<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 0-26264
TELE-COMMUNICATIONS INTERNATIONAL, INC.
---------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1289408
- ------------------------------- ------------------------------------
(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) 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 (or for such shorter period that the
Registrant was required to file such reports) 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 International,
Inc.'s common stock (net of shares held in treasury) as of July 31, 1997, was:
Series A common stock - 103,597,805 shares; and
Series B common stock - 11,700,000 shares.
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
Assets amounts in thousands
- ------
<S> <C> <C>
Cash and cash equivalents (note 2) $ 4,975 44,192
Trade and other receivables, net 10,894 38,185
Film inventory and other prepaid 6,073 65,749
expenses
Investment in Telewest Communications
plc ("Telewest") (note 5) 400,777 488,495
Investment in other affiliates,
accounted for under the equity method,
and related receivables (note 6) 559,667 421,853
Other investments (note 7) 21,987 20,873
Property and equipment, at cost:
Land 415 277
Distribution systems 251,043 216,172
Support equipment and buildings 27,074 51,111
---------- ---------
278,532 267,560
Less accumulated depreciation 72,427 65,033
---------- ---------
206,105 202,527
---------- ---------
Franchise costs and other intangible assets 714,545 755,914
Less accumulated amortization 70,098 61,576
---------- ---------
644,447 694,338
---------- ---------
Deferred financing costs and other assets,
net of amortization 12,308 13,089
---------- ---------
$1,867,233 1,989,301
========== =========
</TABLE>
(continued)
I-1
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ -------------
Liabilities and Stockholders' Equity amounts in thousands,
- ------------------------------------ except share amounts
<S> <C> <C>
Accounts payable $ 21,334 35,467
Accrued liabilities 47,480 75,173
MultiThematiques Obligation (note 6) 26,567 47,902
Debt (note 8) 532,330 511,128
Deferred income tax liability 170,334 193,748
Other liabilities 5,945 17,698
---------- ---------
Total liabilities 803,990 881,116
---------- ---------
Minority interests in equity of subsidiaries 4,333 142,187
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized 10,000,000 shares; none issued -- --
Series A Common Stock, $1 par value
Authorized 300,000,000 shares, issued
106,967,805 shares in 1997 and
106,960,873 shares in 1996 106,968 106,961
Series B Common Stock, $1 par value Authorized
12,000,000 shares, issued 11,700,000 shares
in 1997 and 1996 11,700 11,700
Additional paid-in capital 1,285,434 1,186,788
Accumulated deficit (270,953) (205,456)
Cumulative foreign currency translation
adjustments 14,948 26,146
Unrealized holding gains for available-
for-sale securities 577 --
---------- ---------
1,148,674 1,126,139
Treasury stock, at cost, 3,370,000 shares of
Series A Common Stock in 1997 (42,014) --
Due from Tele-Communications, Inc.
("TCI") (note 9) (47,750) (160,141)
---------- ---------
Total stockholders' equity 1,058,910 965,998
---------- ---------
Commitments and contingencies
(notes 5, 6, 7, 9 and 10)
$1,867,233 1,989,301
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
---------- -------- --------- ---------
amounts in thousands,
except per share amounts
<S> <C> <C> <C> <C>
Revenue:
Cable $ 68,545 51,210 134,156 100,741
Programming -- 22,800 -- 35,893
-------- ------- -------- --------
68,545 74,010 134,156 136,634
-------- ------- -------- --------
Operating costs and expenses:
Cable (note 9) 40,734 31,043 78,419 59,390
Programming -- 29,099 -- 44,534
Programming rights provision -- 8,706 -- 8,706
General and administrative:
Allocated from TCI (note 9) 2,257 725 2,613 535
Other 2,729 2,086 5,167 4,296
Depreciation and amortization 17,140 12,759 32,853 24,885
-------- ------- -------- --------
62,860 84,418 119,052 142,346
-------- ------- -------- --------
Operating income (loss) 5,685 (10,408) 15,104 (5,712)
Other income (expense):
Share of losses of Telewest (note 5) (31,750) (39,606) (73,458) (70,203)
Share of losses of other affiliates (26,342) (18,871) (48,788) (36,836)
(note 6)
Interest expense:
TCI (note 9) (584) (187) (1,164) (375)
Other (8,335) (8,912) (17,193) (17,127)
Interest income:
TCI (note 9) 1,306 4,723 3,752 6,937
Other 691 1,307 1,407 4,260
Minority interests' share of
(earnings) losses (4,333) 6,261 (4,333) 10,469
Foreign currency transaction gains
(losses) (796) 2,145 599 3,449
Other, net 3,943 (103) 3,799 4,337
-------- ------- -------- --------
(66,200) (53,243) (135,379) (95,089)
-------- ------- -------- --------
Loss before income taxes (60,515) (63,651) (120,275) (100,801)
Income tax benefit 28,473 19,474 54,778 30,213
-------- ------- -------- --------
Net loss $(32,042) (44,177) (65,497) (70,588)
======== ======= ======== ========
Net loss per common share (note 1) $ (.28) (.37) (.56) (.60)
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Statement of Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
Cumulative Unrealized
foreign holding
currency gains for
Additional translation available-
Preferred Common Stock paid-in Accumulated adjustment, For-sale securities,
---------------
stock Series A Series B capital deficit net of taxes net of taxes
--------- -------- ------ ---------- ------------ ------------ ----------------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997 $ -- 106,961 11,700 1,186,788 (205,456) 26,146 --
Net loss -- -- -- -- (65,497) -- --
Open market
repurchases of common
stock -- -- -- -- -- -- --
Issuance of common
stock -- 7 -- 91 -- -- --
Adjustment in
connection with the
issuance of ordinary
shares by Flextech
p.l.c. (note 4) -- -- -- 98,555 -- -- --
Foreign currency
translation adjustment -- -- -- -- -- (11,198) --
Unrealized holding
gains for
available-for-sale
securities -- -- -- -- -- -- 577
Change in due from TCI
(note10) -- -- -- -- -- -- --
-------- ------- ------ --------- --------- ------ ------------
Balance at June 30, 1997
$ -- 106,968 11,700 1,285,434 (270,953) 14,948 577
======== ======= ====== ========= ========= ====== ============
<CAPTION>
Total
Treasury Stock Due from stockholders'
at cost TCI equity
-------------- --------- -------------
<S> <C> <C> <C>
Balance at January 1,
1997 -- (160,141) 965,998
Net loss -- -- (65,497)
Open market
repurchases of common
stock (42,014) -- (42,014)
Issuance of common
stock -- -- 98
Adjustment in
connection with the
issuance of ordinary
shares by Flextech
p.l.c. (note 6) -- -- - 98,555
Foreign currency
translation adjustment -- -- (11,198)
Unrealized holding
gains for
available-for-sale
securities -- -- 577
Change in due from TCI
(note 9) -- 112,391 112,391
------------ ------- ---------
Balance at June 30, 1997
(42,014) (47,750) 1,058,910
============ ======= =========
</TABLE>
I-4
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1997 1996
----------- ---------
amounts in thousands
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (65,497) (70,588)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 32,853 24,885
Programming rights provision -- 8,706
Stock compensation 1,831 (1,606)
Share of losses of Telewest 73,458 70,203
Share of losses of other affiliates 48,788 36,836
Minority interests' share of earnings (losses) 4,333 (10,469)
Unrealized foreign currency transaction gains (811) (3,449)
Accretion of discount on MultiThematiques obligation 1,675 3,163
Deferred income tax benefit (55,221) (36,048)
Intercompany current federal income tax benefit (7,465) --
Changes in operating assets and liabilities, net of the effect
of the deconsolidation of Flextech p.l.c.:
Change in receivables 577 (3,913)
Change in film inventory and other prepaid
expenses (2,389) (6,324)
Change in payables, accruals, other liabilities and
the cash intercompany account included
in due from TCI (8,927) (5,977)
----------- ---------
Net cash provided by operating activities $ 23,205 5,419
----------- ---------
</TABLE>
(continued)
I-5
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1997 1996
----------- ---------
amounts in thousands
(see note 2)
<S> <C> <C>
Cash flows from investing activities:
Effect of the deconsolidation of Flextech p.l.c. on
cash and cash equivalents $ (38,142) --
Investments in and loans to affiliates and others (58,666) (102,204)
Cash invested in certificate of deposits -- (23,604)
Cash received (paid) in connection with acquisitions, net (11,993) 5,205
Capital expended for property and equipment (26,080) (23,569)
Repayments received on loans to affiliates 19,598 --
Cash paid to purchase minority interests -- (4,636)
Other, net 2,729 4,944
--------- -------
Net cash used in investing activities (112,554) (143,864)
--------- --------
Cash flows from financing activities:
Borrowings of debt 175,869 36,549
Repayments of debt (205,555) (73,261)
Open market repurchases of common stock (42,014) --
Issuance of debentures -- 345,000
Loan to TCI -- (336,375)
Repayments received on loan to TCI 122,782 66,745
Payment of deferred financing costs (950) (9,524)
Issuance of common stock -- 9,990
Contributions from minority interest owners -- 3,288
--------- --------
Net cash provided by financing activities 50,132 42,412
--------- --------
Effect of exchange rate changes on cash and cash equivalents
-- (320)
---------- --------
Net decrease in cash and cash equivalents (39,217) (96,353)
Cash and cash equivalents:
Beginning of period 44,192 133,109
---------- --------
End of period $ 4,975 36,756
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-6
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
June 30, 1997
(unaudited)
(1) Basis of Presentation
---------------------
Tele-Communications International, Inc. ("TINTA" or the "Company"), a
majority-owned subsidiary of TCI, operates multi-channel video and
telecommunications distribution networks in, and provides diversified
programming services to, selected markets outside the United States. Unless
the context indicates otherwise, references to "TCI" herein are to TCI and
its consolidated subsidiaries (other than the Company).
