<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
5619 DTC Parkway
Englewood, Colorado 80111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Series A Common Stock, par value $1.00 per share
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Tele-Communications International, Inc.'s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. [ ]
Indicate by check mark whether Tele-Communications International, Inc.
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
The aggregate market value of the voting stock held by nonaffiliates of
Tele-Communications International, Inc., computed by reference to the last sales
price of such stock, as of the close of trading on January 31, 1998, was
$341,040,895.
The number of shares outstanding of Tele-Communications International
Inc.'s common stock (net of shares held in treasury) as of January 31, 1998, was
Series A Common Stock 103,627,880 shares; and
Series B Common Stock - 11,700,000 shares
<PAGE> 2
TELE-COMMUNICATIONS IN,ERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-K
Table of Contents
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business ......................................................................... I-1
Item 2. Properties ....................................................................... I-55
Item 3. Legal Proceedings ................................................................ I-55
Item 4. Submission of Matters to a Vote of Security Holders .............................. I-55
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ................................................... II-1
Item 6. Selected Financial Data .......................................................... II-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................... II-5
Item 8. Financial Statements and Supplementary Data ...................................... II-18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................................... II-18
PART III
Item 10. Directors and Executive Officers of the Registrant ............................... III-1
Item 11. Executive Compensation ........................................................... III-1
Item 12. Security Ownership of Certain Beneficial Owners
and Management ................................................................ III-1
Item 13. Certain Relationships and Related Transactions ................................... III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ........................................................... IV-1
</TABLE>
<PAGE> 3
PART III.
The information required by Part III (Items 10, 11, 12 and 13) will be
filed by amendment no later than April 30, 1998 in accordance with General
Instruction G(3) of Form 10-k.
III-1
<PAGE> 4
PART I.
ITEM 1. Business
(a) General Development of Business.
Tele-Communications International, Inc. (together with its
consolidated subsidiaries, "TINTA" or the "Company" unless the context
indicates otherwise) provides diversified programming services to and operates
multi-channel video and telecommunication distribution networks in selected
markets outside the United States (sometimes referred to herein as the "U.S.").
The activities of TINTA are concentrated in Europe, Latin America and The
Caribbean, and Asia and Australia, with particular focus at present on the
United Kingdom (sometimes referred to herein as the "UK"), Argentina and Japan.
TINTA has ownership interests in or manages 48 cable and satellite programming
services, which at December 31, 1997, were received by subscribers in various
countries outside of the U.S. TINTA also has ownership interests in companies
operating broadband networks that, at December 31, 1997, provided cable
television service to an aggregate of approximately 3.9 million basic
subscribers and, primarily in the UK, provided telephone service over
approximately 1.2 million telephone lines (a customer may have multiple
telephone lines).
TINTA is a majority-owned subsidiary of Tele-Communications, Inc.
("TCI"). As of December 31, 1997, TCI owned 86.25 million shares of
Tele-Communications International, Inc. Series A Common Stock ("TINTA Series A
Stock") and all of the outstanding shares of Tele-Communications International,
Inc. Series B Common Stock ("TINTA Series B Stock") (collectively, the "TINTA
Common Stock"). Such shares represented approximately 85% of the outstanding
shares of TINTA Common Stock and, due to TCI's ownership of all of the TINTA
Series B Stock (which has greater per share voting rights), approximately 92%
of the combined voting power of the outstanding shares of TINTA Common Stock.
TCI, through its subsidiaries and affiliates (other than TINTA), is principally
engaged in the construction, acquisition, ownership, and operation of cable
television systems and the provision of satellite-delivered video
entertainment, information and home shopping programming services to various
video distribution media, principally cable television systems. On August 28,
1997, the stockholders of TCI authorized the Board of Directors of TCI to issue
Tele-Communications, Inc. Series A and Series B TCI Ventures Group common stock
("TCI Ventures Group Stock"), which is intended to reflect the separate
performance of the TCI Ventures Group. TCI's 85% equity interest in TINTA has
been attributed to the TCI Ventures Group along with substantially all of TCI's
non-cable and non-programming domestic assets. In connection with the
formation of the TCI Ventures Group, the shares of TINTA common stock held by
TCI were transferred to TCI Ventures Group, LLC ("TVG LLC"), a wholly-owned
subsidiary of TCI, effective October 1, 1997. On September 10, 1997, TCI
consummated an exchange offer (the "Exchange Offer") whereby TCI issued
377,322,600 shares (as adjusted for stock dividend) of Tele- Communications,
Inc. Series A TCI Ventures Group Common Stock and 32,532,800 shares (as
adjusted for stock dividend) of Tele-Communications, Inc. Series B TCI
Ventures Group Common Stock in exchange for 188,661,300 shares of Tele-
Communications, Inc. Series A TCI Group Common Stock and 16,266,400 shares of
Tele-Communications, Inc. Series B TCI Group Common Stock, respectively.
I-1
<PAGE> 5
As noted above, TINTA has ownership interests in companies that
operate in various foreign countries and that prepare their financial
statements in the applicable local functional currency. Merely for
convenience, the following discussion contains translations of the local
functional currency of TINTA's subsidiaries and equity affiliates into U.S.
currency at the applicable rate (as published in The Wall Street Journal) in
effect on the dates specified herein or, if not so specified, on December 31,
1997. No representation is made that any of such local functional currencies
have been, could have been or could be converted into U.S. dollars at such
rates. The applicable rates at December 31, 1997 for the UK pound sterling
("L." or "pounds") and the Japanese yen ("Yen") were L.1.651 per $1.00 and Y.
130.022 per $1.00, respectively. At March 10, 1998, such applicable rates were
L.1.641 per $1.00 and Y. 127,430 per $1.00, respectively.
Certain statements included in this Annual Report on Form 10-K
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 TINTA, 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: the continued
strength of multi-channel video and telecommunication networks and the
distribution and production of programming for multichannel video distribution;
general economic and business conditions and industry trends; uncertainties
inherent in proposed business strategies and development plans, rapid
technological changes, 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;
changes in exchange rates; changes in repatriation rights; governmental
upheaval; bribery and corruption; loss of control of operations; competitor
responses to TINTA'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 Annual Report on Form 10-K. TINTA expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any change in
TINTA's expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
Effective January 1, 1997, TINTA's three consolidated Puerto Rico
entities were merged together into TCI Cablevision of Puerto Rico, Inc. (the
"Puerto Rico Subsidiary"). For purposes of this discussion, except to the
extent the context otherwise indicates, the term the "Puerto Rico Subsidiary"
refers to the three consolidated Puerto Rico entities prior to such merger and
the Puerto Rico Subsidiary following such merger.
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<PAGE> 6
On January 27, 1997, TINTA announced that it was instituting a stock
repurchase program. Under the stock repurchase program, TINTA may repurchase
from time to time up to 5% (approximately 5.3 million shares) of its
outstanding TINTA Series A Stock. As of March 1, 1998, TINTA had repurchased
3,370,000 shares under such program for an aggregate purchase price of $42.0
million.
On February 18, 1997, Jupiter Programming Co., Ltd. ("JPC") (a
50%-owned affiliate of TINTA) announced its acquisition of the distribution
rights for all of Japan's premier soccer league matches (the "J-League").
These distribution rights, which are exclusive for both cable and
direct-to-home ("DTH") satellite distribution during the first year and for
cable distribution thereafter, are effective for five years and include
coverage of J-League games as well as J-League championship games.
On February 24, 1997, MultiThematiques, S.A. ("MultiThematiques") (a
33.3%-owned affiliate of TINTA) announced that it had signed an agreement with
JPC to create two thematic channels for cable and satellite distribution in
Japan. The first channel will be dedicated to European cinema and lifestyle
and will serve as a promotional tool for French and European movies and
television programs in Japan. The second channel will be a Japanese adaptation
of Canal Jimmy, an established channel distributed in France by
MultiThematiques.
In April 1997, Flextech p.l.c. ("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 redesignation by Flextech of one of TINTA's shares as a special
voting share (the "Special Voting Share"). The Special Voting Share when
combined with TINTA's other share capital in Flextech allows TINTA to cast 50%
of the votes on most matters brought to the shareholders of Flextech for vote.
The weighted voting rights attached to the Special Voting Share will terminate
upon the occurrence of the earlier of (i) April 14, 2000, (ii) any transfer of
Flextech shares by TINTA outside a specified affiliated group or (iii) TINTA's
ownership interest in Flextech falling below 30%.
I-3
<PAGE> 7
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 in exchange for 34,954,713
new Flextech ordinary shares ("Flextech Ordinary Shares"), valued at L.7.20
($11.89) 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. Flextech has undertaken to finance the working capital requirements
of the Principal Joint Venture and has also agreed to make certain funding
available to the Second Joint Venture, if required. TINTA has agreed to
fulfill Flextech's financial obligations to the Principal Joint Venture in the
event of Flextech's default. For a detailed description of the BBC Joint
Ventures and such financing arrangements, see "Narrative Description of
Business-- EUROPE-- Programming Operations-- Flextech p.l.c.-- The BBC Joint
Ventures" and "--Interrelationships with Flextech."
During 1997, TINTA purchased 748,435 Flextech Ordinary Shares from
certain officers of Flextech for a per share price of L.6.225 ($10.29 at the
applicable exchange rate) and 800,000 Flextech Ordinary Shares for a per share
price of L.6.05 ($9.76 at the applicable exchange rate). As a result of such
purchases, TINTA's ownership interest in the issued and outstanding share
capital of Flextech increased from 35.9% to 36.8%.
On May 1, 1997, the Puerto Rico Subsidiary paid cash consideration of
$12.2 million, and assumed aggregate indebtedness of $32.3 million, to acquire
the 50% ownership interest in Caguas/Humacao Cable Systems ("Caguas") which
TINTA 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.
I-4
<PAGE> 8
On September 17, 1997, TINTA received a waiver (the "Waiver") under
the Investment Company Act of 1940 (the "40 Act") that clarifies the ability of
TINTA to conduct its operations without registering as an investment company
under the 40 Act. Under the Waiver, in general, TINTA may hold no less than a
10% economic or voting interest in a foreign tele-media venture, provided
TINTA: (i) is or was materially involved in the creation, development or
operation of the venture; (ii) provides or provided material managerial,
advisory or operational services to the venture; or (iii) provides or provided
significant input on material decisions affecting the development or operations
of the venture. Under the Waiver, a "foreign tele-media venture" means
activities conducted outside of the United States involving communications;
media; the creation, storage, and transmission of voice, video, or data;
programming, including entertainment, news, information, and home shopping
services; print media; broadband and satellite distribution; over the air
broadcast; telecommunications; wireline or wireless distribution and telephony;
network construction; design, operation, and ownership of related transport
construction; and any and all related or similar activities, services, and
assets. TINTA may invest in a tele-media venture directly or through
partnerships that acquire interests in, and provide active developmental
assistance to, foreign tele-media ventures.
