225 (4)
NDTC (11,607) 5,053
ETC (6,490) (10,826)
TINTA (2) (9,929) 15,821
WTCI (430) 1,820
@Home (49,541) (23,142)
Corporate and other (126,463) (35,760)
--------------- --------------
$ (177,573) $ (8,809)
=============== ==============
</TABLE>
- -----------------------
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(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 each of the six months
ended June 30, 1998 and 1997 revenue from services provided to
TCI and its consolidated subsidiaries accounted for 37% of
NDTC's total revenue.
(2) As described in note 5 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 six months ended June 30, 1997 (amounts
in thousands):
<TABLE>
<S> <C>
Revenue $ 114,208
Operating costs and expenses (67,618)
Depreciation and amortization (26,376)
-------------
Operating income $ 20,214
=============
</TABLE>
(3) Amount includes stock compensation expense of $116.3 million
and $11.1 million for the six months ended June 30, 1998 and
1997, respectively.
(4) Not meaningful.
(5) Restated - see note 17 to the accompanying combined financial
statements of TCI Ventures Group.
Revenue
Revenue decreased by $27.0 million or 11% and $63.0 million or 13%
during the three and six month periods ended June 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 and @Home.
TINTA revenue decreased by $55.4 million or 81% and $108.5 million or
81% during the three and six month periods ended June 30, 1998, respectively, as
compared to the corresponding prior year period. Such decreases are primarily
attributable to the deconsolidation of Cablevision in 1997.
Revenue from UVSG increased $21.1 million or 16% and $38.6 million or
15% during the three and six month periods ended June 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
Superstar/Netlink effective February 1, 1998.
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Operating Costs and Expenses
Operating costs and expenses, excluding depreciation, amortization,
stock compensation and other non-cash charges decreased by $10.1 million or 5%
and $18.6 million or 5% during the three and six month periods ended June 30,
1998, respectively, as compared to the corresponding prior year periods. Such
decreases are attributable to the effects of the deconsolidation of Cablevision
which was partially offset by increased costs attributable to UVSG and @Home.
TINTA operating costs and expenses, excluding depreciation,
amortization, stock compensation and other non-cash charges decreased $33.4
million or 76% and $64.1 million or 76% for the three and six month periods
ended June 30, 1998, respectively, as compared to the corresponding prior year
periods. Such decreases are primarily attributable to the deconsolidation of
Cablevision in 1997.
Operating costs and expenses, excluding depreciation, amortization,
stock compensation and other non-cash charges from UVSG increased $15.5 million
or 15% and $29.5 million or 14% during the three and six month periods ended
June 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 Superstar/Netlink effective February
1, 1998.
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 June 30, 1998
and 1997, TCI Ventures Group was allocated $4.1 million and $2.2 million,
respectively, in corporate general and administrative costs by TCI Group. During
the six months ended June 30, 1998 and 1997, TCI Ventures Group was allocated
$6.3 million and $4.4 million, respectively, in corporate general and
administrative costs by TCI Group.
Stock compensation expense increased $40.0 million and $113.9 million
during the three and six month periods ended June 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
June 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 14 to the accompanying combined
financial statements of TCI Ventures Group.
The $5.4 million or 12% and $10.5 million or 12% increases in
depreciation and amortization expense during the three and six month periods
ended June 30, 1998, respectively, as compared to the corresponding prior year
periods, are primarily the result of the effects of increases in @Home's, UVSG's
and NDTC's depreciation and amortization, which effects were partially offset by
the deconsolidation of Cablevision.
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Other Income and Expense
The TCI Ventures Group's share of losses from its investment in the PCS
Ventures increased $74.7 million and $166.4 million during the three and six
month periods ended June 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, (iii) interest expense associated with higher amounts of
outstanding debt and (iv) Sprint Spectrum's share of losses of American PCS L.P.
It is expected that Sprint PCS will continue to incur significant operating
losses and significant negative cash flow from operating activities during the
next several years while it continues to expand its PCS network and build its
customer base. Sprint PCS's operating profitability will depend upon many
factors, including, among others, its ability to (i) market its products and
services successfully, (ii) achieve its projected market penetration, (iii)
manage customer turnover rates effectively and (iv) price its products and
services competitively. There can be no assurance that Sprint PCS will achieve
or sustain operating profitability or positive cash flow from operating
activities in the future. If Sprint PCS does not achieve and maintain operating
profitability and positive cash flow from operating activities on a timely
basis, it may not be able to meet its debt service requirements.
The TCI Ventures Group's share of Telewest's net losses increased
(decreased) $1.7 million and $(9.7 million) during the three and six month
periods ended June 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
unrealized foreign currency transaction losses of (i) $13.4 million and $282,000
during the three months ended June 30, 1998 and 1997, respectively, and (ii)
$2.4 million and $40.0 million during the six months ended June 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.