On July 18, 1995, TINTA completed its initial public offering (the "IPO"),
in which 20,000,000 shares of Series A Common Stock, $1 par value per share
("Series A Common Stock") were sold to the public. At June 30, 1997, TCI
owned approximately 85% of the aggregate issued and outstanding common
stock of TINTA and 92% of the aggregate voting interest represented by such
issued and outstanding stock.
The net loss per share set forth in the accompanying consolidated
statements of operations was computed using historical losses and a
weighted average number of common shares of (i) 115.8 million and 118.5
million for the three months ended June 30, 1997 and 1996, respectively,
and (ii) 117.2 million and 118.3 million for the six months ended June 30,
1997 and 1996, respectively. Common stock equivalents were not included in
the weighted average common shares outstanding because their inclusion
would be anti-dilutive.
During the six months ended June 30, 1997 and 1996, the most significant
entities that were reflected in the Company's consolidated financial
statements on a consolidated basis were engaged in the multi-channel video
distribution business (the "cable" business) in Puerto Rico (the
"Consolidated Puerto Rico Entities"), and in Buenos Aires, Argentina
through Cablevision S.A. and certain affiliated companies ("Cablevision").
Additionally, Flextech p.l.c., a company engaged in the distribution and
production of programming for multi-channel video distribution systems (the
"programming business") in the UK and other parts of Europe, was included
in the Company's consolidated financial statements on a consolidated basis
through December 31, 1996. As described below, the Company, effective
January 1, 1997, discontinued using the consolidation method to account for
the Company's ownership interest in Flextech p.l.c.
Effective January 1, 1997, the Company's three Consolidated Puerto Rico
Entities were merged together into one surviving entity (the "Puerto Rico
Subsidiary"). For purposes of this discussion, except to the extent the
context otherwise requires, the term the "Puerto Rico Subsidiary" refers to
the Consolidated Puerto Rico Entities prior to such merger and the Puerto
Rico Subsidiary following such merger.
(continued)
I-7
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
The Company's ownership interest in the issued and outstanding share
capital of Flextech p.l.c. (together with its consolidated subsidiaries,
"Flextech") was 48.8% during the three months ended March 31, 1996, 46.2%
from April 1996 through April 1997, 35.9% from April 1997 to July 1997 and
36.3% from July 1997 to the present. The Company's voting interest in
Flextech was 50.6% during 1996 and approximately 50% from January 1997 to
the present. In light of the Company's decreased voting interest in
Flextech, the Company, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting. For additional information see note 6.
As further described in note 9, the accompanying consolidated statements of
operations separately present certain allocated corporate expenses of TCI.
Although such allocated corporate expenses are not necessarily indicative
of the costs that would have been incurred by the Company on a stand-alone
basis, management believes the allocated amounts are reasonable.
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
of such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These unaudited
interim consolidated financial statements should be read in conjunction
with the Company's December 31, 1996 audited financial statements and notes
thereto.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
No. 128"). Statement No. 128 requires the presentation of basic earnings
per share ("EPS") and, for companies with potentially dilutive securities,
such as convertible debt, options and warrants, diluted EPS. Statement No.
128 is effective for annual and interim periods ending after December 31,
1997. The Company does not expect that Statement No. 128 will have a
material impact on the calculation of the Company's loss per share.
(continued)
I-8
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
From time to time, the Company uses certain derivative financial
instruments to manage its foreign currency risks. Because the Company
generally views its foreign operating subsidiaries and affiliates as long-
term investments, the Company generally does not attempt to hedge existing
investments in its foreign affiliates and subsidiaries. However, the
Company may enter into forward contracts to reduce its exposure to short-
term (generally no more than one year) movements in the exchange rates
applicable to firm funding commitments that are denominated in currencies
other than the U.S. dollar. When high correlation of changes in the market
value of the forward contract and the fair value of the firm commitment is
probable, the forward contract is accounted for as a hedge. Changes in the
market value of a forward contract that qualifies as a hedge and any gains
or losses on early termination of such a forward contract are deferred and
included in the measurement of the item (generally an investment in, or an
advance to, a foreign affiliate) that results from the funding of such
commitment. Market value changes in derivative financial instruments that
do not qualify as hedges are recognized currently in the consolidated
statements of operations. To date, the Company's use of forward contracts,
as described above, has not had a material impact on the Company's
financial position or results of operations.
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.
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
Unless otherwise indicated, convenience translations of foreign currencies
into U.S. dollars are calculated using the applicable spot rate at June 30,
1997.
(continued)
I-9
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
At June 30, 1997, the Company's cash and cash equivalents included $1.9
million of cash and cash equivalents held by Cablevision. The cash and
cash equivalent balances of Cablevision are available to be applied toward
the liquidity requirements of Cablevision, and it is not anticipated that
any significant portion of such cash balances will be distributed or
otherwise made available to TINTA.
Cash paid for interest was $15.0 million and $8.2 million during the six
months ended June 30, 1997 and 1996, respectively. Cash paid for income
taxes was $7.6 million and $7.2 million during the six months ended June
30, 1997 and 1996, respectively.
Cash paid (received) for acquisitions is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Recorded value of assets acquired $ 49,926 65,182
Issuance of notes payable -- (1,000)
Liabilities assumed (including debt of
$32.3 million in 1997) (37,933) (26,164)
Increase in minority interests in equity of
subsidiaries due to issuance of shares by
Flextech -- (43,223)
------------ -----------
Cash paid (received) for acquisitions $ 11,993 (5,205)
============ ===========
</TABLE>
The effects of changing the method of accounting for the Company's
ownership interest in Flextech from the consolidation method to the equity
method 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>
(continued)
I-10
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(3) Acquisitions
------------
On October 1, 1996, Cablevision acquired 99.99% of the issued and
outstanding capital stock of Oeste Cable Color S.A. ("OCC"), a cable
television operation in the west of the greater Buenos Aires metropolitan
area, for a purchase price of $112.2 million (the "OCC Acquisition"). Cash
consideration of $43.7 million was paid at closing and an additional cash
payment of $22.1 million was paid on December 1, 1996. Cablevision incurred
additional bank debt of approximately $45 million in order to fund such
cash payments. The remaining purchase price was satisfied by Cablevision's
issuance of $46.4 million principal amount of secured negotiable promissory
notes (the "OCC Notes"). See note 8.
On May 1, 1997, the Puerto Rico Subsidiary paid cash consideration of $12.0
million, and assumed aggregate indebtedness of $32.3 million, to acquire
the 50% ownership interest in Caguas/Humacao Cable Systems ("Caguas") which
the Company did not already own (the "Caguas Acquisition"). In connection
with the Caguas Acquisition, the Puerto Rico Subsidiary entered into a new
reducing revolving bank credit facility (the "Puerto Rico Bank Facility")
and used borrowings of approximately $45 million thereunder to fund the
cash portion of the purchase price and to repay the assumed indebtedness.
See note 8.
(4) Cablevision
-----------
The Company has a 51% ownership interest in Cablevision. The Company also
has an option to acquire an additional 29%-39% interest, exercisable at any
time on or before October 31, 1997.
Subsequent to June 30, 1997, the Company entered into a non-binding letter
of intent (the "Term Sheet") with CEI Citicorp Holdings SA ("CEI"), an
Argentine media and telecommunications group that is 40% owned by
Citicorp's Citibank unit. The Term Sheet contemplates the sale by the
Company of one-half of its current 51% interest in Cablevision to CEI for
cash (the "Cablevision Sale"). The Term Sheet contemplates that the Company
would continue to have the right to manage Cablevision (pursuant to a five-
year management contract that would be entered into in connection with such
sale), and all material corporate transactions would require the Company's
approval, so long as the Company maintained its percentage interest in
Cablevision at a certain level yet to be agreed. In addition, the Company
and its affiliates would be assured carriage for any programming channels
that they might create, represent or otherwise distribute. CEI would also
purchase the additional 39% interest in Cablevision that the Company
currently has the right to acquire, thereby obtaining a substantial
majority interest in Cablevision. Upon any consummation of the Cablevision
Sale, the Company would cease to consolidate Cablevision and would begin to
account for Cablevision using the equity method of accounting. There can be
no assurance that the transactions contemplated by the Term Sheet will be
consummated.
(continued)
I-11
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Prior to 1997 none of Cablevision's post-acquisition 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 post-acquisition net earnings (exclusive of the
effects of purchase accounting) caused the minority interest's historical
cost basis in Cablevision's net assets to become positive. Accordingly,
the Company 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, 1996, the Company
would have allocated an additional $4.3 million in 1997 and $9.9 million in
1996 of Cablevision's net earnings (exclusive of the effect of purchase
accounting) to the minority interest.
(5) Investment in Telewest
----------------------
At June 30, 1997, the Company indirectly owned, through its 50% ownership
interest in TW Holdings, Inc., 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.
On June 30, 1997, the reported closing price on the London Stock Exchange
of Telewest's ordinary shares was (Pounds).90 ($1.50).
As a result of Telewest's 1995 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, 1997 and 1996, Telewest experienced foreign currency transaction losses
of (Pounds)24.3 million ($40.0 million using the applicable exchange rate)
and (Pounds)47.7 million ($72.8 million using the applicable exchange
rate), respectively, resulting from the translation of the Telewest
Debentures into UK pounds sterling and the adjustment of a related foreign
currency option contract to market value.
(continued)
I-12
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
The functional currency of Telewest is the UK pound sterling. The average
exchange rate used to translate the Company's share of Telewest's operating
results from UK pounds to U.S. dollars was 1.6447 to 1 and 1.5327 to 1
during the six months ended June 30, 1997 and 1996, respectively. The spot
rate used to translate the Company's share of Telewest's net assets from UK
pounds to U.S. dollars was 1.6645 to 1 and 1.7125 to 1 at June 30, 1997 and
December 31, 1996, respectively.