In September 1997, Bresnan International Partners (Poland), L.P. ("BIP
Poland") acquired an additional 49% interest in Aster City Cable Sp. z o.o
("Aster City"), a cable operator serving primarily the City of Warsaw, Poland,
for approximately $29 million. As a result of such acquisition, BIP Poland's
interest in Aster City increased to approximately 98%.
On September 26, 1997, TINTA sold its indirect 13% interest in Sky
Network Television New Zealand, Ltd. ("Sky"), a New Zealand UHF subscription
service, to Independent Newspapers Limited ("INL") for cash proceeds of
approximately $54 million. TINTA owned its interest in Sky through a 25.5%
stake in HKP Partners of New Zealand.
On October 9, 1997, TINTA sold a portion of its 51% ownership interest
in Cablevision S.A. ("Cablevision") to CEI Citicorp Holdings Sociedad Anonima
("CEI") and T.I. Telefonica Internacional de Espana S.A. ("TISA," together with
CEI, the "Cablevision Buyers") for cash proceeds of $120 million. In addition,
on October 9, 1997, Cablevision sold 3,541,829 shares of stock to the
Cablevision Buyers for $80 million in cash and notes in the aggregate principal
amount of $240 million. The notes were paid in full on January 28, 1998. The
above transactions (collectively, the "Cablevision Sale") reduced TINTA's
interest in Cablevision to 26.2%. TINTA will manage Cablevision pursuant to a
renewable five-year management contract that was entered into in connection
with the Cablevision Sale, and all material corporate transactions of
Cablevision require TINTA's approval, so long as TINTA maintains at least a 16%
ownership interest in Cablevision. The Cablevision Buyers also purchased an
additional 39% interest in Cablevision that TINTA had the right to acquire.
I-5
<PAGE> 9
In October 1997, Cablevision acquired a 50% ownership interest in
Fintelco S.A. ("Fintelco"), the owner of Video Cable Communicacion S.A. ("VCC")
for a purchase price of $539.3 million (including assumption of debt and seller
financing) (the "Fintelco Acquisition"). VCC is one of the largest cable
operators in Argentina. VCC's 21 cable systems (the "VCC Systems") operate
primarily in the metopolitan Buenos Aires (including the Federal District) and
in three regional clusters in and around the cities of Cordoba and Rosario.
Also in October 1997, Cablevision purchased a 50% interest in eight cable
companies (the "UIH Companies") operated by United International Holdings
Argentina S.A. for a purchase price of $107.5 million (including seller
financing) (the "UIH Acquisition"). The UIH cable systems operate primarily in
the Argentine regions of Bahia Blanca, Santa Fe and Parana. On January 30,
1998, Cablevision acquired all of the Argentine cable systems of Mandeville
Argentina, S.A. ("Mandeville") for a purchase price of approximately $535.2
million (the "Mandeville Acquisition"). The systems operated by Mandeville
(the "Mandeville Systems") are located principally in the Provinces of Buenos
Aires, Santa Fe, Entre Rios, Salta, Misiones and Chaco. As a result of these
acquisitions, Cablevision added approximately 850,000 subscribers.
In October 1997, Fox Sports International (formerly known as "The
Sports Venture") distributed (i) its 35% interest in Torneos y Competencias
S.A. ("Torneos"), an Argentinian sports programming company, to the
Liberty/TINTA LLC ("Liberty/TINTA") and (ii) certain Australian sports rights
to News Corporation Limited ("News Corp."). Liberty/TINTA is a limited
liability company owned in equal parts by subsidiaries of TINTA and Liberty
Media Corporation, a wholly owned subsidiary of TCI ("Liberty"). On October 2,
1997, TINTA purchased a 5% direct interest in Torneos from an unaffiliated
third party for $12 million. TINTA now owns a 22.5% beneficial interest in
Torneos. See "Narrative Description of Business--LATIN AMERICA AND THE
CARIBBEAN--Programming Operations--Fox Sports International and Torneos y
Competencias S.A."
I-6
<PAGE> 10
Since December 1997, Torneos has made or entered into agreements to
make several acquisitions which, if all are consummated, would significantly
expand its business. In December 1997, Torneos acquired a 50.0% and 40.0%
interest, respectively, of the capital stock of Television Satelital Codificada
S.A. and Tele-Red Imagen S.A., the companies that distribute a significant
percentage of its sports programming for an aggregate purchase price of $107.5
million. In December 1997, Torneos also acquired through Prime Argentina S.A.
ownership interest in Telearte S.A., the owner and operator of Channel 9 of
Buenos Aires, the number three Argentine open air television broadcaster (based
on A.C. Nielsen ratings), as well as interests in television programming and
distribution businesses and three television broadcasting affiliates of Channel
9 based in the cities of Mar Del Plata, Parana and Resistencia. Torneos paid
$49.0 million in cash, and will pay $21.0 million within one year of the
purchase and an additional $4.0 million payable in equal monthly installments
over the next eight years, for its interest in such companies. On February 25,
1998, the Board of Directors of Torneos voted in favor of acquiring a 10%
interest in Editorial Atlantida S.A. ("EASA"). EASA is a leading magazine and
book publisher in Argentina that also owns 42.2% of the capital stock of
Television Federal S.A. ("Telefe"), the leading Argentine open air television
broadcaster (based on A.C. Nielsen ratings). If the EASA transaction closes,
Torneos will exchange a 10% equity interest in itself for cash and a 10%
interest in EASA. On March 6, 1998, Torneos signed a Memorandum of
Understanding ("MOU") to purchase Pramer SRL ("Pramer"), one of Argentina's
leading cable programmers. Pramer currently produces and markets 12 cable
channels. It also markets Channel 2, (the fourth ranked broadcast television
station in Buenos Aires), in the interior of Argentina and abroad. The MOU also
provides that Torneos (through Pramer) will acquire a 7.2% interest in a number
of companies included in the MultiMedios America group ("MultiMedios America"),
an assortment of Argentine media companies which own Channel 2, El Cronista, a
financial newspaper, and Radio America, a radio station. Consummation of the
acquisition of the interest in EASA and of the transactions contemplated by the
MOU are both subject to the negotiation of definitive agreements and other
conditions and there can be no assurance that either of such transactions will
be consummated. The above described acquisitions should serve to transform
Torneos into a full service programming company. Torneos will continue to
produce significant amounts of sports programming for Fox Sports International.
As of December 31, 1997, TINTA sold its 49% interest in Asia Business
News (Singapore) Private ("ABN"), a financial business news channel delivered
in Asia, in exchange for a subordinated promissory note of ABN in the principal
amount of $25.0 million. The note bears interest at 7% per annum accruing from
December 31, 1999 and is due December 31, 2012. Until December 31, 2002
neither TINTA nor its controlled affiliates may directly or indirectly engage
in the ownership, operation, management or marketing of any business news
programming service in Asia (with exceptions for TINTA's interest in JPC and
other minority interests). TINTA may enforce certain non-compete covenants with
respect to business news programming in Asia so long as the note remains
outstanding.
On January 16, 1998, TINTA sold its 49% interest in TeleCable
Nacional, CXA ("TeleCable Nacional"), a cable operator in the Dominican
Republic, for $10 million in cash to a company controlled by certain other
shareholders of TeleCable Nacional.
TINTA is currently in discussions to sell its 44% interest in BIP
Poland to an affiliate of BCI Poland, Inc. ("BCI Poland"), its partner in BIP
Poland, for $39.5 million. TINTA is also in discussions to purchase the
remaining 20% interest which it does not own in Bresnan International Partners
(Chile), L.P. ("BIP Chile") owned by an affiliate of BCI Poland for $700,000.
While there can be no assurance that either transaction will close, TINTA does
not intend to consummate one transaction without consummating the other
transaction.
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(b) Financial Information about Industry Segments.
TINTA, through its subsidiaries and affiliates, is principally engaged
in the distribution and production of programming for multi-channel video
distribution in various foreign countries (the "programming business") and the
operation of multi-channel video and telecommunication distribution networks
(the "cable business"). For financial information concerning such business
segments, see the footnotes to TINTA's financial statements included in Part II
of this report.
(c) Narrative Description of Business.
TINTA, through its subsidiaries and affiliates, is an owner and
manager of entities engaged in the distribution and production of programming
for multi-channel video distribution and the operation of multi-channel video
distribution and telecommunications networks in various foreign markets. The
entities in which TINTA has an ownership interest operate in three major
geographic regions: Europe; Latin America and The Caribbean; and Asia and
Australia. TINTA's goal is to own, acquire and develop localized programming in
markets where TINTA can also maintain meaningful ownership interests in
distribution assets (using either broadband communications networks or
direct-to-home satellite technology) that will guarantee distribution for its
programming.
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The following table sets forth as of December 31, 1997, the names of
each of TINTA's operating companies, TINTA's direct or indirect equity interest
(based generally on the ownership interest in capital stock) in each such
operating company and the businesses currently conducted by each such operating
company. TINTA's interests in such companies are often held by various holding
companies and its voting rights and rights to participate in the earnings of
affiliates may differ from the equity interests indicated in the table. For a
description of the ownership structures of the significant operating companies,
see the applicable discussion under "EUROPE," "LATIN AMERICA AND THE
CARIBBEAN," and "ASIA AND AUSTRALIA."
<TABLE>
<CAPTION>
Company's
Direct
or Indirect
Country Operating Company Interest Business
- ------- ----------------- ----------- --------
<S> <C> <C> <C>
EUROPE
United Kingdom Flextech p.l.c. 36.8% Programming
TCI Music, Inc. (1) 3.4% Music Programming
Telewest Communications plc 26.6% Cable/Telephony
France MultiThematiques, S.A. 33.3% Programming
Videopole S.A. 7.9% Cable
Israel Tevel Israel International
Communications Ltd. 23.3% Cable/Programming
Ireland Princes Holdings Ltd. 25.0% Cable/MMDS
Malta Melita Cable TV Ltd. 25.0% Cable
Poland Aster City Cable Sp. zo.o. 44.0% Cable
Regionale Telewizja 44.0% Cable
Kablowa Autocom
Sp. zo.o.
Przedsiebiorstwo Rozwoju 44.0% Cable
Handlui
TeleKomunikacji
Sp. zo.o.
Katowicka Telewizja 34.2% Cable
Kablowa S.A.
Telefonia Polska Zachod 28.6% Telephony
Sp. z o.o.
</TABLE>
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<TABLE>
<CAPTION>
Company's
Direct
or Indirect
Country Operating Company Interest Business
- ------- ----------------- ----------- --------
<S> <C> <C> <C>
LATIN AMERICA AND
THE CARIBBEAN
Various Countries Fox Sports International(2) 25.0% Programming
DTH Ventures(3) 10.0% DTH Satellite
Argentina Cablevision S.A. 26.2% Cable
Torneos y Competencias S.A.(4) 22.5% Programming
Chile Metropolis-Intercom S.A. 24.0% Cable
Dominican Republic TeleCable Nacional, CXA (5) 49.0% Cable
Puerto Rico TCI Cablevision of Puerto 100.0% Cable
Rico, Inc.