The share of losses from the TCI Ventures Group's investment in TCG
increased $288,000 and $4.2 million for the three and six month periods ended
June 30, 1998, respectively, as compared to the corresponding prior year
periods. The increase in the share of losses for the six month period ended June
30, 1998 is primarily attributable to merger costs incurred by TCG during the
first quarter of 1998 related to the pending merger with AT&T. In January 1998,
TCG entered into certain agreements pursuant to which it agreed to be acquired
by AT&T. Such merger was consummated on July 24, 1998. As a result of such
merger, TCI Ventures Group received in exchange for all of its interest in TCG,
approximately 46.95 million shares of AT&T common stock. TCI Ventures Group will
account for its ownership interest in AT&T common stock using the cost method.
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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 $4.4 million and $7.6 million for the three and six month periods ended June
30, 1998, respectively.
The TCI Ventures Group's share of the losses of affiliates other than
the PCS Ventures, Telewest, TCG and Cablevision (the "Other Affiliates")
remained relatively constant during the three and six month periods ended June
30, 1998, as compared to the corresponding prior year periods. Increased losses
of MultiThematiques, BIP Poland and Jupiter were partially offset by decreases
in share of losses of ABN and Flextech. As of December 31, 1997, TINTA
surrendered all of its shares of ABN in exchange for a $25 million unsecured
note receivable. Accordingly, effective December 31, 1997, TINTA no longer
accounts for ABN under the equity method of accounting. TCI Ventures Group
expects that the Other Affiliates will continue to incur losses as they continue
to expand their operations and/or launch new services. For additional
information, see note 12 to the accompanying combined financial statements of
TCI Ventures Group.
Interest expense decreased $853,000 and $5.9 million during the three
and six month periods ended June 30, 1998, respectively, as compared to the
corresponding prior year periods. Such changes are primarily the result of the
net effects of the deconsolidation of Cablevision, the assignment of certain
capital lease obligations to TCI Group and increased borrowings under the
Ventures Group Bank Facility during the second quarter of 1998.
During the six months ended June 30, 1998, TCI Ventures Group
recognized $41.9 million in gains from the disposition of assets. Such gains are
attributable to TCI Ventures Group's sale of its interest in (i) NHT
Partnership, (ii) Louisville Lightwave, (iii) New Jersey Fiber Technologies,
L.P., (iv) TeleCable Nacional, CXA and Sportsline USA, Inc. In addition, UVSG
recognized a gain of $14.7 million from the dilution of its interest in
Superstar/Netlink. For additional information regarding such transactions, see
note 7 to the accompanying combined financial statements of TCI Ventures Group.
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 (before deducting
deferred income taxes of $70.5 million). For additional information regarding
such transaction, see note 9 to the accompanying combined financial statements
of TCI Ventures Group.
In February 1997, TSX Corporation ("TSX"), an equity affiliate of the
TCI Ventures Group, and Antec Corporation ("Antec") entered into a business
combination with Antec being the surviving entity. In connection with this
transaction, the TCI Ventures Group recognized a $29 million gain (before
deducting deferred income taxes of $11 million) representing the difference
between the fair value of the Antec shares received and the carrying value of
its investment in TSX at the date of the transaction. The TCI Ventures Group
accounts for its investment in Antec using the cost method.
The minority interests' share of net losses increased $18.2 million and
$25.9 million during the three and six month periods ended June 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
increases are primarily attributable to increases in net losses for @Home and
TINTA.
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<PAGE> 168
Net Losses
The TCI Ventures Group's net losses of $90.3 million and $286.2 million
during the three and six month periods ended June 30, 1998, respectively,
represent increases (decreases) of $(21.6 million) and $97.0 million, as
compared to the TCI Ventures Group's net losses of $111.9 million and $189.2
million for the three and six month periods ended June 30, 1997, respectively.
Included in such amounts was the recognition of certain non-operating gains
aggregating (i) $201.4 million and $21.3 million during the three months ended
June 30, 1998 and 1997, respectively, and (ii) $216.1 million and $21.3 million
during the six months ended June 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.
MATERIAL CHANGES IN FINANCIAL CONDITION
TCI GROUP
On March 4, 1998, TCI Group contributed to CSC certain of its cable
television systems serving approximately 830,000 customers in exchange for
approximately 24.5 million newly issued CSC Class A common shares (as adjusted
for a stock dividend) (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 described in note 5 to the
accompanying combined financial statements of TCI Group, TCI also completed,
during the first six months of 1998, three transactions whereby TCI Group
contributed cable television systems serving in the aggregate approximately
670,000 customers to three 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 $833 million. In connection
with such transactions, TCI Group has agreed to take certain steps to support
compliance by each of the 1998 Joint Ventures with their payment obligations
under certain debt instruments, up to an aggregate contingent commitment of $784
million. In light of such contingent commitments, TCI Group has deferred any
gains on the formation of the 1998 Joint Ventures. Such deferred gains, which
aggregated $163 million, will not be recognized until such time as TCI Group's
contingent commitments with respect to the 1998 Joint Ventures are eliminated.