Summarized unaudited results of operations of Telewest are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1997 1996
----------- ---------
<S> <C> <C>
Revenue $ 298,357 204,164
Operating, selling, general and
administrative expenses (271,437) (215,036)
Depreciation and amortization (147,267) (103,524)
--------- --------
Operating loss (120,347) (114,396)
Share of losses of affiliates (16,974) (11,457)
Interest expense (103,975) (79,933)
Interest income 6,760 17,578
Foreign currency transaction loss (40,006) (72,825)
Other, net 242 23
--------- --------
Net loss $(274,300) (261,010)
========= ========
</TABLE>
(6) Investments in Other Affiliates
-------------------------------
The Company's affiliates other than Telewest that are accounted for using
the equity method (the "Other Affiliates") generally are engaged in the
cable and/or programming businesses in various foreign countries. Most of
the Other Affiliates have incurred net losses since their respective
inception dates. As such, substantially all of the Other Affiliates are
dependent upon external sources of financing and capital contributions in
order to meet their respective liquidity requirements.
The Company and/or other subsidiaries of TCI have guaranteed notes payable
and other obligations of certain of the Other Affiliates (the "Guaranteed
Obligations"). At June 30, 1997, the U.S. dollar equivalent of the amounts
borrowed pursuant to the Guaranteed Obligations aggregated $16.0 million.
See note 9.
(continued)
I-13
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Certain of the Other Affiliates are general partnerships and any subsidiary of
the Company that is a general partner in a general partnership could be liable,
depending upon the applicable partnership law, for all debts of that partnership
to the extent liabilities of that partnership were to exceed its assets.
Agreements governing the Company's investment in certain of the Other Affiliates
contain (i) buy-sell and other exit arrangements whereby the Company could be
required to purchase another investor's ownership interest and (ii) performance
guarantees whereby the Company and/or other subsidiaries of TCI have guaranteed
the performance of the Company's subsidiary that directly holds the related
investment. See note 9.
The following table reflects the Company's carrying value (including
receivables) and share of earnings (losses) of the Other Affiliates (amounts in
thousands):
<TABLE>
<CAPTION>
Carrying value Share of earnings (losses)
------------------------- ----------------------------
June 30, December 31, Six months ended June 30,
----------------------------
1997 1996 1997 1996
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Flextech (a) $266,677 -- (10,615) --
Flextech Affiliates (b) -- 129,563 -- (7,307)
MultiThematiques S.A.
("MultiThematiques") (c) 76,511 84,007 (4,134) (3,015)
Liberty/TINTA LLC (d) 63,069 63,227 (7,432) (2,783)
Jupiter Telecommunications Co., Ltd.
("Jupiter") (e) 57,130 47,251 (10,638) (4,737)
Bresnan International Partners
(Poland), L.P. 24,539 27,951 (750) (1,527)
Bresnan International Partners (Chile),
L.P. 25,407 34,408 (1,899) (4,124)
United International Investments 25,982 25,598 1,259 (169)
Jupiter Programming Co., Ltd. ("JPC") 13,115 2,830 (7,513) (998)
Asia Business News (Singapore) PTE Ltd.
("ABN") 7,791 9,556 (6,230) (4,698)
Other (554) (2,538) (836) (7,478)
-------- ------- ------- -------
$559,667 421,853 (48,788) (36,836)
======== ======= ======= =======
</TABLE>
(a) Flextech
At June 30, 1997, the Company owned 56,340,598 Flextech ordinary shares
("Flextech Ordinary Shares") representing 35.9% of the issued and
outstanding Flextech share capital and, when combined with a special voting
share owned by TINTA, approximately 50% of the aggregate voting interests
attributable to such Flextech share capital. Based upon the (Pounds)6.695
($11.15) per share closing price at June 30,1997 of the Flextech Ordinary
Shares on the London Stock Exchange, the Flextech Ordinary Shares owned by
the Company had an aggregate market value of (Pounds)377.2 million ($627.9
million) at June 30, 1997.
(continued)
I-14
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Flextech accounts for its operations under UK generally accepted
accounting principles. The Company's share of Flextech's losses
includes certain adjustments made by the Company to account for
Flextech's operations under U.S. generally accepted accounting
principles. Accordingly, the Company's share of Flextech's losses
reflected in the above table will not correspond to the Company's
share of Flextech's losses as reported by Flextech.
In January 1997, the Company 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 "BBC Joint Ventures") and entered into certain related
transactions, as described below. 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. So
long as the Proxy remains outstanding, TINTA's 50% voting interest
will be reduced by the 960,850 votes represented by the Proxy. 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 the Company outside a specified affiliated group.
In light of the Company's decreased voting interest in Flextech, the
Company, effective January 1, 1997, ceased to consolidate Flextech and
began to account for Flextech using the equity method of accounting.
In connection with the April 1997 formation of the two BBC Joint
Ventures, Flextech acquired from the other shareholders of UK Living
Limited ("UKLL") and UK Gold Television Limited ("UKGL") all of the
share capital in those two companies not already owned by Flextech and
the Company through the issuance of 34,954,713 new Flextech Ordinary
Shares, valued at (Pounds)7.20 ($11.98) per share for U.S. financial
reporting purposes. One joint venture with BBC Worldwide (the
"Principal Joint Venture") will operate and launch a number of new
subscription television channels for distribution in the UK and
Ireland. Flextech and BBC Worldwide each have a 50% interest in this
venture. The other joint venture (the "Second Joint Venture") acquired
65% of the share capital of UKGL from Flextech, with put and call
arrangements over the remaining 35% of such share capital. The Second
Joint Venture will operate and develop UKGL, and both Flextech and BBC
Worldwide have a 50% interest in that venture.
(continued)
I-15
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Flextech had issued convertible non-preference shares ("Flextech Non-
Preference Shares") in connection with previous transactions due to the
Company's requirement that it maintain specified voting interests in
Flextech. With the issuance of the Special Voting Share, the purpose for
the Flextech Non-Preference Shares was eliminated. Accordingly, and in
order to simplify the capital structure of Flextech, upon the issuance of
the Special Voting Share the Flextech Non-Preference Shares were converted
into Flextech Ordinary Shares.
Each of the Principal Joint Venture and the Second Joint Venture have
entered into programming license agreements with the British Broadcasting
Corporation (the "BBC License Agreements"), under which such joint ventures
will have the right to acquire licenses to broadcast programming originated
by the British Broadcasting Corporation on the channels which the joint
ventures are to operate. The BBC License Agreements, which contain certain
exclusivity provisions, have initial terms of 15 years, which terms will
automatically be extended for an additional 15 years unless the relevant
joint venture elects to give notice to the contrary.
As described below, Flextech has undertaken to finance the working capital
requirements of the Principal Joint Venture. Flextech has also agreed to
make available to the Second Joint Venture, if required, funding of up to
(Pounds)10 million ($17 million).
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 the Company assume all of Flextech's funding obligations to
the Principal Joint Venture (the "Standby Commitment"). In addition to
Flextech's April 1997 purchase of (Pounds)22 million ($37 million) of
ordinary shares in the Principal Joint Venture, Flextech is obligated to
provide the Principal Joint Venture with a primary credit facility of
(Pounds)88 million ($146 million) and, subject to certain restrictions, a
standby credit facility of (Pounds)30 million ($50 million).
(continued)
I-16
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
If BBC Worldwide requires the Company to perform Flextech's funding
obligations pursuant to the Standby Commitment, then the Company will
acquire Flextech's entire equity interest in the Principal Joint Venture
for (Pounds)1.00, and will replace Flextech's directors on the board of the
Principal Joint Venture with representatives of the Company. Flextech will
pay commitment and standby fees to the Company for its undertaking under
the Standby Commitment. If Flextech repays to the Company 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 the Company first
becomes obligated to perform Flextech's financial obligations, it may
reacquire its interest in the Principal Joint Venture for (Pounds)1.00. The
Company 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.
So long as the Company 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.
As a result of the issuance of shares by Flextech in connection with
Flextech's acquisition of all of the share capital of UKLL and UKGL which
Flextech did not already own, and the associated dilution of the Company's
ownership interest in Flextech, the Company recorded a $151.6 million
increase to the carrying value of its investment in Flextech, a $98.5
million increase to "Additional paid-in capital" and a $53.1 million
increase to "Deferred income tax liability." No gain was recognized due
primarily to TINTA's contingent obligations under the Standby Commitment.
On July 1, 1997, TINTA purchased from certain officers of Flextech 748,435
Flextech Ordinary Shares for a per share price of (Pounds)6.225 ($10.29 at
the applicable exchange rate). As a result of such purchase, TINTA's
ownership interest in the issued an outstanding share capital of Flextech
increased from 35.9% to 36.3%.
(continued)
I-17
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(b) Flextech Affiliates
Due to the January 1, 1997 deconsolidation of Flextech described in
note 1, Flextech's equity method affiliates (the "Flextech
Affiliates") are no longer included with the Other Affiliates, but are
included with Flextech.
(c) MultiThematiques
On December 13, 1995, TINTA invested 123.1 million French francs
("FF") ($24.7 million at the applicable exchange rate) in
MultiThematiques, a newly formed European programming company that is
one-third owned by each of the Company and two French media companies
(the "MultiThematiques Transaction"). In addition, TINTA contributed
to MultiThematiques FF105.0 million ($20.4 million at the applicable
exchange rate) and FF100.0 million ($19.5 million at the applicable
exchange rate) on December 13, 1996 and February 13, 1997,
respectively. TINTA has agreed to contribute an additional FF164.0
million ($27.9 million) no later than December 13, 1997.
TINTA's obligation to make the above-described additional FF369.1
million in contributions was viewed as additional consideration to be
paid by TINTA to acquire its one-third interest in MultiThematiques.
Accordingly, the U.S. dollar equivalent of the estimated net present
value of such contributions (using a discount rate of 10%) prior to
their payment to MultiThematiques has been reflected as a liability
(the "MultiThematiques Obligation") in the accompanying consolidated
balance sheets. During the six months ended June 30, 1997 and 1996,
the Company experienced unrealized foreign currency transaction gains
of $1.7 million and $3.1 million, respectively, with respect to the
MultiThematiques Obligation.