ASIA AND AUSTRALIA
Japan Jupiter Programming Co., Ltd. 50.0% Programming
Jupiter Telecommunications Co., Ltd.
40.0% Cable
Australia The Premium Movie Partnership 16.7% Programming
Australis Media Ltd. 1.2% MMDS/DTH
Satellite
</TABLE>
- ----------
(1) This interest was previously represented by TINTA's 18% interest in
DMX Inc. which merged with TCI Music, Inc. in July 1997.
(2) Represents the joint venture, including a number of partnerships or
other entities under common ownership, formed by TINTA, Liberty and
News Corp. See discussion under "LATIN AMERICA AND THE CARIBBEAN-- Fox
Sports International and Torneos y Competencias S.A."
(3) Represents joint ventures for the development and operation of
direct-to-home satellite service in Brazil, Mexico and other Central
and South American countries. See discussion under "LATIN AMERICA AND
THE CARIBBEAN-- Strategic Ventures."
(4) TINTA has a direct 5% interest in Torneos and a 50% interest in
TINTA/LLC which owns a 35% interest in Torneos.
(5) Subsequent to December 31, 1997, on January 16, 1998, TINTA sold its
49.0% interest in TeleCable Nacional. See "General Development of
Business."
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EUROPE
Programming Operations
FLEXTECH P.L.C.
TINTA and its predecessors have been actively involved in the
development of cable and satellite programming in the UK since 1988 and TINTA
has created an integrated programming enterprise through the operations of
Flextech, a 36.8%-owned affiliate (such interest representing 50% of the voting
power of Flextech) at December 31, 1997. Through its subsidiaries and
affiliates, Flextech creates, packages and markets entertainment and
information programming for distribution on cable television and DTH satellite
systems throughout the UK and, to a lesser extent, parts of continental Europe.
Flextech also owns the interest in terrestrial broadcast networks. By
acquiring interests in and establishing alliances among providers of a variety
of entertainment programming, Flextech has been able to achieve significant
economies of scale and establish itself as a major low-cost provider of
television programming. At December 31, 1997, Flextech had interests in 15
cable and satellite channels of which 14 are distributed in the UK market.
Flextech's ordinary shares trade on the London Stock Exchange.
Flextech's management and consultancy services are operated through
its subsidiary, Flextech Television Limited ("FTV"). In addition to managing
its four wholly owned programming services, FTV currently provides management
services to the BBC Joint Ventures and to Discovery Channel Europe, Discovery
Home and Leisure (formerly The Learning Channel), The Parliamentary Channel,
Playboy TV and HSN Direct International Limited ("HSN Direct") (an indirect 49%
interest in The Discovery Channel Europe and Discovery Home & Leisure is owned
by a subsidiary of TCI). FTV generally provides programmers with technical
assistance and a core management team, whose roles include, among others, the
coordination of advertising sales, the negotiation of affiliation agreements,
the marketing of the channels to existing and potential subscribers, the
coordination of program schedules, the management of the programming budget,
and the provision of managerial and technical expertise. For its management and
consultancy services, Flextech receives a management fee and, in some cases, a
percentage of the programming company's gross revenues. Flextech received a
total of L.3.3 million in management fees in 1997 from its two management
contracts with third parties unaffiliated with Flextech--Discovery
Communications, Inc. and the Parliamentary Channel Limited (the entity which
owns Parliamentary Channel). The contract with Discovery Communications, Inc.
has a remaining term of 5 years and the contract with Parliamentary Channel
Limited must be renewed annually.
I-11
<PAGE> 15
The following table sets forth the name and a description of each
programming service in which Flextech had an interest or to which it provided
management services as of December 31, 1997:
<TABLE>
<CAPTION>
Flextech
Ownership Interest/
Channel Management Services Description
- ------- ------------------- -----------
<S> <C> <C>
Bravo 100%/Management control General entertainment targeted to
male audiences
TCC 100%/Management control Children's programming, including
dramas, comedies, documentaries,
teen soaps and animations
Challenge TV 100%/Management control Family entertainment and game shows
Living 100%/Management control Talk shows, game shows, dramas, soap
operas, mini-series and music
UK Gold 68%/Shared management control (1) (2) General entertainment from BBC and
Thames Television archives
HSN Direct 63%/Management control (3) Home shopping and infomercials
Playboy TV 51%/Management control Adult entertainment
Sell-A-Vision 50%/No day-to-day management role(4) Home shopping and infomercials
UK Arena 50%/Shared management control (2) Arts and drama
UK Horizons 50%/Shared management control (2) Documentaries, nature and science
UK Style 50%/Shared management control (2) Leisure and lifestyle
KinderNet Channel 31%/No day-to-day management role (5) Children's programming targeted to
Dutch audiences
The Discovery Channel Manages day-to-day operations(6) Documentaries relating to travel,
Europe adventure, nature, history and
technology
Discovery Home & Leisure Manages day-to-day operations(6) Documentaries and educational series
(formerly The Learning
Channel)
The Parliamentary Channel Manages day-to-day operations(7) Live proceedings of British
Parliament
</TABLE>
I-12
<PAGE> 16
- ----------
(1) As part of the formation of the BBC Joint Ventures, as described
below, in April 1997, Flextech acquired the 75% interest in UKGL
(which produces UK Gold) which it did not already own and then
contributed 65% of the share capital of UKGL to the Second Joint
Venture. Accordingly, Flextech has a direct 35% interest in UKGL and
a 50% interest in the Second Joint Venture which owns a 65% interest
in UKGL. The Second Joint Venture also has put and call arrangements
over the remaining 35% of such share capital owned by Flextech.
(2) Operated by the BBC Joint Ventures. An affiliate of the BBC is
responsible for the scheduling, programming and presentation of the
channels, while Flextech is responsible for providing distribution,
air-time sales, off-air marketing and management services.
(3) Flextech owns a 63% interest and TINTA (independent of Flextech) owns
a 15.7% interest in HSN Direct. A subsidiary of TCI has an indirect
equity interest in USA Networks, Inc. (formerly HSN), another partner
in HSN Direct.
(4) Pursuant to an agreement that expires on January 31, 1999, Flextech
provides transponder capacity in exchange for 50% of the defined net
profits of Sell-A-Vision.
(5) Flextech's ownership interest is held through its 33.3% interest in
Preview Investments BV ("Preview") which owns 97% of KinderNet
Channel. Pursuant to a shareholders agreement with Infinity
Investments BV ("Infinity"), the owner of the remaining 66.7% interest
in Preview, Flextech has the right to
(6) A subsidiary of TCI has a 49% interest in Discovery Communications,
Inc., the owner of The Discovery Channel Europe and Discovery Home and
Leisure.
(7) TINTA owns an indirect 26.6% interest in Telewest Communications plc,
which owns a 16.7% interest in The Parliamentary Channel.
Other Flextech Interests
SMG. Flextech holds an 18.7% interest in Scottish Media Group plc
("SMG") (formerly Scottish Television plc), a publicly traded company in the
UK. SMG is a holding company of a group of companies which include Scottish
Television Ltd. which is the terrestrial channel broadcast licensee for Channel
3 in central Scotland, Grampian Television Limited, the terrestrial channel
broadcasting licensee for Channel 3 for northern Scotland, and a newspaper
publishing company, Scottish Media Newspapers Ltd. SMG's broadcast signals
reach approximately 1.6 million UK homes. Pursuant to the terms of its
investment, Flextech is entitled to appoint two directors to SMG's board of
directors for so long as it owns more than 15% of SMG's outstanding ordinary
shares and TINTA, TCI and/or certain of their affiliates (the "TINTA Group")
own at least 25% of the outstanding capital stock of Flextech. Flextech will
be entitled to appoint one director to SMG's board if its ownership interest in
SMG falls below 15% but exceeds 10%, or if Flextech's ownership exceeds 15% but
the TINTA Group's ownership interest in Flextech falls below 25%.
I-13
<PAGE> 17
Flextech's interest in SMG provides it with access to programming
through SMG's subsidiary, Scottish Television Enterprises ("STE"), a UK
production company. In connection with the acquisition of its interest in SMG,
Flextech acquired the license rights to over 125 hours of drama and documentary
features from STE's program library. Flextech also entered into a production
output agreement with STE under which Flextech has agreed to commission
television programs from STE over a two year period, subject to agreement on
budgets and other items for each program.
Maidstone Studios. Flextech owns a 100% interest in Maidstone Studios
Limited, a production facilities company which it acquired in April 1996.
Hallmark Entertainment Licenses. Flextech has acquired distribution
and exhibition rights for a variety of programming under license agreements
with Hallmark Entertainment, Inc. ("Hallmark Entertainment"), a subsidiary of
Hallmark Cards Incorporated. The rights are limited to the UK and certain
other European markets and have a term of ten years from the commencement of
the license period. Through December 31, 1997, programming with an aggregate
contractual value of L.9.5 million ($15.7 million) had been delivered to
Flextech under the agreements with Hallmark Entertainment. Hallmark
Entertainment has provided Flextech a guarantee that it will recover all L.9.5
million ($15.7 million) from the exploitation of such rights.
HIT Entertainment plc. In July 1997, Flextech disposed of its 23%
interest in HIT Entertainment plc, an independent distributor and packager of
television programming worldwide, for proceeds of L.7.5 million.
Competition
The business of distributing programming for cable and satellite
television is highly competitive. Flextech directly competes with other
programming services for distribution on a limited number of television
channels and, when distribution is obtained, the programming offered by
Flextech competes in varying degrees, for viewers and advertisers with other
programming services, as well as with other entertainment media. TINTA
believes that important competitive factors include the prices charged for
programming, the quantity, quality and variety of the programming offered and
the effectiveness of marketing efforts. With the advent of new compression
technologies, which are intended to increase channel capacity, competition for
channel capacity may substantially decrease, although additional competitors
may have the opportunity to enter the marketplace. In addition to competition
for cable and satellite distributors, viewers and advertisers, Flextech also
competes, to varying degrees, for product with other programming companies that
distribute similar types of programs.
Regulation
The Independent Television Commission ("ITC") regulates programming in
the UK through imposing obligations on broadcast licensees with respect to the
programming broadcast or broadcasts otherwise provided by them. Broadcast
licensees are required to abide by certain codes and directions issued by the
ITC from time to time. These codes include the Programme Code, the Code of
Advertising Standards and Practice, the Rules on Advertising Breaks and the
Code of Programme Sponsorship. The Broadcasting Act of 1996 also restricts the
extent to which certain sporting events of national interest (designated by the
Secretary of State for National Heritage as "listed events") may be broadcast
live on television on an exclusive basis within the United Kingdom.