TCI Group uses the equity method of accounting to account for its investments in
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."
I-166
<PAGE> 169
Including the 1998 Contribution Transactions, TCI Group, as of July 31,
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 six months ended June 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 June 30, 1998, the Equity Swap Facility had acquired 4,935,780
shares of TCI Group Series A Stock and 1,151,800 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $48 million less than
the fair value of such Equity Swap Shares at June 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.
Through June 30, 1997, TCI Group had a 50.1% partnership interest in
QE+, a limited partnership interest which distributed STARZ!. Entities
attributed to Liberty Media Group held the remaining 49.9% partnership interest.
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<PAGE> 170
Subsequent to June 30, 1997, TCI Group and Liberty Media Group entered
into a series of transactions pursuant to which the businesses of Encore and
STARZ! were contributed to Encore Media Group. Upon the July 1997 formation of
Encore Media Group, the operations of QE+ were no longer included in the
combined financial results of TCI Group. In connection with the foregoing
transactions, Liberty Media Group issued a note payable to TCI Group (which note
was paid in full during the first quarter of 1998) and TCI Group entered into
the EMG Affiliation Agreement pursuant to which TCI Group pays monthly fixed
amounts in exchange for unlimited access to all of the existing Encore and
STARZ! services.
TCI Group's fixed annual commitments pursuant to the EMG Affiliation
Agreement increase annually from $220 million in 1998 to $315 million in 2003,
and will increase with inflation through 2022.
On July 11, 1997, TCI Music merged with DMX. Simultaneously with the
DMX Merger, substantially all of TCI's controlling ownership interest in TCI
Music was transferred from TCI Group to Liberty Media Group in exchange for an
$80 million promissory note and an agreement to reimburse TCI for any amounts
TCI pays pursuant to its contingent obligation pursuant to a Rights Agreement
(the "Rights Agreement") to purchase up to 14,896,648 shares (6,812,393 of which
are owned by subsidiaries of TCI) of TCI Music common stock at a price of $8.00
per share. TCI will settle its obligation under the Rights Agreement during the
third quarter of 1998 by paying $8.00 per share to all holders who tender TCI
Music common stock and the associated rights to TCI in accordance with the terms
of the Rights Agreement. Liberty Media Group will reimburse TCI Group for the
amount required to satisfy such obligation. The Music Note may be reduced by the
payment of cash or the issuance by TCI of shares of Liberty Group Stock for the
benefit of entities included within TCI Group. Additionally, Liberty Media Group
may elect to pay $50 million of the Music Note by delivery of a Stock
Appreciation Rights Agreement that will give TCI Group the right to receive 20%
of the appreciation in value of Liberty Media Group's investment in TCI Music,
to be determined at July 11, 2002.
A subsidiary of TCI that 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 June 30, 1998, TCI Group had approximately $2.6 billion of
availability in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although TCI
Group was in compliance with the restrictive covenants contained in its credit
facilities at said date, additional borrowings under the credit facilities are
subject to TCI Group's continuing compliance with the restrictive covenants
after giving effect to such additional borrowings. Such restrictive covenants
require, among other things, the maintenance of certain earnings, specified cash
flow and financial ratios (primarily the ratios of cash flow to total debt and
cash flow to debt service, as defined), and include certain limitations on
indebtedness, investments, guarantees, dispositions, stock repurchases and/or
dividend payments. See note 8 to the accompanying combined financial statements
of TCI Group for additional information regarding TCI Group's debt.
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<PAGE> 171
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
and stock compensation) ($1,283 million and $1,327 million during the six months
ended June 30, 1998 and 1997, respectively) to interest expense ($500 million
and $555 million during the six months ended June 30, 1998 and 1997,
respectively), is determined by reference to the combined statements of
operations. TCI Group's interest coverage ratio was 257% and 239% during the six
months ended June 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 ($474 million and $763 million during
the six months ended June 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 $493 million, $128 million and $538 million during the six months ended June
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 includes proceeds received in connection
with certain asset dispositions. Such proceeds, which aggregated $303 million
and $34 million at June 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 $203
million at June 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 six months ended June 30,
1998. The maximum amount of borrowings permitted under the Ventures Intergroup
Credit Facility will be reduced on a dollar-for-dollar basis by up to $300
million if and to the extent that the aggregate amount of any additional capital
that TCI Ventures Group is required to contribute to certain specified
partnerships subsequent to the September 10, 1997 consummation of the Exchange
Offers is less than $300 million. No borrowings were outstanding pursuant to the
Ventures Intergroup Credit Facility at June 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 June 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 June 30, 1998 to make minimum revenue payments through 2017 and
minimum license fee payments through 2007 aggregating approximately $419 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 June 30, 1998, the amount of such obligations or
guarantees was approximately $272 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 basic set-top device. Through June 30,
1998, approximately 525,000 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. It is anticipated
that the value associated with such equity interest would be attributed to TCI
Group upon purchase and deployment of the digital set-top devices. 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.