The Company has entered into a forward contract that allows the
Company to purchase FF164.0 million at a price of FF5.5367 per U.S.
dollar ($29.6 million) on December 13, 1997. For accounting purposes,
the Company is treating this contract as a hedge of its December 13,
1997 contribution obligation.
(continued)
I-18
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(d) Liberty/TINTA LLC
TINTA may make additional cash contributions totaling approximately 22
million to the limited liability company (the "LLC") owned in equal
parts by subsidiaries of TINTA and Liberty Media Corporation
("Liberty") to fund the operations of the joint venture between TINTA,
News Corporation Limited ("News Corp.") and Liberty (the "Sports
Venture"). As part of the formation of the Sports Venture, the LLC is
entitled to receive from News Corp. 7.5% of the outstanding stock of
STAR Television Limited. Upon the delivery of such stock to the LLC,
News Corp. is entitled to receive from the LLC up to $20.0 million and
rights under various Asian sports programming agreements. STAR
Television Limited operates a satellite-delivered television platform
in Asia.
On April 19, 1996, TINTA, Torneos y Competencias S.A. ("Torneos"), an
entity that is 35%-owned by the Sports Venture, and certain
unaffiliated stockholders of Torneos entered into an agreement (the
"TINTA/Torneos Sports Agreement") whereby TINTA agreed to make minimum
periodic payments from 1996 through 2004 aggregating $235.2 million to
acquire certain rights and considerations, including the exploitation
rights to all sports rights owned by Torneos with the exception of any
rights which at that time had been contractually committed to any
third party.
Pending the assignment of the rights under the TINTA/Torneos Sports
Agreement which fit within the geographic area and business plan of
the Sports Venture (the "Sports Venture Rights") to the Sports
Venture, TINTA, News Corp. and Liberty have paid their respective
portion of any payments made with respect to the Sports Venture
Rights. Through June 30, 1997, payments made under the TINTA/Torneos
Sports Agreement totaled $26.5 million.
(continued)
I-19
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(e) Jupiter
Through June 30, 1997, the Company had made aggregate contributions to
Jupiter of (Yen)9.8 billion ($90.5 million at the applicable exchange
rates). In addition, on March 31, 1997 the Company paid (Yen)200
million ($1.6 million at the applicable exchange rate) to Sumitomo
Corporation ("Sumitomo"). The Company anticipates that Jupiter will
require additional funding, which could be significant, for the
acquisition of franchises and the development of its network. The
Company anticipates that such additional funding will be obtained
through a combination of capital contributions by TINTA and Sumitomo,
on a pro rata basis, and, to the extent available on acceptable terms,
debt financing by Jupiter or its operating affiliates.
The Company had entered into an option agreement whereby the Company
was entitled to sell (Yen)1.6 billion in exchange for $17.5 million on
April 4, 2002. The option was treated as a hedge of the Company's
foreign currency risk with respect to its existing investment in
Jupiter. On May 2, 1997, the Company sold such option for $1.8
million.
Other
DMX, Inc.
Prior to May 1996, the Company owned 49% of the outstanding stock of DMX
Europe N.V. ("DMX Europe"). DMX, Inc. ("DMX") owned the remaining 51%
interest in DMX Europe. TCI-Euromusic, Inc. ("TCI-E"), an indirect wholly-
owned subsidiary of TINTA, was formed to hold the Company's ownership
interest in DMX Europe. In May 1996, TCI-E merged with and into DMX, with
DMX as the surviving corporation ("the DMX Merger"). In effecting the DMX
Merger, the Company exchanged all of its shares of TCI-E common stock for
10,841,624 shares or 18% of the then issued and outstanding DMX common
stock. Including shares of DMX common stock owned by the Company, TCI owned
approximately 46% of the issued and outstanding DMX common stock at June
30, 1997. In consideration of TCI's overall percentage interest in DMX, the
Company accounts for DMX using the equity method. The Company's share of
losses of DMX for the year ended December 31, 1996 exceeded the Company's
carrying value of DMX. The Company recorded its share of losses for the
year ended December 31, 1996 only to the extent of its carrying value of
DMX as the Company has no obligation to provide any additional funding. At
June 30, 1997, the market value of the Company's interest in DMX common
stock was $18.2 million ($1.68 per share).
(continued)
I-20
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
On July 11, 1997, TCI, DMX and TCI Music, Inc. ("TCI Music"), a wholly-
owned subsidiary of TCI, consummated the merger of DMX pursuant to an
Agreement and Plan of Merger, as amended (the "TCI Music Merger
Agreement"). Pursuant to the TCI Music Merger Agreement, DMX became a
wholly-owned subsidiary of TCI Music and each share of DMX common stock was
converted into the right to receive (i) one-fourth share of TCI Music
Series A Common Stock and (ii) one right (a "Right") with respect to each
whole share of TCI Music Series A Common Stock (the "Merger"). Each Right
entitles the holder to require TCI to purchase from such holder one share
of TCI Music Series A Common Stock for $8.00 per share (the equivalent of
$2.00 per share of DMX common stock) payable at the election of TCI, in
cash, a number of shares of Tele-Communications, Inc. Series A TCI Group
Common Stock, having an equivalent value, or a combination thereof, if
during the one-year period beginning on the effective date of the Merger,
the price of TCI Music Series A Common Stock does not equal or exceed $8.00
per share for a period of at least 20 consecutive trading days. Following
the completion of the transactions contemplated by the TCI Music Merger
Agreement and the transactions contemplated by a related "Contribution
Agreement," (i) TINTA owned 2,710,406 Rights and 2,710,406 shares of TCI
Music Series A Common Stock, representing approximately 3.5% of TCI Music's
issued and outstanding common stock and less than 1% of the voting
interests attributable to such issued and outstanding common stock, and
(ii) TCI owned shares of TCI Music common stock (including shares of TCI
Music Series A Common Stock owned by TINTA) representing approximately
89.6% of TCI Music's issued and outstanding common stock, and 98.7% of the
voting interests attributable to such issued and outstanding common stock.
In consideration of TCI's overall percentage interest in TCI Music, the
Company will continue to account for TCI Music using the equity method. At
July 31, 1997, the market value of the Company's interest in TCI Music was
$19.7 million ($7.25 per share).
(continued)
I-21
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Summarized unaudited results of operations of the Other Affiliates by
geographic region for the periods in which they were owned by the Company
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Six months ended June 30, 1997
-------------------------------------------------------------
Latin
America and
Asia and the
Europe (a) Australia Caribbean (b) Total
---------- --------- ------------- --------
<S> <C> <C> <C> <C>
Combined Operations
-------------------
Revenue $ 130,458 111,101 6,559 248,118
Operating, selling, general and
administrative expenses (159,370) (129,664) (5,233) (294,267)
Depreciation and amortization (14,422) (7,205) (1,191) (22,818)
--------- -------- ------- --------
Operating income (loss) (43,334) (25,768) 135 (68,967)
Interest expense, net (922) (5,498) (2,784) (9,204)
Other, net (4,815) (13,579) (14,807) (33,201)
--------- -------- ------- --------
Net loss $ (49,071) (44,845) (17,456) (111,372)
========= ======== ======= ========
<CAPTION>
Six months ended June 30, 1996
-------------------------------------------------------------
Latin
America and
Asia and the
Europe (a) Australia Caribbean (c) Total
---------- --------- ------------- --------
<S> <C> <C> <C> <C>
Combined Operations
-------------------
Revenue $ 167,975 63,796 28,612 260,383
Operating, selling, general and
administrative expenses (165,816) (74,286) (30,118) (270,220)
Depreciation and amortization (16,636) (15,712) (3,859) (36,207)
--------- -------- ------- --------
Operating loss (14,477) (26,202) (5,365) (46,044)
Interest expense, net (5,338) (4,678) (5,517) (15,533)
Other, net (7,146) 745 (4,179) (10,580)
--------- -------- ------- --------
Net loss $ (26,961) (30,135) (15,061) (72,157)
========== ======== ======= ========
</TABLE>
_____________
(a) The summarized combined operations for the six months ended June 30,
1997 include the results of operations of Flextech but exclude the
results of operations of the Flextech Affiliates. See related
discussion above.
(continued)
I-22
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(b) The summarized operating results of Caguas are included in the
combined operations through May 1, 1997, the date that the Company
acquired the 50% ownership in Caguas which the Company did not already
own. See note 3.
(c) The summarized operating results of Torneos are included in the
combined operations through April 29, 1996, the date of TINTA's
contribution of its 35% ownership interest in Torneos to the Sports
Venture.
(7) Other Investments
-----------------
The components of other investments are set forth below (amounts in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
DTH Ventures $19,470 17,945
Other 2,517 2,928
------- ------
$21,987 20,873
======= ======
</TABLE>
On November 20, 1995, TINTA announced its intention to form strategic
partnerships with News Corp., Organizacoes Globo and Grupo Televisa S.A.
for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). It is anticipated that TINTA could be
required to make cash contributions totaling approximately $45 million over
the next three years in connection with the DTH Ventures.
(continued)
I-23
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(8) Debt
----
The components of debt are as follows (amounts in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
TINTA:
------
Convertible Subordinated
Debentures (a) $345,000 345,000
Cablevision Notes (b) -- 13,013
-------- -------
345,000 358,013
-------- -------
Subsidiaries:
-------------
Flextech -- 1,000
-------- -------
Cablevision:
Bank loans (c) 138,630 104,556
OCC Notes (d) -- 46,418
Other 3,700 1,141
-------- -------
142,330 152,115
-------- -------
Puerto Rico Subsidiary (e) 45,000 --
-------- -------
$532,330 511,128
======== =======
</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 due 2006 having an aggregate principal amount of $345
million (the "Debentures"). The Debentures are convertible into
shares of Series A Common Stock at a price of $27.30 per share of
Series A Common Stock, subject to anti-dilution adjustments. Interest
on the Debentures is payable on February 15 and August 15 of each
year, commencing August 15, 1996. The Debentures are redeemable by
TINTA in whole or in part, at any time on or after February 15, 1999.