I-14
<PAGE> 18
The BBC Joint Ventures
In April 1997, Flextech formed two separate joint ventures with BBC
Worldwide and acquired all of the shares of UKGL and UKLL that Flextech did not
already own. 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 the venture. The
Principal Joint Venture launched three new theme channels in November 1997 and
has committed to the launch of at least one additional channel by September 30,
1998. The Second Joint Venture has acquired 65% of the share capital of UKGL
(following Flextech's acquisition of the UKGL share capital, as described
below), with put and call arrangements over the remaining 35% of such share
capital. The Second Joint Venture operates and develops UKGL, and Flextech and
BBC Worldwide have a 50% interest in that venture.
An affiliate of the British Broadcasting Corporation ("BBC") is
responsible for the scheduling, programming and presentation of the channels
operated by the BBC Joint Ventures, while Flextech is responsible for providing
distribution, air-time sales, off-air marketing and management services to the
two joint ventures. Program license agreements with the BBC (the "BBC License
Agreements") have been entered into by each joint venture, under which they are
entitled to acquire licenses to broadcast programs originated by the BBC after
their initial airing. For the first five years, BBC programming will be
acquired in accordance with a pricing formula based on current market prices,
and thereafter pricing will approximate current market prices. Each of the BBC
License Agreements has an initial term of 15 years, and will be extended
automatically for an additional 15 years, unless both Flextech and the BBC
agree not to extend the term. A failure to extend one of the BBC License
Agreements after the first 15 year term will result in BBC Worldwide having the
right to acquire any channel brands owned by the Principal Joint Venture for
fair value. In such circumstances, Flextech may alternatively require that BBC
Worldwide purchase its interest in the Principal Joint Venture for fair value.
The BBC Joint Ventures will not be limited to BBC programming material.
Flextech has undertaken to finance the working capital requirements of
the Principal Joint Venture and TINTA has undertaken to fulfill Flextech's
financial obligations to the Principal Joint Venture in the event of Flextech's
default, and has agreed not to compete with the channels of the BBC Joint
Ventures, as more fully described below under "--Interrelationships with
Flextech."
Flextech acquired the 75% of UKGL (and L.12.5 million ($20.6 million)
of loan stock) and the 68.8% of UKLL (and L.13.7 million ($22.6 million) of
loan stock) that it did not already own in exchange for 34,954,713 new Flextech
Ordinary Shares. One of the current shareholders of UKLL retained L.5.2
million ($8.6 million) of loan stock, to be repaid in two equal installments.
One installment was repaid on December 31, 1997 and the other installment will
be repaid on December 31, 1998. Immediately following the issuance of the new
Flextech Ordinary Shares to the former shareholders of UKGL and UKLL, TINTA's
voting power in Flextech would have fallen below 50%; however, upon
consummation of the BBC Joint Ventures, one of TINTA's Ordinary Shares was
redesignated as a Special Voting Share, which, when combined with TINTA's other
share capital in Flextech, will generally permit TINTA to cast a number of
votes equal to 50% of all votes attributable to the outstanding share capital
of Flextech at any meeting of Flextech stockholders. The weighted voting
rights attached to the Special Voting Share will terminate upon the occurrence
of the earlier of (i) April 14, 2000, (ii) any transfer of Flextech shares by
TINTA outside a specified affiliated group or (iii) TINTA's interest in
Flextech falling below 30%.
I-15
<PAGE> 19
In April 1997, Flextech exchanged approximately 40% of the ordinary
shares of UKGL for variable rate redeemable unsecured loan stock of the Second
Joint Venture and approximately 25% of the UKGL ordinary shares for redeemable
preference shares of the Second Joint Venture. Flextech and the Second Joint
Venture also entered into call and put option arrangements with respect to the
shares of UKGL retained by Flextech (the "Retained Shares"). Under the call
arrangement, the Second Joint Venture may acquire the Retained Shares, with the
consent of Flextech (which may be withheld in its sole discretion), following
the second anniversary of the initial transfer of shares of UKGL by Flextech to
the Second Joint Venture (the "Initial Transfer"). The purchase price would be
L.52.5 million ($86.7 million), which may be paid in loan stock of the Second
Joint Venture. If the call is not exercised, then under the put arrangement,
on or after the fifth anniversary of the Initial Transfer, Flextech may require
that the Second Joint Venture acquire the Retained Shares for the greater of
(i) L.66.2 million ($109.3 million) or (ii) the fair value of such shares,
which may be paid in loan stock.
Stockholding in Flextech; Preemptive Rights
At December 31, 1997, TINTA owned 57,889,032 Flextech Ordinary Shares
representing 36.8% of the issued Flextech share capital and, when combined with
the Special Voting Share, 50% of the aggregate voting power attributable to
such Flextech share capital. TINTA also owned variable rate convertible
unsecured loan stock of Flextech ("VRCUL Stock"), but such VRCUL Stock was
redeemed by Flextech in November 1997 for L.10.1 million, including accrued
interest ($17.0 million at the applicable exchange rate).
Immediately following the issuance of new Flextech Ordinary Shares to
the former shareholders of UKGL and UKLL, TINTA's voting power in Flextech
would have fallen below 50%; however, in connection with TINTA's agreement to
approve the transactions related to the BBC Joint Ventures, Flextech agreed to
redesignate one of TINTA's shares in Flextech as a Special Voting Share, so
that TINTA would retain 50% of the voting power of Flextech notwithstanding its
reduction in equity.
Under the City Code on Takeovers and Mergers (the "City Code"), which
is designed to ensure fair and equal treatment of all shareholders in relation
to takeovers of UK public companies such as Flextech, it must be a condition of
any offer for the voting equity share capital which, if accepted in full, would
result in the offeror holding shares carrying over 50% of the voting rights of
the offeree company, that the offer not become or be declared unconditional as
to acceptances until the offeror has acquired or agreed to acquire (pursuant to
the offer or otherwise) shares carrying over 50% of the voting rights
attributable to both the equity share capital and the equity share capital and
non-equity share capital combined. The Special Voting Share does not count as
having voting rights for this purpose. Also, the Special Voting Share does not
carry any right to vote in respect of certain resolutions proposed at a general
meeting of Flextech to approve certain actions which require approval under the
City Code during the course of such an offer, or while one might be imminent.
I-16
<PAGE> 20
Except with the approval of the Panel on Takeovers and Mergers (the
body responsible for the administration of the City Code), any person who holds
not less than 30%, but not more than 50%, of the voting rights of a company
which is subject to the City Code (or persons acting in concert with that
person) may not in any period of 12 months acquire additional shares carrying
more than 1% of the voting rights of that company without extending offers to
acquire additional shares to all holders of equity share capital in the company
in which such person (or persons acting in concert with him) holds shares. The
Special Voting Share will not be taken into account in determining TINTA's
percentage voting rights of Flextech for this purpose.
Certain Agreements
Tag-Along Right. In June 1995, Flextech issued Flextech Ordinary
Shares and Flextech Non-Preference Shares to U S WEST (UK), a subsidiary of U S
WEST, Inc. ("U S West") (the "U S WEST Subscription"). As discussed below, the
Flextech Non-Preference Shares have been converted into Flextech Ordinary
Shares in connection with the closing of the BBC Joint Ventures and the
issuance to TINTA of the Special Voting Share. In connection with the U S WEST
Subscription, TINTA entered into an agreement with U S WEST (UK) which provides
for, among other things, the pro rata right of U S WEST (UK) to participate in
any sale by TINTA of 10% or more of its then existing shareholdings in
Flextech, at the same per share price as that being received by TINTA.
Certain Purchase Rights. If at any time (i) the aggregate of the
amount of Flextech securities held by TINTA and acquired by U S WEST in the U S
WEST Subscription exceeds 75% of Flextech's issued and outstanding share
capital, or (ii) subject to certain exceptions, the Flextech Ordinary Shares
cease to be listed on the Official List of the London Stock Exchange as a
result of the exercise by TINTA of any of its rights as a Flextech shareholder,
TINTA shall be obligated to offer to purchase from U S WEST (UK) any Flextech
Ordinary Shares held by it which were originally subscribed for under the U S
WEST Subscription. The offer price for such shares in each of the foregoing
circumstances shall be the higher of the then current market price for the
Flextech Ordinary Shares or the highest price paid to any third party by TINTA
for any Flextech Ordinary Shares during the preceding twelve month period. In
the event TINTA is required to purchase any Flextech Ordinary Shares, as
described above, it may elect, subject to certain limited exceptions, to pay
the purchase price thereof in cash or in shares of TINTA Series A Stock, or in
certain securities of TCI.
Similar tag-along rights and purchase rights had been granted to
Hallmark Entertainment and International Family Entertainment, Inc. ("IFE") in
connection with certain issuances of Flextech shares to such parties, but both
Hallmark Entertainment and IFE have sold their shares of Flextech, and,
accordingly, such rights have terminated.
In connection with the closing of the BBC Joint Ventures and the
issuance to TINTA of the Special Voting Share, all of U S West (UK)'s Flextech
Non-Preference Shares were converted into Flextech Ordinary Shares, thereby
eliminating certain rights of U S West (UK) to require TINTA to purchase such
Flextech Non-Preference Shares.
I-17
<PAGE> 21
Interrelationships with Flextech
Board Representation. TINTA currently has three appointees on
Flextech's 15-member board of directors. To ensure that TINTA continues to
have appropriate representation on Flextech's board of directors, upon
Flextech's acquisition of the interests in UKGL and UKLL that it did not
already own, the formation of the BBC Joint Ventures and designation of the
Special Voting Share, the Articles of Association of Flextech were amended to
provide that (i) for so long as TINTA owns greater than 50% of the outstanding
ordinary share capital of Flextech (or owns the Special Voting Share), (x)
TINTA will continue to have the right to have three appointees on the Flextech
board of directors and (y) no resolution of Flextech's board of directors which
appoints a managing director, chief executive, or director of finance or
similar position may be validly passed without the approval of at least one of
the directors appointed by TINTA and (ii) TINTA will have the right to appoint
two directors for so long as it owns between 25% and 50% and one director for
so long as it owns between 5% and 25%, of the outstanding ordinary share
capital of Flextech. The directors appointed by TINTA are not allowed, by
Flextech's Articles of Association and the Listing Rules of the London Stock
Exchange, to constitute a majority of the members of Flextech's board of
directors. In connection with the formation of the BBC Joint Ventures, the
Articles of Association of Flextech were further amended to provide that (a) so
long as Cox Communications, Inc. ("Cox") or its respective affiliates hold 5%
or more of the equity share capital of Flextech, Cox will have the right to
appoint one director of Flextech and (b) Thames Television Limited ("Thames")
will have the right to appoint one director of Flextech so long as: Thames does
not sell any of the shares issued to it upon consummation of the BBC Joint
Ventures or (ii) if it makes such a disposal, Thames continues to hold at least
as many shares in Flextech as entitle any other shareholder to appoint a
director. Thames has sold a portion of its shares such that it does not have a
right to elect a director.