TCI Group has 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 $400 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 June 30, 1998, TCI Group has sold and leased back
advanced digital set-top devices under the Lease with an aggregate cost of $107
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 has entered into Interest Rate Swaps pursuant to which
it (i) pays a fixed interest rate of 6.2% and receives variable interest rates
on a notional amount of $10 million at June 30, 1998 and (ii) pays variable
interest rates and receives fixed interest rates ranging from 4.8% to 9.7% on
notional amounts of $2,400 million at June 30, 1998. During the six months ended
June 30, 1998 and 1997, TCI Group's net payments pursuant to the Fixed Rate
Agreement were less than $1 million and $4 million, respectively; and TCI
Group's net receipts pursuant to the Variable Rate Agreements were $4 million
and $11 million, respectively.
At June 30, 1998, TCI Group would be required to pay less than $1
million to terminate the Fixed Rate Agreement and would be entitled to receive
$43 million upon termination of the Variable Rate Agreements.
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In addition to the Fixed Rate and Variable Rate Agreements, TCI Group
entered into Interest Rate Swaps pursuant to which it pays a variable rate based
on LIBOR (6.1% at June 30, 1998) and receives a variable rate based on CMT (5.9%
at June 30, 1998) on a notional amount of $400 million through September 2000;
and pays a variable rate based on LIBOR (6.0% at June 30, 1998) and receives a
variable rate based on CMT (6.0% at June 30, 1998) on notional amounts of $95
million through February 2000. During the six months ended June 30, 1998, TCI
Group's net payments pursuant to such agreements were less than $1 million. At
June 30, 1998, TCI Group would be required to pay an estimated $3 million to
terminate such Interest Rate Swaps.
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, TCI Group does not anticipate that it
will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, as of June 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 11 to the
accompanying combined financial statements for additional information regarding
Interest Rate Swaps.
At June 30, 1998, after considering the net effect of the
aforementioned Interest Rate Swaps, TCI Group had $6,895 million (or 55%) of
fixed rate debt and $5,752 million (or 45%) 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
12.4 million shares of UVSG Class A common stock in exchange for 12.7 million
shares of TCI Ventures Group Series A Stock and 7.3 million shares of Liberty
Group Series A Stock. The aggregate value assigned to the shares issued by TCI
was based upon the market value of such shares at the time the transaction was
announced. As a result of such transaction TCI increased its ownership in the
equity of UVSG to approximately 73%, of which 17% is attributed to Liberty Media
Group.
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In February 1998, TCI, Liberty Media Group and UVSG announced their
agreement in principal for UVSG to acquire Liberty Media Group's 40% interest in
Superstar/Netlink and its 100% interest in certain businesses conducted by
Netlink USA ("Netlink") (the "Netlink Business") in exchange for 6.4 million
shares of UVSG's common stock. In April 1998, UVSG, Liberty Media Group and
Turner-Vision entered into a memorandum of understanding with PRIMESTAR, Inc.
("PRIMESTAR") for the sale of Superstar/Netlink to PRIMESTAR for shares of a new
series of convertible preferred stock of PRIMESTAR and the assumption of
liabilities (the "Primestar Transaction"). Liberty Media Group and UVSG have
agreed in principal to restructure their transaction to provide for UVSG to
acquire any shares of PRIMESTAR preferred stock received by Liberty Media Group
in the Primestar Transaction and Liberty Media Group's Netlink Business for 6.4
million shares of Class B Common Stock of UVSG. Consummation of the transaction
between Liberty Media Group and UVSG is subject to UVSG stockholder approval and
certain regulatory approvals. Consummation of the Primestar Transaction is
subject to a number of conditions, including negotiation of a definitive
agreement and receipt of applicable regulatory approvals. No definitive
agreement with respect to the Primestar Transaction has been reached, however,
and there can be no assurance that any such agreement will be entered into or
that the terms of any such agreement would be the same as terms previously
disclosed.
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 June 30, 1998, Liberty Media Group holds approximately 57 million
shares of the TW Exchange Stock. During the six months ended June 30, 1998, the
unrealized appreciation, net of taxes, of the fair value of such shares of TW
Exchange Stock was $808 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 $10 million in cash dividends for each of the
first six months of 1998 and 1997. 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 $15 million in cash
dividends on a 30 year non-convertible 9% preferred stock, with a stated value
of $345 million, during the six months ended June 30, 1998.