Pending its use by TINTA, the net proceeds from the sale of the
Debentures were loaned to TCI pursuant to an unsecured promissory note
(the "TCI Note Receivable"). See note 9.
(b) The Cablevision Notes were secured by the Company's pledge of the
stock representing its 51% interest in Cablevision. The Cablevision
Notes were repaid in their entirety in March 1997.
(c) Represents Cablevision's bank debt, which is denominated in U.S.
dollars, and bears interest at fixed rates. Including value added
tax, the weighted average rate of Cablevision's bank debt at June 30,
1997 was 7.06%.
(d) In connection with the OCC Acquisition, Cablevision issued $46.4
million principal amount of secured negotiable promissory notes. The
OCC notes were repaid in their entirety during the second quarter of
1997.
(continued)
I-24
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(e) The Puerto Rico Bank Facility is unsecured and provides for maximum
borrowing commitments of $100 million. 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 in accordance with a schedule, until final
maturity at March 31, 2006. Borrowings under the Puerto Rico Bank
Facility bear interest at variable rates. In addition, the Puerto
Rico Subsidiary is required to pay a commitment fee equal to 0.375% on
the average daily unused portion of the maximum borrowing commitments,
payable quarterly in arrears and at maturity. The Puerto Rico Bank
Facility contains restrictive covenants which require, among other
things, the maintenance of certain financial ratios (primarily the
ratios of cash flow to total debt and cash flow to debt service, as
defined), and includes certain limitations on indebtedness,
investments, guarantees, acquisitions, dispositions, dividends, liens
and encumbrances, and transactions with affiliates. If TCI's
ownership interest in TINTA were to fall below 50.1%, borrowings under
the Puerto Rico Bank Facility would be secured by the assets of the
Puerto Rico Subsidiary and the variable interest rates on such
borrowings would be increased.
With the exception of the Debentures, which had a fair value of $277
million at June 30, 1997, the Company believes that the fair value and
the carrying value of the Company's debt were approximately equal at June
30, 1997.
(continued)
I-25
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(9) Related Party Transactions
--------------------------
Due from TCI
The effects of all transactions between the Company and TCI have been
reflected as intercompany payables or receivables to be settled (i) in the
case of certain non-cash income tax and stock compensation allocations (the
"Non-Cash Intercompany Account"), at some future date (as described below),
(ii) in the case of amounts outstanding pursuant to the TCI Note
Receivable, as mutually agreed from time to time by TCI and TINTA, (iii) in
the case of a note payable (the "TCIC Note Payable") to TCI Communications,
Inc. ("TCIC"), a subsidiary of TCI, in accordance with the applicable
repayment terms as described below, and (iv) in the case of all other
intercompany transactions, within thirty days following notification (the
"Cash Intercompany Account"). Any amounts within the Cash Intercompany
Account that remain outstanding after such thirty-day period generally are
treated as adjustments of the outstanding borrowings pursuant to the
revolving subordinated credit agreement between TCI, as creditor, and
TINTA, as borrower (the "TCI Credit Facility"). Due to TCI's ownership of
85% of the issued and outstanding common stock of TINTA and 92% of the
aggregate voting interest represented by such issued and outstanding stock,
the amounts due from (to) TCI have been classified as a component of
stockholder's equity in the accompanying consolidated balance sheets. The
components of "Due from (to) TCI" are as follows (amounts in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- -------------
<S> <C> <C>
TCI Note Receivable (a) $ 53,719 176,501
TCIC Note Payable (b) (21,886) (23,262)
TCI Credit Facility (c) -- --
Non-Cash Intercompany Account (d) 20,679 14,955
Cash Intercompany Account (4,762) (8,053)
-------- -------
$ 47,750 160,141
======== =======
</TABLE>
(a) Amounts outstanding under the TCI Note Receivable bear interest at
variable rates based on TCI's weighted average cost of bank borrowings
of similar maturities (6.3% at June 30, 1997). 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, 1997 and 1996, interest
income related to the TCI Note Receivable aggregated $3.8 million and
$6.9 million, respectively.
(continued)
I-26
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(b) During 1996, TCIC transferred, subject to regulatory approval, certain
distribution equipment to a subsidiary of TINTA in exchange for a
(Pounds)14,950,000 ($23.3 million using the applicable exchange rate)
principal amount promissory note. The TCIC Note Payable is due in
semi-annual installments through July 31, 2001 and bears interest at
compounded semi-annually. During the six months ended June 30, 1997,
the U.S. dollar equivalent of interest expense incurred with respect
to the TCIC Note Payable was $789,000. The distribution equipment was
subsequently leased back to TCIC over a 5 year term with semi-annual
payments of (Pounds)998,000 ($1.7 million), plus expenses. TINTA can
require TCIC to repurchase the equipment at the end of the lease term
at an amount equal to the greater of (i) fair market value or (ii) an
amount that when combined with the rental payments received (excluding
executory costs) during the lease term, and discounted using an
interest rate of 7%, would not exceed 89% of the fair market value of
the equipment at the inception of the lease. During the six months
ended June 30, 1997, the U.S. dollar equivalent of the lease revenue
under the above-described lease agreement aggregated $1.7 million.
During the six months ended June 30, 1997, the Company experienced
unrealized foreign currency transaction losses of $589,000 with
respect to the TCIC Note Payable.
(c) The TCI Credit Facility is a subordinated unsecured revolving credit
facility that provides for loans from TCI to the Company in an
aggregate outstanding principal amount of up to $200 million. If at
any time TCI shall beneficially own capital stock of TINTA
representing less than a majority in voting power of the outstanding
shares of TINTA capital stock entitled to vote for the election of
directors, TCI may terminate its obligation to make further loans
under the TCI Credit Facility upon two business days prior notice to
TCI Credit Facility at June 30, 1997 and December 31, 1996. The TCI
Credit Facility requires an annual credit facility fee in an amount
equal to 3/8% of the unused borrowing availability under such
facility. Such credit facility fees aggregated $375,000 during each of
the six month periods ended June 30, 1997 and 1996.
(continued)
I-27
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(d) At June 30, 1997, the Non-Cash Intercompany Account was comprised of
$1.9 million due to TCI with respect to TINTA's share of TCI's
compensation liability arising from certain stock appreciation rights
and stock options (the "TCI Compensation Liability") and $22.6 million
due from TCI with respect to the allocation of current intercompany
income tax benefits (the "TCI Tax Receivable") pursuant to a tax
sharing agreement among TINTA, TCI and certain other affiliates of TCI
(the "Tax Sharing Agreement"). The TCI Compensation Liability, which
represents TINTA's share of TCI's stock compensation expense for
periods subsequent to July 18, 1995 (the date that the IPO was
consummated), will be settled in cash only to the extent that TCI is
required to make cash payments to satisfy the TCI Compensation
Liability. The TCI Tax Receivable, which represents TINTA's current
intercompany income tax benefit for periods subsequent to July 1, 1995
(the date that the Tax Sharing Agreement was implemented), will be
settled in cash only upon the deconsolidation of TINTA for purposes of
TCI's federal income tax returns. As described below, changes in the
TCI Compensation Liability have been included in the accompanying
consolidated statements of operations.
Other Related Party Transactions
Certain key employees of TINTA hold stock options with tandem stock
appreciation rights with respect to certain common stock of TCI (the "TCI
Options and SARs"). Estimates of the compensation expense relating to the
TCI Options and SARs have been included in the accompanying consolidated
statements of operations, but are subject to future adjustment based upon
the market value of the underlying TCI common stock and ultimately on the
final determination of market value when the rights are exercised. The
estimated compensation adjustment with respect to the TCI Options and SARs
resulted in increases (decreases) to TINTA's share of TCI's stock
compensation liability of $1.7 million and $(958,000) for the six months
ended June 30, 1997 and 1996, respectively. Such compensation adjustments
are included in "General and administrative - Allocated from TCI" in the
accompanying consolidated statements of operations.
Pursuant to a services agreement between TCI and TINTA, TCI allocates
corporate expenses to TINTA based upon the estimated cost of general and
administrative services provided. The amounts allocated to the Company for
the six months ended June 30, 1997 and 1996 aggregated $872,000 and $1.5
million, respectively.
The Puerto Rico Subsidiary purchases programming services from a subsidiary
of TCI. The charges, which approximate such TCI subsidiary's cost and are
based on the aggregate number of subscribers served by the Puerto Rico
Subsidiary, aggregated $2.9 million and $2.2 million during the six months
ended June 30, 1997 and 1996, respectively. Such programming charges are
included in "Operating costs and expenses - Cable" in the accompanying
consolidated statements of operations.
(continued)
I-28
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Cablevision purchases programming services from certain affiliates. The
related charges generally are based upon the number of Cablevision's
subscribers that receive the respective services. During the six months
ended June 30, 1997 and 1996, such charges aggregated $7.4 million and $7.6
million, respectively. 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 and $2.0 million during each of the
six month periods ended June 30, 1997 and 1996, respectively. The above-
described programming and general and administrative charges are included
in "Operating costs and expenses - Cable" in the accompanying consolidated
statements of operations.
As further described in note 6, certain subsidiaries of TCI have provided
guarantees and other credit enhancements on the Company's behalf. In this
respect, the Company has entered into an indemnification agreement with TCI
whereby the Company will indemnify TCI for any loss, claim or liability
that TCI may incur by reason of certain guarantees and credit enhancements
made by TCI on the Company's behalf.