In connection with the U S WEST Subscription, Flextech's Articles of
Association were amended to provide U S WEST with the right to appoint one
director of Flextech for so long as it or its respective affiliates hold 5% or
more of the outstanding share capital of Flextech.
Financial Support of BBC Joint Ventures Financing. Flextech has
undertaken to finance the working capital requirements of the Principal Joint
Venture. In addition to Flextech's April 1997 purchase of L.22 million ($36.3
million) of ordinary shares in the Principal Joint Venture, Flextech's funding
obligations to the Principal Joint Venture consist of a primary credit facility
of L.88 million ($145.3 million) and, subject to certain restrictions, a
standby credit facility of L.30 million ($49.5 million). Borrowings under the
primary and standby credit facility will be represented by shares of loan stock
of the Principal Joint Venture, bearing interest at 2% above LIBOR, which
interest would be capitalized quarterly. Flextech has also agreed to make
available to the Second Joint Venture, if required, funding of up to L.10
million ($16.5 million). To support its funding obligations, Flextech has
obtained a revolving credit facility (the "Flextech Revolving Credit Facility")
with current borrowing availability of up to L.85 million ($140.3 million),
with a term of up to five years. If Flextech defaults in its funding
obligation to the Principal Joint Venture and fails to cure within 42 days
after receipt of notice from BBC Worldwide, BBC Worldwide is entitled, within
the following 90 days, to require that TINTA assume all of Flextech's funding
obligations to the Principal Joint Venture (the "Standby Commitment").
Flextech pays commitment and standby fees to TINTA for its undertaking under
the Standby Commitment.
I-18
<PAGE> 22
If BBC Worldwide requires TINTA to perform Flextech's funding
obligations pursuant to the Standby Commitment, then TINTA will automatically
acquire Flextech's entire equity interest in the Principal Joint Venture for
L.1.00, and TINTA's loans will become senior to any loans of Flextech to the
Principal Joint Venture (except to the extent such subordination would
adversely affect Flextech's ability to repay amounts borrowed under the
Flextech Revolving Credit Facility). Further, TINTA will be entitled to
replace Flextech's directors on the board of the Principal Joint Venture with
representatives of TINTA. If Flextech repays to TINTA all loans it makes to the
Principal Joint Venture (plus interest at TINTA's marginal cost of funds plus
2% per annum) within 180 days after TINTA first becomes obligated to perform
Flextech's financial obligations, it may reacquire its interest in the
Principal Joint Venture for L.1.00. TINTA may also, within the same period,
require Flextech to reacquire its interest on the same terms. The Standby
Commitment will terminate on the earliest of (i) the date on which Flextech has
met all of its required financial obligations to the Principal Joint Venture
under the primary and standby credit facilities or (ii) the date on which
Flextech delivers a bank guarantee of all of its funding obligations to the
Principal Joint Venture.
So long as TINTA is contingently obligated under the Standby
Commitment, Flextech has agreed with TINTA 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 obligations 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.
Non-Compete. TINTA has undertaken to Flextech, BBC Worldwide and the
BBC Joint Ventures that neither it, nor any company that it controls, will own
more than a 20% equity interest in any entity that competes with any of the
channels operated by the Principal Joint Venture ("Competing Channels"). For
this purpose and under certain circumstances, TINTA's interest in an entity is
to be aggregated with that of TCI and any company that TCI controls. This
non-compete may be terminated at such time as (i) TINTA no longer owns more
than 10% of the ordinary shares of Flextech and (ii) TINTA is no longer
obligated pursuant to the Standby Commitment (the "Termination Date"). In
addition, TCI has undertaken to Flextech that neither it nor companies TCI
controls will acquire a 20% or greater voting interest in any Competing
Channels without Flextech's prior consent. This non-compete terminates on the
earlier of the Termination Date or March 31, 2007.
Right of First Refusal. TINTA's Flextech interest is held through its
wholly-owned subsidiary, United Artists European Holdings Limited ("UAEH").
UAEH has agreed that so long as it beneficially owns 30% or more of the
outstanding voting stock of Flextech, Flextech will have a right of first
refusal with respect to all offers made to UAEH relating to English language
cable and satellite programming in Europe. The right of first refusal is
subject to the consent of the supplier of any such programming offered to UAEH
and of any other parties that may have interests therein, and to Flextech being
able to fund the purchase of such programming out of its own resources.
I-19
<PAGE> 23
MULTITHEMATIQUES S.A.
On December 13, 1995, TINTA invested in MultiThematiques, a newly
formed French programming company, with two French media companies, Canal +
S.A. ("Canal +") and Havas Images ("Havas") (formerly Generale d'Images S.A.).
MultiThematiques was formed to create and develop thematic programming for
French and other continental European audiences. MultiThematiques provides
multi-channel programming to cable television and DTH satellite providers in
continental Europe. As of December 31, 1997, MultiThematiques offered sixteen
programming services which are distributed throughout France (five channels),
Spain (two channels), Germany (three channels), Italy (five channels) and
Poland (one channel) by cable television operators and DTH satellite providers.
MultiThematiques has also secured carriage on DTH satellite platforms in
Scandinavia. TINTA expects that programming developed by MultiThematiques may
be used to support TINTA's distribution interests in other regions,
particularly Japan and Latin America. MultiThematiques has signed an agreement
with JPC to create two thematic channels for satellite and cable distribution
in Japan. See "General Development of Business."
Canal + and Havas contributed to MultiThematiques their combined
equity interests in four French thematic channels and Canal + also contributed
its equity interest in a classic movie channel distributed in Spain. In
addition to TINTA's initial investment of 123.1 million French francs ("FF")
($24.7 million at the applicable exchange rate), TINTA also contributed to
MultiThematiques FF 105.0 million ($20.4 million at the applicable exchange
rate), FF 100.0 million ($19.5 million at the applicable exchange rate) and FF
164.0 million ($30.3 million at the applicable exchange rate), on December 13,
1996, February 13, 1997, and December 12, 1997, respectively. TINTA expects to
contribute an additional FF 117.0 million in 1998. TINTA's cash contributions
have been used by MultiThematiques to (i) support the operations of its
existing programming services and to expand their distribution to new European
markets, (ii) launch additional thematic channels in Europe, (iii) adapt
selected programming formats for use in other markets in which TINTA has
interests in distribution systems, and (iv) support the costs of transferring
its channels to a digital format capable of being delivered by DTH services.
Each of TINTA, Canal + and Havas own a one-third interest in MultiThematiques.
I-20
<PAGE> 24
The following table sets forth the name and a description of each
programming service in which MultiThematiques had an interest as of December
31, 1997:
<TABLE>
<CAPTION>
MultiThematiques
Ownership Interest/
Channel Country Management Services Description
------- ------- ------------------- -----------
<S> <C> <C> <C>
Planete France 70%/Management control Documentary channel.
Poland 70%/Management control
Germany 100%/Management control
Italy 100%/Management control
Canal Jimmy France 85%/Management control Lifestyle and entertainment channel
Italy 100%/Management control targeted at young male audiences.
Cine Cinemas France 60%/Management control Channel featuring recent movies.
Italy 100%/Management control
Cine Cinefil France 60%/Management control French channel featuring classic
movies.
Cine Classics Spain 50%/Management control Channel featuring classic movies.
Germany 100%/Management control
Italy 100%/Management control
Seasons France 100%/Management control Channel featuring hunting, fishing
Spain 100%/Management control and similar pursuits.
Germany 100%/Management control
Italy 100%/Management control
</TABLE>
Each of TINTA, Canal + and Havas has equal representation on
MultiThematiques' board of directors. Each partner has the right to designate
the chairman of MultiThematiques for a two-year term every six years (in
successive order). Each of TINTA, Canal + and Havas, for so long as its
respective ownership interest in MultiThematiques equals or exceeds 25%, has
the right to veto certain specified corporate actions including the adoption of
a budget.
Each of TINTA, Canal + and Havas has agreed not to dispose of any
shares in MultiThematiques prior to November 21, 1999. Thereafter, each
shareholder may sell all (but not less than all) of its shares to a third party
subject to a pro rata right of first refusal by the non-selling shareholders.
In the event that any two shareholders propose to sell their shares of
MultiThematiques or jointly receive an offer to purchase such shares, the other
shareholder shall have the right to participate in such sale by selling its
shares to the prospective buyer on the same terms.
In connection with the formation of MultiThematiques, Com Dev Images,
S.A. ("Com Dev"), a minority shareholder in Planete and Cine Cinemas, was
granted certain rights with respect to future transactions involving
MultiThematiques. Specifically, in the event of a public offering of shares of
MultiThematiques occurring prior to December 13, 2003, Com Dev shall have the
right to exchange its shares in Planete and Cine Cinemas prior to the public
offering for shares of MultiThematiques at an agreed upon exchange rate.
I-21
<PAGE> 25
Cable Television and Telephony Operations
TELEWEST COMMUNICATIONS PLC
TINTA indirectly owns 132,638,250 non-voting convertible preference
shares and 246,111,750 ordinary shares of Telewest Communications plc
("Telewest") representing 26.6% of the aggregate convertible preference and
ordinary share capital of Telewest. Telewest is one of the largest cable
operators in the United Kingdom, as measured by franchise homes. At December
31, 1997, Telewest provided cable television and cable telephony services to 28
owned and operated franchises ("Owned and Operated Franchises") in the United
Kingdom. Telewest provides cable television services over a broadband (i.e.,
high capacity) network and uses such network, together with twisted-pair copper
wire connection for final delivery to the customer premises, to provide
telephony services to its customers. The broadband network enables Telewest to
deliver a wide variety of both television and telephony services to its
customers and will enable Telewest to provide customers with a wide range of
interactive and integrated entertainment, telecommunications and information
services as they become available in the future. Telewest currently provides
analog services over its network and expects to begin introducing digital
services over the network by the end of 1998. Such digital services may
include pay-per-view programming, near-video on demand, cable television
Internet access, electronic mail, home shopping and banking. Telewest has also
been awarded an out of area national telecommunications license and an
international facilities license under the U.K. Telecommunications Act 1984,
which will enable Telewest to interconnect directly with international public
telephone operators and reduce the cost of international carriage.
At December 31, 1997, Telewest also had minority equity interests in
three UK cable operators, which owned and operated at that date seven
additional cable franchises (the "Telewest Affiliated Franchises"). The three
UK cable operators in which Telewest has a minority interest include Birmingham
Cable Limited (27.5% equity interest), Cable London (50% equity interest), and
Cable Corporation (16.5% equity interest). Comcast U.K. Cable Partners Limited
("Comcast") also owns a 27.4% equity interest in Birmingham Cable Limited and a
50% equity interest in Cable London. On February 5, 1998, Comcast announced
its intention to merge with NTC Incorporated ("NTC"). Under certain agreements
between Telewest and Comcast, Telewest has rights to acquire Comcast's interest
in both Cable London and Birmingham Cable Limited which are triggered as a
result of Comcast's merger with NTC. Telewest has informed Comcast that it
intends to exercise its rights to acquire these interests.