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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 $298 million and $305 million, respectively, were outstanding at
June 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 June 30, 1998. TCI Music has a revolving loan agreement which provides for
borrowings of up to $100 million. Borrowings of $78 million were outstanding at
June 30, 1998. See note 8 to the accompanying combined financial statements of
Liberty Media Group.
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 held by subsidiaries of TCI that are not members of
the Liberty Media Group, the obligation under the Rights Agreement could be as
high as $86 million and will be paid by Liberty Media Group in August of 1998.
Various partnerships and other affiliates of Liberty Media Group
accounted for under the equity method finance a substantial portion of their
acquisitions and capital expenditures through borrowings under their own credit
facilities and net cash provided by their operating activities.
As of June 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 June 30, 1998, Encore Media
Group's future minimum obligation related to certain film licensing agreements
was $680 million. The amount of the total obligation is not currently estimable
because such amount is dependent upon the number of qualifying films released
theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying films.
Continued development may require additional financing and it cannot be
predicted whether Liberty Media Group will obtain such financing. If additional
financing cannot be obtained, Liberty Media Group could attempt to sell assets
but there can be no assurance that asset sales, if any, can be consummated at a
price and on terms acceptable to Liberty Media Group. Further, Liberty Media
Group and/or TCI could attempt to sell equity securities but, again, there can
be no certainty that such a sale could be accomplished on acceptable terms.
In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, Liberty Media Group paid
$64 million during the first quarter of 1998 for its allocated share of the Call
Payments. See note 9 to the accompanying combined financial statements of
Liberty Media Group.
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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. Pursuant to the
LLC Exchange Agreement, each LLC Share issued or to be issued to Liberty Media
Group is exchangeable for one share of USAI's Common Stock.
In connection with the 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 six months ended June 30, 1998, pursuant to the stock
repurchase program, 266,783 shares of Liberty Group Stock were repurchased at an
aggregate cost of approximately $8 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, will be considered by TINTA's board of directors.
TINTA, on behalf of the board of directors, has engaged an investment banking
firm to render its opinion concerning the fairness to TINTA's public
shareholders of the consideration offered by Liberty Media Group.
TCI VENTURES GROUP
The following table sets forth total assets and debt and capital lease
obligations for the TCI Ventures Group and each of the businesses attributed to
it:
<TABLE>
<CAPTION>
June 30,
1998 (1)
--------------------
amounts in thousands
Total assets
<S> <C>
TINTA $ 1,376,290
TCI Telephony 821,726
UVSG 386,932
NDTC 345,276
@Home 371,099
ETC 82,745
WTCI 80,290
Other 413,693
-------------------
$ 3,878,051
===================
Debt and capital lease obligations (2)
TINTA $ 390,023
Corporate and other 204,015
NDTC 151,539
UVSG 22,397
@Home 26,484
-------------------
$ 794,458
===================
</TABLE>
I-175
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(1) Restated - see note 17 to the accompanying combined financial
statements of TCI Ventures Group.
(2) For additional information concerning the terms of TCI
Ventures Group's debt, see note 13 to the accompanying
combined financial statements of the TCI Ventures Group.
The TCI Ventures Group's combined operating activities provided (used)
cash of $(56.0 million) and $43.0 million during the six months ended June 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 $21.3 million during the six months ended June 30, 1997. At June 30,
1998, UVSG and @Home held cash and cash equivalents of $95.5 million and $91.2
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 six months ended June 30, 1998 and 1997, cash used by TCI
Ventures Group's investing activities aggregated $98.6 million and $255.7
million, respectively. The 1998 amount includes cash proceeds of $83.0 million
received upon the disposition of assets. Additionally, the 1998 and 1997 amounts
include $160.9 million and $146.0 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 the TCI Ventures Group's
entities and/or affiliates will not significantly increase due to changing
circumstances, such as unanticipated opportunities, technological or marketing
hurdles, unanticipated expenses, and the like. The failure to generate
sufficient cash flow from operating activities or to raise sufficient funds may
require such entity to delay or abandon some or all of its development and
expansion plans or in certain instances, could result in the failure to meet
certain regulatory requirements, any and all of which could have a material
adverse effect on such entity's growth, its ability to compete in its industry
and its ability to service its debt.