(continued)
I-29
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(10) Commitments and Contingencies
-----------------------------
The Company 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, the
Company believes that the aggregate payments pursuant to such obligations
could be significant. If the Company were to fail to fulfill its
obligations under the guarantee, the beneficiaries have the right to demand
an aggregate payment from the Company of approximately $51 million. In
connection with this guarantee, the Company has agreed to maintain a
defined net worth (cash equivalents plus the fair value of securities
listed on an exchange less liabilities) of at least $150 million. If the
Company's net worth (as defined) were to fall below $150 million, TCI has
agreed to subordinate any intercompany amounts owed by the Company to TCI
to the Company's obligation pursuant to this guarantee. Although the
Company has not had to perform under such guarantee to date, the Company
cannot be certain that it will not be required to perform under such
guarantee in the future.
For information concerning the Company's commitments and contingent
liabilities with respect to certain affiliates, see note 6.
In 1995, Flextech issued newly issued Flextech Ordinary Shares and Flextech
Non-Preference Shares to subsidiaries of Hallmark Cards Incorporated
("Hallmark") (the "Hallmark Subscription") and U S WEST, INC. ("U S WEST")
(the "U S WEST Subscription").
(continued)
I-30
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the Company, (ii) the Hallmark and U S WEST subsidiaries' interests
in Flextech acquired under the Hallmark Subscription and the U S WEST
Subscription, respectively, and (iii) Flextech securities acquired by
International Family Entertainment, Inc. ("IFE") pursuant to certain
acquisitions (the "IFE Acquisitions") exceeds 75% of Flextech's issued and
outstanding share capital, or (y) subject to certain exceptions, the
Flextech Ordinary Shares cease to be admitted to trading on the Official
List of the London Stock Exchange as a result of the exercise by the
Company of any of its rights as a Flextech shareholder, the Company shall
be obligated to offer to purchase from the Hallmark and U S WEST
subsidiaries, and from IFE any Flextech Ordinary Shares held by them and
which were originally acquired pursuant to the Hallmark Subscription, the U
S WEST Subscription, or the IFE Acquisitions, as applicable. Under such
circumstances, the offer price for such shares shall be the higher of (i)
the then current market price for the Flextech Ordinary Shares and (ii) the
highest price paid to any third party by the Company for any Flextech
Ordinary Shares during the preceding 12 month period. In the event the
Company is required to purchase any Flextech Ordinary Shares, it may elect,
subject to certain limited exceptions, to pay the purchase price thereof in
cash or in shares of Series A Common Stock, or in certain securities of
TCI.
As described in note 6, the Company has significant contingent obligations
with respect to certain credit enhancements that were provided by the
Company upon the closing of the BBC Joint Ventures and related
transactions.
I-31
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations
---------------------
General
- -------
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements, included elsewhere herein, and the
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations included in the Company's Annual Report on Form 10-K for the year
- ----------
ended December 31, 1996. With respect to trends, risks and uncertainties
affecting the Company's results of operations and financial condition, the
following discussion addresses only changes in such matters that have occurred
during 1997 through the date of this Quarterly Report on Form 10-Q.
A significant portion of the Company's operations are conducted through
corporations and partnerships in which the Company holds a 20%-50% ownership
interest. As the Company 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 consolidated basis within the
Company's consolidated financial statements.
Certain statements included in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements of the Company, or industry
results, to differ materially from any 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 continued strength of multi-
channel video and telecommunication networks and the distribution and production
of programming for multi-channel video distribution; uncertainties inherent in
proposed business strategies and development plans, future financial
performance, including availability, terms and deployment of capital; the
ability of vendors to deliver required equipment, software and services; product
launches; availability of qualified personnel; changes in, or the failure or
inability to comply with, government regulation, 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 overall market acceptance of such products and
services, including acceptance of the pricing of such products and services; and
other factors. These forward-looking statements speak only as of the date of
this Quarterly Report on Form 10-Q. 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 change in events, conditions
or circumstances on which any such statement is based.
I-32
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
General (continued)
- -------------------
As further described in note 4 to the accompanying consolidated financial
statements, subsequent to June 30, 1997, the Company entered into a Term Sheet
with CEI which contemplates the Cablevision Sale. Upon any consummation of the
Cablevision Sale, the Company would cease to consolidate Cablevision and would
begin to account for Cablevision using the equity method of accounting.
Material Changes in Results of Operations
- -----------------------------------------
During the six months ended June 30, 1997 and 1996, Cablevision and the
Puerto Rico Subsidiary were reflected in the Company's consolidated financial
statements on a consolidated basis. Additionally, Flextech was included in the
Company's consolidated financial statements on a consolidated basis through
December 31, 1996. As described in note 6 to the accompanying consolidated
financial statements, the Company, effective January 1, 1997, discontinued using
the consolidation method to account for its ownership interest in Flextech. As
a result, the Company's consolidated financial statements as of and for the six
months ended June 30, 1997 do not include Flextech's financial position and
results of operations on a consolidated basis. The following table sets forth
summary information with respect to the operating results of Flextech that were
included in the Company's consolidated financial statements for the six months
ended June 30, 1996 (amounts in thousands):
<TABLE>
<S> <C>
Programming revenue $ 35,893
Programming operating costs and
expenses before depreciation and (49,891)
amortization
Depreciation and amortization (2,987)
--------
Operating loss (16,985)
Other, net 4,258
--------
Net loss $(12,727)
========
</TABLE>
I-33
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Cablevision owned cable television systems serving approximately 592,000
and 450,000 basic subscribers at June 30, 1997 and 1996, respectively. The
following table sets forth summary information with respect to Cablevision's
results of operations (as adjusted for the effects of purchase accounting) for
the indicated periods (amounts in thousands):
<TABLE>
<CAPTION>
Six months ended
------------------------------------
June 30, 1997 (1) June 30, 1996
------------------ ----------------
<S> <C> <C> <C> <C>
Revenue $114,208 100% $ 88,174 100%
Operating costs and expenses
before depreciation and
amortization (67,618) (59)% (50,767) (58%)
-------- ----- -------- ----
Operating Cash Flow (2) 46,590 41% 37,407 42%
Depreciation and amortization (26,376) (23)% (18,146) (20%)
-------- ----- -------- ----
Operating income $ 20,214 18% $ 19,261 22%
======== ===== ======== ====
</TABLE>
__________________
(1) On October 1, 1996, Cablevision acquired 99.9% of the issued and
outstanding stock of OCC. In accordance with the purchase method of
accounting OCC has been included in Cablevision's consolidated financial
statements since the October 1, 1996 acquisition date. The following table
sets forth summary information with respect to OCC's results of operations
included with those of Cablevision for the six months ended June 30, 1997
(amounts in thousands):
<TABLE>
<S> <C>
Revenue $16,083
Operating costs and expenses
before depreciation and
amortization (6,790)
-------
Operating Cash Flow 9,293
Depreciation and amortization (4,853)
-------
Operating income $ 4,440
=======
</TABLE>
(2) "Operating Cash Flow," which represents income before depreciation and
amortization, is a commonly used measure of value and borrowing capacity.
Operating Cash Flow is not intended to be a substitute for a measure of
performance in accordance with generally accepted accounting principles and
should not be relied upon as such.
I-34
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Revenue
-------
Cable revenue increased $17.3 million and $33.4 million or 34% and 33%
during the three and six month periods ended June 30, 1997, respectively, as
compared to the corresponding prior year periods. Such increases are primarily
attributable to the positive effects of the OCC Acquisition and a 6% increase in
Cablevision's average number of basic subscribers (exclusive of the basic
subscribers acquired in the OCC Acquisition). Revenue of the Puerto Rico
Subsidiary increased $3.5 million and $4.3 million or 55% and 34% during the
three and six month periods ended June 30, 1997, respectively, as compared to
the corresponding prior year periods. Such increases are due primarily to the
Caguas Acquisition ($2.4 million) and a 4% increase in basic subscribers of the
Puerto Rico Subsidiary. An increase in basic rates in February 1997 also
contributed to the increases in cable revenue of the Puerto Rico Subsidiary.
During the three and six months ended June 30, 1997, the Company also earned
revenue of $834,000 and $1.7 million, respectively, from the lease of certain
equipment to TCIC as described in note 9 to the accompanying consolidated
financial statements.
The areas serviced by Cablevision are also serviced by other cable
providers. During the second quarter of 1996 one of these cable providers began
offering cable services at rates substantially below that charged by
Cablevision. Cablevision has offered promotional packages in response to such
competition. Although the Company believes that such competition may limit
Cablevision's ability to increase its subscribers and/or rates, the Company
cannot otherwise predict the impact competition will have on Cablevision's
result of operations.
Operating Costs and Expenses
----------------------------
Cable operating costs and expenses increased $9.7 million and $19.0 million
or 31% and 32% during the three and six month periods ended June 30, 1997,
respectively, as compared to the corresponding prior year periods. Such
increases are primarily attributable to the effects of the OCC Acquisition and
an increase in Cablevision's programming costs. Such increased programming
costs are attributable to a higher number of subscribers and higher programming
rates. See related discussion below. Operating costs and expenses of the Puerto
Rico Subsidiary increased $1.4 million and $1.9 million during the three and six
months ended June 30, 1997, respectively, as compared to the corresponding prior
year periods. Such increases are due primarily to the Caguas Acquisition
($768,000) and increased programming costs.
I-35
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Cablevision and the Puerto Rico Subsidiary purchase programming under
contracts that expire at various dates in the future. No assurance can be given
that future contracts will contain terms as favorable as those contained in the
existing programming contracts of Cablevision and the Puerto Rico Subsidiary.