Telewest believes that its franchises (including the Telewest
Affiliated Franchises) contained a total of approximately 5.2 million homes
(4.4 million on an equity basis) and approximately 344,000 businesses (290,000
on an equity basis) and included approximately 25.7% of the UK homes in areas
covered by licenses at December 31, 1997. "On an equity basis" means the total
number of subscribers or customers served multiplied by Telewest's indirect
percentage equity interest in the franchise. According to Telewest, more than
50% of its customers subscribe for both cable television and cable telephony
services. As of December 31, 1997, Telewest was offering home access to the
Internet in all of the Owned and Operated Franchises and all of the Telewest
Affiliated Franchises.
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<PAGE> 26
The following table presents certain information concerning the
Telewest owned and operated franchises and the Telewest Affiliated Franchises
at and for the year ended December 31, 1997.
<TABLE>
<CAPTION>
Telewest
owned and Telewest
operated Affiliated
franchises Franchises(1) Total
---------- ------------- ---------
<S> <C> <C> <C>
Franchise homes 3,962,004 400,504 4,362,508
Franchise businesses 260,514 28,968 289,482
Cable television
Homes passed 2,970,168 347,563 3,317,731
Basic subscribers 605,988 81,364 687,352
Basic penetration rate 22.0% 24.2% 20.7%
Average churn rate (2) 34.0% 37% --
Average monthly revenue per
subscriber(3) $ 14.17 $ 12.88 --
Residential telephony
Homes passed 2,791,684 299,603 3,139,597
Residential customers 810,358 48,250 894,682
Penetration rate 29.7% 25.0% --
Residential lines connected 836,168 86,372 922,540
Average churn rate (2) 20.0% 29.9% --
Average monthly revenue per
line (4) $ 11.62 $ 15.06 --
Business telephony
Business customers 25,475 8,796 34,271
Business lines connected 100,989 56,322 157,311
Average churn rate (2) 15.0% 23.1% --
Average number of lines per
customer (5) 4.0 6.4 --
Average monthly revenue
per line (6) $ 45.10 $ 43.13 --
</TABLE>
- ----------
(1) Information presented reflects Telewest's equity interest.
(2) Represents the number of subscribers who terminated basic service or
whose service was terminated during the year ended December 31, 1997,
divided by the average number of basic subscribers during such period.
(3) Represents the December 31, 1997 U.S. dollar equivalent of the average
monthly revenue per subscriber for the year ended December 31, 1997.
Such amounts are calculated as (i) one-twelfth of the total cable
television revenue for such period, divided by (ii) the average number
of basic cable television subscribers during such period.
(4) Represents the December 31, 1997 U.S. dollar equivalent of the average
monthly revenue per residential line for the year ended December 31,
1997. Such amounts are calculated as (i) one-twelfth of the total
residential cable telephony revenue for such period, divided by (ii)
the average number of residential cable telephony lines during such
period.
(5) Represents average number of business lines per customer at December
31, 1997. Such amounts are calculated as (i) the average number of
business cable telephony lines at such date, divided by (ii) the
average number of business cable telephony customers at such date.
I-23
<PAGE> 27
(6) Represents the December 31, 1997 U.S. dollar equivalent of the average
monthly revenue per business line for the year ended December 31,
1997. Such amounts are calculated as (i) one-twelfth of the total
business cable telephony revenue for such period, divided by (ii) the
average number of business cable telephony lines during such period.
The UK is one of only a few countries that allow cable operators to
provide both television and telephony services directly to subscribers over a
single network on a commercial basis. By allowing cable operators to offer both
television and telephony service, such companies are able to spread the costs
of their networks over two revenue sources as well as take advantage of various
efficiencies such as cross marketing. In addition, integrated cable/telephony
operators are permitted to install their own telephone switches, which permit
them in certain cases to minimize fees otherwise charged by public telephone
companies and to offer a variety of value-added services without relying on
public telephone operators for implementation.
Current UK regulatory policy is designed to promote competition in the
provision of domestic telecommunications and the development and construction
of franchised cable/telephony networks. These policies include the granting of
exclusive cable television franchises and limitations on the right of British
Telecommunications plc ("BT") and Mercury Communications Limited ("Mercury") to
use their existing telephone networks to compete with the provision of
entertainment services by cable television operators. In general, the licenses
held by BT, Mercury and similar public telephone operators ("PTOs") do not
permit them to convey broadcast services to households over their existing
systems without holding a cable television license. The UK government's
published policy, as stated in the Duopoly Review in 1991, is that the removal
of this restriction will not be reviewed until later in 1998 (the relevant
regulatory body has not specified an exact deadline for an announcement). The
ITC has stated, however, that BT and other PTOs may offer video-on-demand
services pursuant to their existing licenses. See "UK Regulation" below. BT
has recently announced that it does not currently intend to deliver
video-on-demand or other entertainment services via its network.
UK consumers presently have access to only five terrestrial broadcast
networks; however digital terrestrial television is expected to commence
transmission in late 1998 and will add up to 36 additional terrestrial
channels. The growth of multi-channel television in the UK was triggered by the
emergence in 1989 of the DTH satellite service of British Sky Broadcasting
Group plc ("BSkyB"). The UK cable industry evolved more slowly due largely to
various regulatory uncertainties that existed prior to 1991 and the inherent
slow rate of mandatory underground construction of broadband cable
infrastructure.
Telewest Services
Telewest currently offers more than 40 channels to its cable customers
as part of its basic service and 14 channels as part of its premium service
offering (including bonus channels provided in connection with the subscription
for certain premium channels). Telewest obtains its programming from a variety
of sources, including BSkyB, terrestrial broadcasters and other programming
suppliers. Telewest intends to introduce digital technology in one franchise
area by the end of 1998. Digital technology allows operators to provide more
channels (through digital compression of analog signals), and higher quality
pictures and sounds. Through the introduction of digital technology, Telewest
expects to be able to offer customers up to 240 programming channels, which
will enable Telewest to provide services such as near video on demand and
digital pay per view. It will also enable Telewest to use its broadband
network to provide additional services such as cable television Internet
access, electronic mail, home shopping and banking.
I-24
<PAGE> 28
Telewest seeks to offer residential and business telephony customers
reliable and high-quality telephony services over its broadband network at
competitive prices. Telewest offers its residential customers local, long
distance and international cable telephony service as well as a broad range of
additional services, including call waiting, call forwarding and three-way
calling. Telewest's business services include high-capacity private lines to
carry voice and data between two or more locations within a franchise area
(which service is being expanded to serve two or more locations in different
franchise areas through the use of Telewest's interfranchise network), a
"CENTREX" switching service and, in certain franchise areas, Integrated
Services Digital Network ("ISDN") telephony service. Telewest anticipates
rolling-out the ISDN telephony service over time to the other franchise areas.
Telewest currently provides three Internet access services: dial-up
services primarily for residential customers, leased lines for business
customers and network access for wholesale customers. Telewest also intends to
offer high speed Internet access to business customers using ISDN lines.
Telewest has completed a technical trial of high speed Internet access using
cable modems and intends to develop this opportunity further in 1998 as
international standards develop.
Pricing
Telewest currently charges either L.17.99 (if the customer elects the
direct debit payment option) or L.18.99 per month for its standard basic cable
television-only service (generally 52 channels and one converter box which
provides cable service to one television). Premium services are priced between
L.4.00 per channel per month and L.9.00 per channel per month, depending on the
channels selected. Additional converter boxes are available to subscribers for
a monthly charge of L.4.49 per additional box.
Telewest currently seeks to provide its telephony customers with
savings on the cost of telephone calls compared to BT. The monthly line charge
for residential customers subscribing for the telephony-only service is L.7.89
per line, providing a savings of L.1.00 per month over BT's equivalent charge.
The monthly charges for special services such as call waiting or call diversion
vary between L.1.00 and L.2.00 per service. Telewest's line charges for
business customers also are competitive with those of BT, Mercury and other
suppliers.
In September 1996, Telewest began offering combined pricing packages
under the brand name Teleplus to better encourage residential customers to
subscribe to both television and telephony services. In February 1998,
Telewest introduced the "Millennium" pricing packages for customers subscribing
to both services which vary between L.12.99 and L.21.99 per month (excluding
premium channels), depending on the Millennium package chosen. The packages
provide different combinations of basic telephony and television service
together with premium channels and free local calls to other customers within
Telewest's franchise areas.
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<PAGE> 29
Construction
Construction of broadband cable networks has commenced in all of the
Owned and Operated Franchises and all of the Telewest Affiliated Franchises.
As of December 31, 1997, Telewest had completed construction of networks
which "passed" (i.e., could be connected to) approximately 75% of the homes in
the Owned and Operated Franchises and invested approximately L.1,973 million
toward the construction of such networks (including the costs of cable, ducting,
network electronic equipment and subscriber connections). As of December 31,
1997, construction had been completed in 89.5% of the homes in the Telewest
Affiliated Franchises. In addition to the construction of a hybrid fiber
coaxial ("HFC") cable network in each of its franchises, Telewest is developing
a broadband interfranchise network to carryvoice, data and video traffic between
its franchises which is expected to reduce interfranchise connection charges. As
of December 31, 1997, the interfranchise network was operational with full
completion expected by the middle of 1998.
Over the past few years, Telewest has devoted substantial resources to
rapidly constructing its network in accordance with the license construction
milestones, while also actively developing and marketing various cable
telephony, television and Internet products and servicing its customers. During
1997, Telewest decided to significantly reduce the pace of its network
construction and increase its focus on developing and marketing attractive
product offerings and enhancing customer service.
Telewest reduced the pace of its network construction from passing (on
average) approximately 35,000 new homes per month in 1997 to passing
approximately 5,000 new homes per month in 1998. In addition, to improve
operating and management efficiencies, during 1997 Telewest streamlined its
franchise operations by consolidating the management of its franchises into four
regional franchise areas, rather than the previous seven. In connection with the
consolidation of franchise management and other initiatives to improve operating
efficiencies in the second half of 1997 Telewest announced and implemented a 25%
reduction in the size of its work force. Although no assurance can be given, the
reduction in the pace of network construction is expected to significantly
reduce Telewest's capital expenditures, and the reduction of the work force and
the introduction of various operating efficiencies are expected to result in
significant ongoing operating cost reductions.
Government-issued Telecommunications Licenses authorize cable operators
to install and operate the physical network used to provide cable television and
telecommunications services. Each Telecommunications License prescribes build
obligations ("milestones") that require the licensee to construct its network to
pass a specified number of premises (which are defined for purposes of
Telecommunications Licenses as homes or businesses passed for cable television
service) by certain dates. If such milestones are not met, Telewest may be
subject to enforcement action from regulatory authorities which, if not complied
with, could result in revocation of Telewest's telecommunications licenses.