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The ability of 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 TCG and Sprint PCS, are holding
companies, the assets of which consist solely or primarily of investments in
their subsidiaries and affiliates. As such, the ability of such holding
companies to meet their respective financial obligations and their funding and
other commitments to their respective subsidiaries and affiliates, is dependent
upon external financing and/or of dividends, loans or other payments from their
respective subsidiaries and affiliates, or repayment of loans and advances from
such holding companies. Accordingly, such holding companies' ability to meet
their respective liquidity requirements, including debt service, is 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 June 1998, the Sprint PCS partners have
contributed $4.2 billion to Sprint PCS (of which TCI Telephony contributed an
aggregate of $1.3 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 and the receipt of required FCC
approvals. 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. If the
above-described transactions are consummated, the Company would begin to use the
cost method to account for its investment in the Sprint PCS stock. 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
June 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), which borrowings bear interest
at a rate per annum equal to The Bank of New York's prime rate (as in effect
from time to time) plus 1% per annum, payable quarterly. A commitment fee equal
to 3/8% per annum of the average unborrowed availability under the Ventures
Intergroup Credit Facility is payable by the TCI Ventures Group to the TCI Group
on a quarterly basis. The maximum amount of borrowings permitted under the
Ventures Intergroup Credit Facility will be reduced on a dollar-for-dollar basis
by up to $300 million if and to the extent that the aggregate amount of any
additional capital that TCI Telephony is required to contribute to Sprint PCS
subsequent to the September 10, 1997 consummation of the Exchange Offers is less
than $300 million. No borrowings were outstanding pursuant to the Ventures
Intergroup Credit Facility at June 30, 1998. Additionally, in March 1998, TCI
Ventures Group entered into the Ventures Group Bank Facility with a term of one
year which provides for aggregate borrowings of up to $400 million. At June 30,
1998, borrowings of $204 million were outstanding under the Ventures Group Bank
Facility. If the available borrowings under the Ventures Group Bank Facility and
the Ventures Intergroup Credit Facility are not sufficient to fund the TCI
Ventures Group's capital requirements, no assurance can be given that the TCI
Ventures Group will be able to obtain any required additional financing on terms
acceptable to it, or at all. Additional capital could be raised for the TCI
Ventures Group by, among other things, engaging in public offerings or private
placements of TCI Ventures Group common stock or through issuance of debt
securities or preferred equity securities attributed to the TCI Ventures Group.
If TCI Ventures Group is unable to obtain sufficient financing from outside
sources, the TCI Ventures Group may continue to be dependent upon funding from
the TCI Group. The TCI Ventures Group's failure to meet its contractual and
other capital requirements could have significant adverse consequences to a
particular operating company or affiliate and to the TCI Ventures Group.
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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 June 30, 1998,
(i) $5.4 million due from TCI Ventures Group pursuant to an unsecured promissory
note, (ii) a $200 million credit facility with the TCI Ventures Group and (iii)
the ability to access any excess cash and borrowing availability from the Puerto
Rico Subsidiary, TINTA's ability to otherwise obtain debt financing to assist
its operating companies and to meet its capital obligations at other than the
subsidiary level will be limited because TINTA does not conduct any operations
directly. Furthermore, because TINTA's assets consist primarily of ownership
interests in foreign subsidiaries and affiliates, the repatriation of any cash
provided by such subsidiaries' and affiliates' operating activities in the form
of dividends, loans or other payments is subject to, among other things,
exchange rate fluctuations, tax laws and other economic considerations, as well
as applicable statutory and contractual restrictions. Moreover, the liquidity
sources of TINTA's foreign subsidiaries and affiliates are generally intended to
be applied towards the respective liquidity requirements of such foreign
subsidiaries and affiliates, and accordingly, do not represent a direct source
of liquidity to TINTA. Accordingly, with the exception of any liquidity that may
be provided to TINTA by the Puerto Rico Subsidiary, no assurance can be given
that TINTA will have access to any cash generated by its foreign operating
subsidiaries and affiliates.
On April 15, 1998, it was announced that Telewest and General Cable had
agreed to the terms of a proposed merger in which holders of General Cable will
be offered 1.243 new Telewest shares and (pound)0.65 ($1.08) in cash for each
share of General Cable. In addition, holders of General Cable ADSs (each
representing five General Cable shares) will be offered 6.215 new Telewest
shares and (pound)3.25 ($5.42) in cash for each share of General Cable ADSs.
Based upon Telewest's closing share price of (pound)0.89 ($1.48) on April 14,
1998, the Merger Offer is valued at approximately (pound)649 million ($1.1
billion).
The cash portion of the Merger Offer will be financed through an offer
to qualifying Telewest shareholders for the purchase of 261 million new Telewest
shares at a price of (pound)0.925 ($1.54) per share. Mediaone, TINTA and Cox
have agreed to subscribe for their full allocation of new Telewest shares
(approximately 69 million shares in the case of TINTA) and to subscribe on a pro
rata basis for any new Telewest shares not subscribed for by other Telewest
shareholders. Together, Mediaone, TINTA and Cox held 67.9% of the issued and
outstanding Telewest ordinary shares at June 30, 1998. In addition, it is
anticipated that Mediaone, TINTA, Cox and SBC will convert their entire
respective holdings of Telewest convertible preference shares into new Telewest
shares. Following the issuance of new Telewest shares with respect to the above
transactions, and assuming the exercise of all options under General Cable's
share option schemes, it is anticipated that existing Telewest shareholders
would hold 79% and existing General Cable shareholders would hold 21% of the
then issued ordinary share capital of the combined group.