TINTA incurred corporate, general and administrative expenses of $5.0
million and $2.8 million during the three months ended June 30, 1997 and 1996,
respectively, of which $2.3 million and $725,000 were allocated from TCI. TINTA
incurred corporate, general and administrative expenses of $7.8 million and $4.8
million during the six months ended June 30, 1997 and 1996, respectively, of
which $2.6 million and $535,000, respectively, were allocated from TCI. General
and administrative allocations from TCI are generally based upon the estimated
cost of the services provided to the Company. Estimated changes in (i) TINTA's
stock compensation liability and (ii) TINTA's share of TCI's stock compensation
liability are also reflected in general and administrative expenses. Such
estimated increases (decreases) aggregated $1.9 million and $(1.2 million)
during the three months ended June 30, 1997 and 1996, respectively, and include
increases (decreases) in the Company's share of TCI's stock compensation
liability of $1.8 million and $(49,000), respectively. Such estimated increases
(decreases) aggregated $1.8 million and $(1.6 million), during the six months
ended June 30, 1997 and 1996, respectively, and include increases (decreases) in
the Company's share of TCI's stock compensation liability of $1.7 million and
$(958,000), respectively. Such estimated amounts are subject to future
adjustment based upon market value and, ultimately, upon the final determination
of the market value of the stock appreciation rights at the time they are
exercised.
The $4.4 million and $8.0 million or 34% and 32% increases in depreciation
and amortization expense during the three and six month periods ended June 30,
1997, as compared to the corresponding prior year periods, are the result of net
increases in the Company's assets that are subject to depreciation and
amortization. The increases in such assets attributable to the OCC Acquisition,
Caguas Acquisition and capital expenditures more than offset the decrease
attributable to the deconsolidation of Flextech, as described in note 6 to the
accompanying consolidated financial statements.
I-36
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Other Income and Expense
------------------------
Telewest has incurred losses since its inception. The Company's share of
Telewest's net losses increased (decreased) $(7.9 million) and $3.3 million or
(20)% and 5% during the three and six month periods ended June 30, 1997,
respectively, as compared to the corresponding prior year periods. Such changes
are primarily attributable to (i) increases in depreciation and amortization and
interest expense and (ii) changes in foreign currency transaction losses. In
connection with a previous merger transaction, Telewest issued the Telewest
Debentures. Changes in the exchange rate used to translate the Telewest
Debentures into UK pounds sterling and the adjustment of a foreign currency
option contract to market value caused Telewest to experience unrealized foreign
currency transaction losses of (Pounds)172,000 ($282,000 using the applicable
exchange rate) and (Pounds)31.0 million ($47.2 million using the applicable
exchange rate) during the three months ended June 30, 1997 and 1996,
respectively. Telewest experienced unrealized foreign currency transaction
losses of (Pounds)24.3 million ($40.0 million using the applicable exchange
rate) and (Pounds)47.7 million ($72.8 million using the applicable exchange
rate) during the six months ended June 30, 1997 and 1996, 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.
Subsequent to June 30, 1997, Telewest announced that it was streamlining the
operating structure of its business and concentrating on its core products of
cable television, residential and business telephony, and data services. In
connection with such streamlining, Telewest expects to reduce its workforce. The
Company cannot determine what effect such streamlining will have on Telewest's
operating results.
The Company's share of the losses of the Other Affiliates increased $7.5
million and $12.0 million or 40% and 32% during the three and six month periods
ended June 30, 1997, as compared to the corresponding prior year periods. Such
increases are primarily attributable to increased losses of JPC, Jupiter, the
LLC, ABN and MultiThematiques. The increased losses during the six months ended
June 30, 1997 were partially offset by a $5.0 million decrease in the Company's
share of the losses of DMX. During the third quarter of 1996, the Company's
cumulative share of DMX's losses exceeded the Company's investment in DMX. Since
that time, the Company has not recorded its proportionate share of DMX's losses
as the Company has no obligation to provide any additional funding to DMX. In
addition, as described in note 6 to the accompanying consolidated financial
statements, the Company, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting. For additional information concerning the Other Affiliates, see note
6 to the accompanying consolidated financial statements.
Interest income decreased $4.0 million and $6.0 million or 67% and 54%
during the three and six month periods ended June 30, 1997, respectively, as
compared to the corresponding prior year periods. Such decreases are due
primarily to the decrease in the Company's cash and cash equivalents as a result
of the deconsolidation of Flextech as described in note 6 to the accompanying
consolidated financial statements and decreases in the outstanding balance of
the TCI Note Receivable.
I-37
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Interest expense remained relatively constant during the three and six
month periods ended June 30, 1997, as compared to the corresponding prior year
periods. Increases in interest expense attributable to (i) OCC Notes, (ii) the
Debentures, (iii) the TCIC Note Payable and (iv) the Puerto Rico Bank Facility
were offset by a reduction in interest expense that is attributable to the
deconsolidation of Flextech.
The minority interests' share of net losses in 1996 related entirely to
Flextech. As described in note 1 to the accompanying consolidated financial
statements, the Company, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting. Accordingly, the minority interests' share of net losses for
Flextech is no longer included in the Company's consolidated statement of
operations. The minority interests' share of net earnings in 1997 relates
entirely to Cablevision. Prior to the second quarter of 1997, none of
Cablevision's post-acquisition operating results had been allocated to
Cablevision's 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 post-
acquisition net earnings (exclusive of the effects of purchase accounting)
caused the minority interest's historical cost basis in Cablevision's net assets
to become positive. Accordingly, the Company 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,
1996, the Company would have allocated an additional $4.3 million in 1997 and
$9.9 million in 1996 of Cablevision's net earnings (exclusive of the effect of
purchase accounting) to the minority interest.
The Company recognized realized and unrealized foreign currency transaction
gains (losses) of $(796,000) and $2.1 million during the three months ended June
30, 1997, and 1996, respectively. The Company recognized realized and unrealized
foreign currency transaction gains of $599,000 and $3.4 million during the six
months ended June 30, 1997 and 1996, respectively. During the six months ended
June 30, 1997 and 1996 the Company recognized (i) unrealized gains of $1.7
million and $3.1 million, respectively, with respect to the remeasurement into
the U.S. dollar of the French franc-denominated MultiThematiques Obligation and
(ii) unrealized losses of $1.0 million and $1.7 million, respectively, with
respect to the remeasurement into the U.S. dollar of the UK pound-denominated
debt owed by Flextech to an indirect subsidiary of TINTA.
I-38
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Income Taxes
------------
The Company's income tax benefit was $54.8 million and $30.2 million during
the six months ended June 30, 1997 and 1996, respectively. The effective tax
rates associated with such benefits were 46% and 30%, respectively. The
Company's income tax benefit was $28.5 million and $19.5 million during the
three months ended June 30, 1997 and 1996, respectively. The effective tax rates
associated with such benefits were 47% and 31%, respectively. The higher
effective tax rates during the 1997 periods are primarily attributable to the
recognition of certain deferred tax assets in connection with (i) the
deconsolidation of Flextech as described in note 6 to the accompanying
consolidated financial statements and (ii) the Company's non-deductible share
of losses of its affiliates.
Net Losses
----------
The Company reported net losses of $65.5 million and $70.6 million during
the six months ended June 30, 1997 and 1996, respectively. Such net losses are
due, in part, to the relatively high level of depreciation and amortization that
is common to growth oriented companies operating within the capital intensive
telecommunications industry. Any improvements in the Company's results of
operations are largely dependent upon the ability of the Company's operating
subsidiaries and affiliates to increase their respective subscriber bases. There
can be no assurance that any such subscriber base increases will occur.
Material Changes in Financial Condition
- ---------------------------------------
TINTA expects to have substantial capital requirements for the foreseeable
future because its businesses and investments consist of entities which require
the acquisition, ownership, development and operation of broadband cable
television and telephony distribution networks and new programming services.
Many of TINTA's subsidiaries and affiliates are incurring substantial costs as
they build or rebuild their cable networks or develop and acquire programming.
Until such companies begin generating profits and positive cash flow from
operating activities, they will need additional capital to fund capital
expenditures and working capital requirements. TINTA and its consolidated
subsidiaries 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. TINTA believes that its
actual future cash requirements in order to fund the capital expenditures and
working capital requirements of its subsidiaries and affiliates will exceed
the amounts that TINTA and its consolidated subsidiaries are currently
contractually obligated to fund. The Company is not able to more precisely
predict the timing or amount of the future funding requirements of its
affiliates because such future cost requirements are dependent upon a variety of
factors.
(continued)
I-39
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Financial Condition (continued)
- ---------------------------------------------------
TINTA's business strategy also requires that it have the ability to access
or raise sufficient funds to allow it to take advantage of new acquisition and
joint venture opportunities as they arise, which management of TINTA believes
will require the availability of substantial additional funds. Although TINTA
has $53.7 million proceeds remaining from the sale of its Debentures (which have
been loaned to TCI pursuant to an unsecured promissory note pending the use of
such proceeds by TINTA), has a $200 million credit facility with TCI and has the
ability to access any excess cash and borrowing availability of the Puerto Rico
Subsidiary, TINTA's ability to otherwise obtain 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 the Company'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 the Company'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 afffiliates.
At June 30, 1997, $1.9 million of the Company's $5.0 million of cash and
cash equivalents was held by its subsidiaries. Exclusive of amounts held by its
subsidiaries, TINTA held cash and cash equivalents of $3.1 million at June 30,
1997. TINTA believes that such cash and cash equivalents, the remaining net cash
proceeds from the sale of the Debentures, borrowing availability pursuant to the
TCI Credit Facility and the Puerto Rico Bank Facility, and any funds generated
by the operating or financing activities of TINTA's operating subsidiaries and
affiliates will be sufficient for the next year to (i) fund the Company's
existing capital contribution and lending commitments to its affiliates and (ii)
fund the Company's working capital, debt service and capital expenditure
requirements. Although TINTA's ability to obtain dividends or advances from
certain of its operating subsidiaries and affiliates is limited, TINTA's
liquidity requirements with respect to its operating subsidiaries and affiliates
are reduced to the extent that such operating subsidiaries and affiliates are
able to generate funds through their respective operating or financing
activities. To the extent that the Company seeks to make significant
acquisitions or is required to meet significant future liquidity requirements in
addition to those described above, the Company anticipates that it will need to
obtain additional debt or equity financing. Other events could occur involving
TINTA that could require TINTA to obtain significant additional funds. No
assurance can be given, however, that TINTA or its subsidiaries or affiliates
will be able to obtain additional financing on terms acceptable to them, or at
all.