Although Telewest from time to time has not met certain milestones, it has
sought and received appropriate milestone modifications from the Director
General of Telecommunications (the "Director General") and is currently in the
final stages of discussions with the Office of Telecommunications ("OFTEL")
regarding substantial modification of milestone obligations. Telewest believes
that in view of the substantial portions of its networks constructed to date,
and the fact that Telewest proposes to meet OFTEL criteria, Telewest will be
able to obtain the necessary modifications to its obligations, although there
can be no assurance it will be successful in so doing.
Other Telewest Interests
In October 1997 Telewest announced the formation with three other
cable operators of a consortium, Front Row Limited, to launch and operate an
industry premium movie service on a pay per view basis. Content supply
agreements have been signed with three major Hollywood studios and others are
in negotiation.
I-26
<PAGE> 30
Competition
The current regulatory policy of the ITC is to grant only one
broadband cable license within a franchise area. Accordingly, Telewest does
not compete for subscribers with other cable operators within its franchises.
Telewest does, however, compete with other providers of video entertainment,
including terrestrial broadcast stations, DTH satellite services, Satellite
Master Antenna Television ("SMATV") operators and video cassette rental stores.
In the future, UK cable operators may face competition from near
video-on-demand, video-on-demand and other entertainment services that may be
provided by PTOs. Telewest also competes with other companies (which may
include PTOs and other cable operators) for the award of new franchises, the
purchase of existing franchises and new sources of capital.
The most significant competition for cable operators in the UK
multi-channel television market currently comes from providers of DTH satellite
television services and, in particular, BSkyB. DTH satellite services are
widely available in the UK. Although TINTA believes that DTH satellite
services will continue to compete with Telewest in the future, management
believes that cable television has a number of competitive advantages over DTH
satellite systems. These advantages include the following: (a) DTH satellite
service generally involves up-front and ongoing servicing costs (particularly
for those customers who purchase, as opposed to rent, their satellite dishes)
which are substantially greater than the up-front and ongoing servicing costs
for cable television; (b) installation of satellite dishes often requires
compliance with zoning ordinances and must be placed with a "line-of-sight"
orientation toward the transmitting satellite, which can limit or preclude
placement in urban areas; (c) DTH satellite television generally does not
provide local oriented programming or advertising; and (d) cable offers a
sophisticated two way physical link, and in the future will offer interactive
and integrated entertainment, telecommunications and information services in
addition to television programming. Telewest believes that the principal
competitive advantage of DTH satellite service is the generally lower monthly
service charges for basic services and premium services than comparable
services provided by cable operators.
BSkyB has indicated that it intends to launch a digital service in
late 1998 which may provide up to 200 channels including multiplexed movies,
interactive services such as home shopping, home banking and pay-per-view
sports and movies. As discussed above, Telewest intends to launch a digital
service in one franchise in 1998, although there can be no assurance that this
will be achieved and a delay may have a negative impact on Telewest's offering
if it is launched after the satellite digital offering.
Currently, terrestrial broadcast stations only provide five analog
channels, but in 1997, the UK government designated six multiplexes of radio
spectrum for the broadcasting of digital terrestrial television in the UK. Two
of the six multiplexes were awarded to existing analog terrestrial
broadcasters: the BBC was awarded one, and ITV, Channel 4 and Teletext Limited
were awarded the second. One of the remaining four multiplexes was awarded to
S4C Digital Networks Limited and the other three were awarded to British
Digital Broadcasting Limited. The ITC licenses the operation of five out of
the six multiplexes; the BBC's multiplex is not licensed or regulated by the
ITC. In order to subscribe to the digital terrestrial channels, subscribers
will have to purchase a digital set top box. The mulitplex operators are
expected to launch up to an additional 36 channels in late 1998. TINTA cannot
currently predict the competitive effect of these new channels, although TINTA
believes that the limited capacity and the need to purchase set top boxes may
limit the potential competitive effect.
I-27
<PAGE> 31
BT is the largest provider of business and residential telephony
services in the UK. With its fully built national network, extensive experience
in the marketing and operation of telecommunications services and considerable
financial resources, BT represents the greatest source of competition for
Telewest's UK telephony operations. In addition to BT, Telewest competes with
Mercury and other companies that have been granted telecommunications licenses,
including Energis Communications Limited, Cable and Wireless Communications plc
and Ionica plc. TINTA believes Telewest has been able to compete in the UK
telephony market thus far primarily because it has priced its cable telephony
call charges below those of BT. BT's ability to respond to such price
competition has been restricted by its license obligation not to show undue
preference to or unduly discriminate against different classes of customers and
to offer uniform rates nationally. There can be no assurance that Telewest will
be able to continue to price its telephony services below those charged by BT
or its other telephony competitors, or that future price reductions will not
adversely impact the profitability of Telewest's telephony operations. TINTA
believes Telewest has been able to attract telephony customers in the UK partly
because of Telewest's advanced network, which allows it to offer a variety of
special services (such as call waiting and call forwarding) to business and
residential customers at attractive rates. In addition, as of December 31,
1997, Telewest had introduced number portability in all of its franchises.
Regulation
General
The operation of cable/telephony systems in the UK requires two
principal licenses: (i) a cable television license which permits the holder to
provide cable television services to a specific franchise area and (ii) a
telecommunications license which allows the holder to construct and operate the
physical network necessary to provide cable television and telephony services.
The ITC was established under the Broadcasting Act 1990 (the "1990 Act") as the
governmental body responsible for issuing and enforcing cable television
licenses, satellite television service licenses and all other commercial
broadcast licenses. Under the Broadcasting Act 1996, the ITC is responsible
for licensing and regulating digital terrestrial television program services,
other digital terrestrial services (such as interactive services and text
services) and the digital terrestrial multiplexes (except the multiplex awarded
to the BBC). Telecommunications licenses are issued by the Department of Trade
and Industry ("DTI") and enforced by OFTEL. In addition, cable/telephony
operators may also be required to secure other licenses, including those
relating to the use of wireless telegraphy apparatus.
Cable Television Licenses
General. The UK has been divided into franchise areas and each cable
television license gives the licensee the right to provide television services
within the relevant franchise area. The stated policy of the ITC is presently
that only one cable television license will be granted in respect of each
franchise area. This exclusivity is not written into the license itself and the
ITC may change its policy at any time although it has indicated that it does
not intend to do so for the foreseeable future.
I-28
<PAGE> 32
The operator of a cable television franchise which covers more than
1,000 premises must hold a cable television license in the form of either (i) a
prescribed diffusion service license ("PDSL") issued under the predecessor to
the 1990 Act, or (ii) a local delivery service license ("LDSL") issued by the
ITC under the 1990 Act. LDSLs are awarded under a competitive bidding system
whereby the license is awarded to the highest cash bidder unless the ITC
determines that "exceptional circumstances" (primarily geographic coverage)
exist which require the license to be awarded to another party. The amount of
the bid is payable over the 15-year term of the license. In addition, the
licensee must pay a fixed percentage of "qualifying revenue" to the ITC in each
year of the term of the license. The percentage of qualifying revenue is set
by the ITC and is likely to vary from franchise to franchise. Under a PDSL,
the annual fee payable by the licensee is intended only to cover the ITC's
administration costs.
License Period and Renewal. LDSLs are issued for a period of 15 years
and are renewable upon application to the ITC for further periods of 15 years.
PDSLs were granted for a period of 15 years. An operator holding a PDSL can
apply to the ITC for an 8-year extension of the PDSL provided that the operator
holds a 23-year telecommunications license. Upon the expiration of the
extended PDSL, the operator will be required to apply for a new LDSL for the
franchise under the competitive bidding procedures required for the issuance of
LDSLs. If the operator elects not to extend the PDSL, it may apply to the ITC
(no earlier than 5 years prior to the expiration of the PDSL) to convert the
PDSL into a 15-year LDSL. Telewest's cable licenses have remaining terms of
approximately 2 to 14 years.
Restrictions on Ownership. Certain ownership restrictions in respect
of cable television licenses are set out in the 1990 Act. The ITC is required
to ensure that such licenses are not held by "disqualified" persons, which are
defined to include persons whose objectives are wholly or mainly political or
religious. There are also certain cross- media ownership restrictions in the
1996 Broadcasting Act (the "1996 Act") designed to prevent the accumulation of
interests in persons involved in other media (including local and national
newspapers) operating substantially in the same franchise area.
Restrictions on Transfer, Revocation. A cable license is only
transferable to a third party with the consent of the ITC. The ITC may revoke a
cable license if an operator fails to comply with the license conditions or if
the ITC considers revocation to be in the public interest. In addition, the ITC
may revoke the license if the characteristics of the licensee change (for
example, a change in control) such that the ITC would not have initially
awarded the license to such licensee.
Telecommunications Licenses
General. In 1991, the UK Government concluded as part of its Duopoly
Review that cable operators should be permitted to provide telephony services
over their systems. Under the current regulatory framework, a cable operator
must obtain a telecommunications license under the Telecommunications Act of
1984 (the "1984 Act") regardless of whether that operator intends to offer
cable telephony services. Telecommunications licenses are not exclusive and,
therefore, a cable operator is subject to competition in the provision of voice
telephony services within its franchise area. An annual fee is payable by the
operator under the license based upon the costs incurred by the Director
General in carrying out his functions under the 1984 Act.
License Period. Licenses are awarded by the Secretary of State for
Trade and Industry and are either for a period of 15 or 23 years, depending
upon the technical nature of the cable operator's system. Telewest's
telecommunications licenses will expire at various times between 2008 and 2017.
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<PAGE> 33
Restrictions on Transfer; Revocation. Telecommunications licenses are
not transferable; however, a change in control of the license holder is
generally permitted. Conditions in the license entitle the Secretary of State
to revoke the license in certain circumstances, including the breach of a
license condition (such as a failure to meet build milestones). The Director
General has powers under the 1984 Act to secure compliance with license
conditions and, subject to requirements for public consultation and the consent
of the licensee, to modify license conditions.
Build Schedule. Each telecommunications license prescribes build
milestones which require the licensee to construct its network according to a
set timetable. The milestones may be modified in the same way as any other
license condition, except that public consultation is required if a request is
sought to modify the final milestone. Failure to meet the milestones will
entitle the Director General to take action which could result in revocation of
the telecommunications license. As described previously, Telewest is currently
renegotiating its milestone obligations with both OFTEL and the ITC. Telewest
believes that it will be able to obtain the necessary modifications to its
obligations, although there can be no assurance it will be successful in so
doing.
Interconnection. Any cable operator providing telephony services will
need to interconnect its system with that of a PTO, international telephone
company or other telephone company, as the case may be, for calls that do not
originate and terminate on the cable operator's network. All PTO licenses
contain provisions obligating the PTO to enter into interconnection agreements
with other PTOs, including cable operators, if requested to do so by the party
seeking interconnection. If the parties are unable to reach agreement as to the
financial terms of the interconnection agreement, then either party may seek a
determination of those terms from the Director General. Where there is
interconnection with BT, specific regulations apply and interconnection is in
accordance with the terms of a standard form interconnection agreement. BT's
interconnection charges payable by the interconnecting operators are regulated
by OFTEL under a cost-based regulatory regime.