Consummation of the merger is subject to regulatory approval and other
conditions. There can be no assurance that such merger will be consummated or
consummated on the terms contemplated by the parties.
On July 23, 1998, TINTA agreed to purchase 100% of the issued and
outstanding common stock of Pramer S.A., an Argentine programming company, for
$80 million in cash and the assumption of certain liabilities. Consummation of
such transaction is expected to occur in the third quarter of 1998. No assurance
can be given that such transaction will be consummated or consummated on the
terms contemplated by the parties.
I-180
<PAGE> 183
TINTA has signed a memorandum of understanding with UIH for the sale of
TINTA's ownership interests in Tevel and Melita to UIH. Concurrently, TINTA will
purchase an additional 25% interest in PHL from UIH. The parties have agreed
that, net of its purchase of UIH's 25% interest in PHL, TINTA will receive $71
million for its interests in Tevel and Melita. Such proceeds are subject to
adjustment. Consummation of such transactions is contingent on the consent of
certain third parties and regulatory bodies, as well as on the completion of
financing by UIH. There can be no assurance that such transactions will be
consummated or consummated on the terms contemplated by the parties.
@Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is in a very early state of development. As of
June 30, 1998 there were minimal subscribers to its @Home services. @Home
believes that the net cash proceeds from a proposed 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.
@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 June 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-181
<PAGE> 184
During the period in which each of TCI, Cox, Comcast Corporation
("Comcast") and Cablevision Systems Corporation ("CSC") have agreed (subject to
certain exceptions and limitations) to use @Home as its exclusive provider of
high speed residential consumer Internet access services, a stockholders
agreement among such parties and @Home provides that in the event the number of
exclusive homes passed attributable to TCI decreases below 80% of the number of
homes passed of TCI and its controlled affiliates as of June 1996, then TCI will
be required to offer to sell a proportionate amount of its equity in @Home to
certain other stockholders of @Home at fair market value. Since June 1996, TCI
has sold or transferred certain cable systems that reduce TCI's number of base
homes passed. In addition, TCI has announced the proposed sale or transfer of
additional cable systems that would further reduce TCI's number of base homes
passed. In the event that such cable systems continue to be exclusive to @Home,
such cable systems and their homes passed would continue to be included in TCI's
homes passed for purposes of determining whether or not TCI is obligated to
offer a portion of its equity interest in @Home to Cox, Comcast and CSC, even
though such cable systems are no longer owned or controlled by TCI. If TCI does
not require that such cable systems remain exclusive to @Home, the TCI Ventures
Group could be required to sell shares to Cox, Comcast, CSC and certain other
stockholders of @Home, at fair market value. There can be no assurance that, if
the TCI Ventures Group is required to sell shares of @Home, the price paid to
the TCI Ventures Group would represent adequate consideration to the TCI
Ventures Group because such fair market value may not adequately reflect the TCI
Ventures Group's expectation of the long term value of such investments in
@Home. In addition to the exceptions to the general exclusivity obligations, Cox
and Comcast have the right to terminate the exclusivity provisions with respect
to TCI, Cox, Comcast and CSC in the event TCI does not attain certain customer
penetration levels for the @Home service relative to the customer penetration
levels of Cox and Comcast, as of June 4, 1999, and each anniversary thereafter
until 2002. Such termination could have a material adverse effect on @Home and
the value of the TCI Ventures Group's interest in @Home.
In addition, although TCI, Cox, Comcast and CSC are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.
Because TINTA generally views its foreign operating subsidiaries and
affiliates as long-term investments, TINTA generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries. Although TINTA
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, TINTA believes that, given
the nature of its business, it is not possible or practical to eliminate TINTA's
exposure to unfavorable fluctuations in foreign currency exchange rates. As of
June 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 12 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-182
<PAGE> 185
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 June 30, 1998, the Equity Swap Facility has acquired 4,935,780
shares of TCI Group Series A Stock and 1,150,800 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $48 million less than
the fair value of such Equity Swap Shares at June 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.
A TCI subsidiary attributed to TCI Ventures Group issued preferred
stock in connection with a previous acquisition. Such preferred stock is
exchangeable at the option of the holders into 1,084,056 shares of TCI Group
Series A Stock beginning in April 1999. TCI Ventures Group entered into a
forward purchase contract in July 1998 with a commercial bank to acquire
1,084,056 shares of TCI Group Series A Stock for approximately $45 million on or
before April 19, 1999. Such shares will be used to satisfy the exchange
requirements of the aforementioned preferred stock.
During the six months ended June 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 1,000,000 shares of UVSG's Class A common
stock. During the six months ended June 30, 1998, UVSG repurchased 188,000
shares of stock for a total of $6.7 million.