(continued)
I-40
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Financial Condition (continued)
- ---------------------------------------------------
The Company's consolidated operating activities provided cash of $23.2
million and $5.4 million during the six months ended June 30, 1997 and 1996,
respectively. With the exception of cash provided by the Puerto Rico Subsidiary
($4.7 million and $4.1 million during the six months ended June 30, 1997 and
1996, respectively), cash provided by the Company's consolidated operating
activities does not presently represent a source of liquidity to TINTA since the
cash provided by Cablevision's operating activities is intended to be applied
towards Cablevision's liquidity requirements, and the Company's remaining
consolidated operating activities are expected to produce net cash flow deficits
for the foreseeable future. The 1996 amount includes cash used in Flextech's
operating activities of $27.6 million. As discussed under note 6 to the
accompanying consolidated financial statements, effective January 1, 1997,
Flextech's cash flows are no longer included in the Company's consolidated
statements of cash flows.
During the six months ended June 30, 1997 and 1996, cash used by the
Company's investing activities aggregated $112.6 million and $143.9 million,
respectively. Such amounts include $58.7 million and $102.2 million,
respectively, that were used by the Company to fund investments in, and loans
to, affiliates. In addition, the 1997 amount includes a $38.1 million reduction
in the Company's cash and cash equivalents as a result of the deconsolidation of
Flextech. See notes 2 and 6 to the accompanying consolidated financial
statements. See also the consolidated statements of cash flows included in the
accompanying consolidated financial statements.
TINTA has invested in most of its subsidiaries and affiliates with
strategic and local partners, and financial and operational considerations, as
well as laws that limit foreign equity positions, will likely require TINTA to
continue to invest with partners. Many foreign countries limit foreign
investment to a minority equity position or require the board of directors to be
largely independent, which can result in TINTA having diminished ability to
implement strategies that TINTA may favor, or cause dividends or distributions
to be paid.
Certain of the countries in which TINTA has operating companies or in which
TINTA may operate in the future, may be subject to a substantially greater
degree of social, political and economic instability than is the case in other
countries. Risks associated with social, political and economic instability in a
particular country could materially adversely affect the results of operations
and financial condition of any subsidiary or affiliate of TINTA (and thereby
have a potentially material adverse effect on the results of operations or
financial condition of TINTA) and could result in the loss of TINTA's investment
in such subsidiary or affiliate or the loss by such subsidiary or affiliate of
its assets in such country.
Many of TINTA's interests in its subsidiaries and affiliates are governed
by partnership and other agreements that require it to contribute capital or
make loans to such subsidiaries or affiliates. The failure of TINTA to meet its
capital commitments to a particular operating company may have adverse
consequences to it and therefore to TINTA.
I-41
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Financial Condition (continued)
- ---------------------------------------------------
On November 20, 1995, TINTA announced its intention to form strategic
partnerships with News Corp., Organizacoes Globo and Grupo Televisa S.A. for the
development and operation of a direct-to-home satellite service for Latin
America, Mexico, and various Central and South American countries It is
anticipated that TINTA could be required to make cash contributions totaling
approximately $45 million over the next three years in connection with the DTH
Ventures.
TINTA may make additional cash contributions totaling approximately $22
million to the LLC to fund the operations of the Sports Venture. As part of the
formation of the Sports Venture, the LLC is entitled to receive from News Corp.
7.5% of the outstanding stock of STAR Television Limited. Upon the delivery of
such stock to the LLC, News Corp. is entitled to receive from the LLC up to
$20.0 million and rights under various Asian sports programming agreements. STAR
Television Limited operates a satellite-delivered television platform in Asia.
On April 19, 1996, TINTA, Torneos and the Torneos stockholders entered into
the TINTA/Torneos Sports Agreement whereby TINTA agreed to make minimum periodic
payments from 1996 through 2004 aggregating $235.2 million to acquire certain
rights and considerations, including the exploitation rights to all sports
rights owned by Torneos with the exception of any rights which at that time had
been contractually committed to any third party.
Pending the assignment of the Sports Venture Rights to the Sports Venture,
TINTA, News Corp. and Liberty have paid their respective portion of any payments
made with respect to the Sports Venture Rights. Through June 30, 1997, payments
made under the TINTA/Torneos Sports Agreement totaled $26.5 million.
I-42
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Financial Condition (continued)
- ---------------------------------------------------
The Company has significant contingent obligations with respect to
guarantees, credit enhancements and other contingent obligations arising from
its ownership interests in affiliates and other matters. The Company also has
consummated certain transactions and entered into certain agreements which have
impacted or may, in the future, impact the Company's liquidity and capital
resources. For additional information, see notes 6, 7 and 10 to the accompanying
consolidated financial statements.
During the six months ended June 30, 1997, Cablevision and the Puerto Rico
Subsidiary accounted for $21.9 million and $4.2 million, respectively, of the
Company's aggregate capital expenditures of $26.1 million. As described further
in note 6 to the accompanying consolidated financial statements, effective
January 1, 1997, the capital expenditures and other cash flows of Flextech are
no longer included in the Company's consolidated statements of cash flows.
Although the Company expects that its future capital expenditure requirements
with respect to Cablevision and the Puerto Rico Subsidiary will equal or exceed
historical levels, the Company currently believes that the internally generated
funds and other sources of liquidity of Cablevision and the Puerto Rico
Subsidiary generally will be sufficient to satisfy its foreseeable capital
expenditure requirements. In this regard, the Puerto Rico Subsidiary entered
into the Puerto Rico Bank Facility in connection with the Caguas Acquisition.
See note 8 to the accompanying consolidated financial statements and related
discussion below.
I-43
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Material Changes in Financial Condition (continued)
- ---------------------------------------------------
On October 1, 1996 Cablevision acquired 99.99% of the issued and
outstanding capital stock of OCC for a purchase price of $112.2 million. Cash
consideration of $43.7 million was paid at closing and an additional cash
payment of $22.1 million was paid on December 1, 1996. Cablevision incurred
additional bank debt in order to fund such cash payments. The remaining
purchase price was satisfied by Cablevision's issuance of the OCC Notes. The
OCC Notes were repaid in their entirety during the second quarter of 1997.
On January 27, 1997, the Company announced that it was instituting a stock
repurchase program. Under the stock repurchase program, the Company may
repurchase from time to time up to 5% (approximately 5.3 million shares) of its
outstanding Series A Common Stock. Through June 30, 1997, the Company had
repurchased 3,370,000 shares under such program for an aggregate purchase price
of $42.0 million.
As a result of the April 1997 issuance of shares by Flextech in connection
with Flextech's acquisition of all of the share capital of URLL and URGl which
Flextech did not already own, and the associated dilution of the Company's
ownership interest in Flextech, the Company recorded a $151.6 million increase
to the carrying value of its investment in Flextech, a $98.5 million increase to
"Additional paid-in capital" and a $53.1 million increase to "Deferred income
tax liability." No gain was recognized due primarily to TINTA's contingent
obligations under the Standby Commitment.
On May 1, 1997, the Puerto Rico Subsidiary paid cash consideration of
approximately $12.0 million, and assumed aggregate indebtedness of $32.3
million, to acquire the 50% ownership interest in Caguas/Humacao Cable Systems
which the Company did not already own. In connection with the Caguas
Acquisition, the Puerto Rico Subsidiary entered into the Puerto Rico Bank
Facility and used borrowings of approximately $45 million thereunder to fund the
cash portion of the purchase price and to repay the assumed indebtedness. For a
description of the terms of the Puerto Rico Bank Facility, see note 8 to the
accompanying consolidated financial statements.
At June 30, 1997, the Company had aggregate debt of $532.3 million. For
additional information concerning the terms of such debt, see note 8 to the
accompanying consolidated financial statements. At June 30, 1997, 8% of the
Company's debt either bore interest at variable interest rates, or was scheduled
to be repriced on or before December 31, 1997. Accordingly in an environment of
rising interest rates, the Company could experience increased interest expense.
Cablevision's debt includes $135.9 million of bank borrowings due on or
before December 31, 1997. Although no assurance can be given, it is anticipated
that Cablevision will extend the maturity dates of, or otherwise refinance, such
bank borrowings.
I-44
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
PART II - OTHER INFORMATION
Item 2. Changes in Securities
- ------- ---------------------
In April 1997, TINTA issued 6,932 shares of Series A Common Stock
(valued at $98,000 based upon a price per share of $14.14) to an
employee of TINTA for services rendered. The issuance was made in
reliance on the exemption from registration of a private placement
offering as afforded by section 4(2) under the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K filed during quarter ended June 30, 1997 -
none
II-1
<PAGE>
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 INTERNATIONAL, INC.
Date: August 13, 1997 By: /s/ Fred A. Vierra
-----------------------------
Fred A. Vierra
Chief Executive Officer
Date: August 13, 1997 By: /s/ Graham Hollis
-----------------------------
Graham Hollis
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,975
<SECURITIES> 0
<RECEIVABLES> 10,894
<ALLOWANCES> 0
<INVENTORY> 6,073
<CURRENT-ASSETS> 0
<PP&E> 278,532
<DEPRECIATION> 72,427
<TOTAL-ASSETS> 1,867,233
<CURRENT-LIABILITIES> 0
<BONDS> 532,330
0
0
<COMMON> 118,668
<OTHER-SE> 940,242
<TOTAL-LIABILITY-AND-EQUITY> 1,867,233
<SALES> 0
<TOTAL-REVENUES> 134,156
<CGS> 0
<TOTAL-COSTS> 78,419
<OTHER-EXPENSES> 32,853
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,357
<INCOME-PRETAX> (120,275)
<INCOME-TAX> (54,778)
<INCOME-CONTINUING> (65,497)
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<EXTRAORDINARY> 0
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<NET-INCOME> (65,497)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
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