Effective February 1, 1998, Turner-Vision contributed the assets,
obligations and operations of its retail C-band satellite business to
Superstar/Netlink in exchange for an approximate 20% interest in
Superstar/Netlink. As a result of this transaction, both UVSG's and Liberty
Media Group's ownership interest in Superstar/Netlink decreased from 50% to
approximately 40%. UVSG recognized a gain of $14.7 million (before deducting
deferred income tax expense of $5.9 million) in connection with such dilution.
See note 7 to the accompanying combined financial statements of TCI Ventures
Group.
I-183
<PAGE> 186
In February 1998, TCI, Liberty Media Group and UVSG announced an
agreement in principal for UVSG to acquire Liberty Media Group's 40% interest in
Superstar/Netlink and its 100% interest in certain businesses conducted by
Netlink in exchange for 6.4 million shares of UVSG's common stock. In April
1998, UVSG, Liberty Media Group and Turner Vision entered into a memorandum of
understanding with PRIMESTAR for the sale of Superstar/Netlink to PRIMESTAR for
shares of a new series of convertible preferred stock of PRIMESTAR and the
assumption of liabilities. Liberty Media Group and UVSG have agreed in principal
to restructure their transaction to provide for UVSG to acquire any shares of
PRIMESTAR preferred stock received by Liberty Media Group in the PRIMESTAR
Transaction and Liberty Media Group's Netlink Business for 6.4 million shares of
UVSG Class B common stock. Consummation of the transaction between Liberty Media
Group and UVSG is subject to UVSG stockholder approval and certain regulatory
approvals. Consummation of the PRIMESTAR Transaction is subject to a number of
conditions including negotiation of a definitive agreement and receipt of
applicable regulatory approvals. No definitive agreement with respect to the
PRIMESTAR Transactions has been reached, however, and there can be no assurance
that any such agreement will be entered into or that the terms of any such
agreement would be the same as the terms previously disclosed.
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 30 million
shares of UVSG's stock, including 11,251,706 shares of its Class A common stock
and 18,748,294 shares of its Class B common stock. As a result of the
transaction, and certain other pending transactions, 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.
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 January 12, 1998, TCI acquired from a minority shareholder of UVSG
12.4 million shares of UVSG Class A common stock in exchange for 12.7 million
shares of TCI Ventures Group Series A Stock and 7.3 million shares of Liberty
Group Series A Stock. The aggregate value assigned to the shares issued by TCI
was based upon the market value of such shares at the time the transaction was
announced. As a result of such transaction TCI increased its ownership in the
equity of UVSG to approximately 73%, of which 56% is attributed to 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.
I-184
<PAGE> 187
On January 16, 1998, TINTA sold its interest in TeleCable Nacional, CXA
for cash proceeds of $10 million and TCI Ventures Group sold its interest in
Acclaim Entertainment, Inc. in February 1998 for cash proceeds of approximately
$17 million.
On February 12, 1998, 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 January 1998, TCG entered into certain agreements pursuant to which
it agreed to be acquired by AT&T. Such merger was consummated on July 23, 1998.
As a result of such merger, TCI Ventures Group received in exchange for all of
its interest in TCG, approximately 46.95 million shares of AT&T Common Stock.
TCI Ventures Group will account for its ownership interest in AT&T Common Stock
using the cost method. As of June 30, 1998, the current annual dividend per
share for AT&T Common Stock was $1.32. No assurance can be given that future
dividends will be paid at such rate or at all. See note 2 to the accompanying
combined financial statements of TCI Ventures Group.
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 and the remaining 50% is held by Kansas City Cable
Partners, a partnership in which the TCI Group holds a 50% interest. TCI
Ventures Group received proceeds of approximately $20 million in connection with
such sale.
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 June 30, 1998, 525,000 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. It is anticipated
that the value associated with such equity interest would be attributed to TCI
Group upon purchase and deployment of the digital set-top devices. 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, 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 technology 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
services to GI's set-top authorization business.
I-185
<PAGE> 188
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/A (AMENDMENT #1) FOR THE SIX MONTHS ENDED JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 295
<SECURITIES> 0
<RECEIVABLES> 578
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,665
<DEPRECIATION> 4,789
<TOTAL-ASSETS> 33,499
<CURRENT-LIABILITIES> 0
<BONDS> 14,422
299
0
<COMMON> 1,500
<OTHER-SE> 4,405
<TOTAL-LIABILITY-AND-EQUITY> 33,499
<SALES> 0
<TOTAL-REVENUES> 3,685
<CGS> 0
<TOTAL-COSTS> 1,423
<OTHER-EXPENSES> 868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 536
<INCOME-PRETAX> 212
<INCOME-TAX> 165
<INCOME-CONTINUING> 47
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