In 1997, Telewest began development of a broadband interfranchise
network to carry voice, data and video traffic between the franchises which is
expected to reduce interfranchise connection charges. This network is
currently operational and is scheduled to be completed by mid-1998.
A cable operator that provides telephony services may be required to
provide "equal access," a concept whereby local telephone systems are required
to offer customers access to each fixed link trunk system, thereby enabling the
customer to choose over which PTO's network to route its national and
international calls. OFTEL has not yet exercised its power to impose equal
access and the timing and terms of the introduction of equal access are at
present unclear.
Restrictions on PTOs. The existing telecommunications licenses of PTOs
(other than cable operators) contain a prohibition on the licensee conveying
entertainment services in its own right over its existing national telephone
networks. The UK Government has stated in its Duopoly Review that it will not
review whether this restriction should be removed until later in 1998 (and only
then if recommended to do so by OFTEL), and that it would not allow PTOs (other
than cable operators) to provide entertainment services over their existing
national networks until 2001. The relevant regulatory body has not specified an
exact deadline for an announcement. The ITC has confirmed that, in its view,
BT and other national PTOs are not prevented by the restriction in their
existing telecommunications licenses from providing video-on-demand services
over their networks.
I-30
<PAGE> 34
Restrictions on Price. Cable television and cable telephony services
are not currently subject to specific government price control in the United
Kingdom. However, BT, the largest provider of business and residential
telephony services in the UK, is subject to certain price controls. Because
Telewest seeks to compete with BT by pricing its services below BT's,
Telewest's prices are affected by such price controls as well.
Stockholding in Telewest; Anti-Dilution Rights
At December 31, 1997, TINTA and U S WEST each beneficially owned
136,638,250 or 26.5% 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 through their respective 50% interest in TW Holdings,
L.L.C., a Colorado limited liability company ("TW Holdings"). At December 31,
1997, SBC Communications, Inc. ("SBC") and Cox, each beneficially owned
91,997,480 or approximately 10% (assuming no conversion of the Telewest
convertible preference shares) of the issued and outstanding Telewest ordinary
shares and 115,395,104 or approximately 23% of the issued and outstanding
Telewest convertible preference shares. In accordance with the requirements of
the London Stock Exchange, the Telewest convertible preference shares are
convertible into Telewest ordinary shares on a one-for-one basis only to the
extent that, following conversion, at least 25% of the ordinary shares remain
publicly held. Telewest's ordinary shares trade on the London Stock Exchange
and are represented by American Depository Receipt in the United States, where
they trade on the National Market tier of The Nasdaq Stock Market.
Under the Companies Act of 1985 of Great Britain, if Telewest issues
new equity shares for cash, it is required to offer those shares to its
existing shareholders (including TW Holdings) on a pre-emptive pro rata basis
(subject to exceptions for certain issuances approved by Telewest's
shareholders). TINTA and U S WEST have sought to further ensure that their
collective majority interest in Telewest will not be diluted without their
consent by obtaining options ("Anti-dilution Options") from Telewest which are
exercisable upon the issuance of Telewest ordinary shares by Telewest other
than for cash at a price related to the market price for Telewest ordinary
shares at the time of the exercise of the Anti-dilution Options. The
Anti-dilution Options grant affiliates of TINTA and U S WEST the right to
purchase additional Telewest ordinary shares for cash. For so long as the
aggregate beneficial ownership of Telewest ordinary shares by TINTA and U S
WEST exceeds 50.1% of the issued Telewest ordinary shares, prior to any
issuance by Telewest of Telewest ordinary shares for consideration other than
cash, the Anti-dilution Options are exercisable to the extent necessary to
permit TINTA and U S WEST collectively to maintain 50.1% of all shareholders'
voting rights in Telewest. TW Holdings is to exercise the foregoing pre-emptive
rights and Anti-dilution Options, on behalf of TINTA and U S WEST, to the
extent necessary to ensure that it owns at least 50% of the outstanding
Telewest ordinary shares.
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<PAGE> 35
The City Code regulates various aspects of takeovers and mergers
relating to UK public companies and imposes certain conditions on acquisitions
of shares by certain shareholders. Rule 9 of the City Code ("Rule 9") provides
that, except in cases when dispensation is granted by the Panel on Takeovers
and Mergers (the "Takeover Panel"), when any person or group of persons acting
in concert acquires shares which represent 30% or more of the voting rights in
a company, or when any person or group of persons acting in concert already
holding not less than 30% and not more than 50% of the voting rights in a
company acquires in any period of 12 months additional shares representing more
than 1% of such voting rights, such person or group of persons is normally
required to make a general offer to purchase from all the shareholders all
their shares in the company. Rule 9 would ordinarily apply to the exercise of
rights to convert shares such as the Telewest convertible preference shares
into Telewest ordinary shares and such exercise would ordinarily be considered
to be an acquisition of such shares for the purposes of Rule 9.
The Takeover Panel has confirmed that Rule 9 will not apply to the
conversion of the Telewest convertible preference shares or, provided that
TINTA and U S WEST continue to beneficially own collectively more than 50% of
the outstanding Telewest ordinary shares, to the exercise of the Anti-dilution
Options. The foregoing will not, however, prevent Rule 9 from applying, if it
otherwise would, to future acquisitions of Telewest ordinary shares made by
TINTA and its affiliates or U S WEST and its affiliates.
Certain Agreements with Telewest
Technology Sharing. TINTA makes available to Telewest technology
related to cable television and telephony, to the extent requested by Telewest,
at a price which is generally no less favorable than that at which such
technology is provided to non-affiliates.
Registration Rights. Telewest has granted TINTA and its affiliates
the right, subject to certain exceptions, to require Telewest to include all or
a portion of the shares beneficially owned by TINTA in any registered offering
by Telewest, and to cause Telewest, on up to two occasions, to offer all or any
portion of the Telewest ordinary shares beneficially owned by TINTA in a
registered offering in the United States or the United Kingdom. Identical
registration rights have been granted to U S WEST.
Arrangements Regarding Control of Telewest
TW Holdings. TINTA and U S WEST each hold an indirect 50% interest in
TW Holdings. The only assets of TW Holdings are the Telewest shares
beneficially owned by TINTA and U S WEST, which shares constitute a majority
interest in Telewest. The operating agreement which governs the operations of
TW Holdings, as well as certain other agreements to which TINTA and U S WEST
are subject, contain provisions regarding, among other things, the voting and
disposition of the Telewest shares, as set forth in more detail below. The
members in TW Holdings are entitled to elect a Board of Managing Directors of
four persons (two of whom are nominated by the TINTA members and two of whom
are nominated by the U S WEST members) who are responsible for the management
of TW Holdings. The operating agreement contains restrictions on transfer of
ownership interests in TW Holdings by the members which are commensurate with
restrictions on transfer of shares of Telewest described below. References in
the following discussion and elsewhere in this Report to ownership of Telewest
shares by TINTA and U S WEST include their respective pro rata portions of the
Telewest shares held by TW Holdings.
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<PAGE> 36
Board Representation. The Telewest charter provides that so long as
both TINTA and U S WEST each beneficially own at least 25% of the outstanding
Telewest ordinary shares, each will be entitled to appoint two directors to the
12- member Telewest board of directors. Each of SBC and Cox are also entitled
to appoint a director to the Telewest board of directors for so long as it owns
at least 5% of the outstanding Telewest ordinary shares (assuming conversion of
their Telewest convertible preference shares). So long as TINTA and U S WEST
have the right to appoint directors, the remainder of the Telewest board is
required to consist of the three most senior executive officers of Telewest and
three independent non-executive directors.
TINTA and U S WEST have entered into various agreements, described
below, with respect to the ownership and voting of shares of Telewest currently
beneficially owned by them and the manner in which they will cause the director
designees of TINTA and U S WEST to vote on matters considered by the Telewest
board of directors. The agreements continue for so long as TINTA and its
affiliates and U S WEST and its affiliates own in the aggregate 50% or more of
the outstanding Telewest ordinary shares.
Voting of Shares; Director Votes. TINTA and U S WEST have agreed that
on any matter requiring shareholder or board of directors approval, they will
cause TW Holdings, or their respective director designees (subject to such
directors' fiduciary duties to Telewest and its minority stockholders), as
applicable, to vote in such manner as may be agreed by them or, in the absence
of such agreement, in such manner as would be most likely to continue the
status quo, without materially increasing Telewest's financial obligations or
materially deviating from its approved budget and business plan. If either
TINTA or U S WEST (or their respective director designees) is precluded from
voting on a matter because of a conflict of interest, the other (or its
director designees, as the case may be) may vote on such matter as it deems
appropriate. As a result of the foregoing arrangements, TINTA and U S WEST will
generally be able to determine the outcome of any matter requiring shareholder
approval (other than matters which require approval by 75% of the
stockholders), including the election or removal of directors and the creation
and issuance of shares, and TINTA and U S WEST will have significant influence
over decisions made by Telewest's board of directors (including a veto right as
to matters requiring more than a two-thirds vote of the board). TINTA and U S
WEST have agreed with Telewest that, so long as they collectively beneficially
own more than 50% or individually own more than 30% of the outstanding Telewest
ordinary shares, they will use their respective best efforts to ensure that a
majority of the directors of Telewest are "independent" (within the meaning of
the Listing Rules of the London Stock Exchange) of TINTA and U S WEST.
Disposition of Telewest Stock; Standstill. TINTA and U S WEST have
each agreed not to transfer any of the shares of Telewest stock beneficially
owned by them (other than to certain affiliates) without first offering such
shares to the other on the same terms as the proposed transfer. They have each
further agreed that they will not cause their respective beneficial interests
in Telewest to be reduced to 25% or less of the outstanding Telewest ordinary
shares without the consent of the other. After November 22, 1999, however,
TINTA and U S WEST will each be permitted to cause their beneficial interests
to be reduced below 25% through sales in the public market, after first
offering such shares to the other on substantially the same terms.
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<PAGE> 37
SBC and Cox have agreed, subject to certain exceptions, that for a
period of four years after October 3, 1996, any sale of their shares in
Telewest in the public market will be made with the involvement of Telewest's
stockbrokers. In connection with a private disposition of their Telewest
shares after October 3, 1996, SBC and Cox must first offer such shares to U S
WEST, TINTA and Telewest. In addition, subject to certain exceptions, SBC and
Cox have agreed that they will not increase their holdings of shares in
Telewest through the acquisition of additional Telewest ordinary shares, the
conversion of Telewest convertible preference shares, or otherwise.
In the event of a change of control of TINTA or U S WEST,
respectively, the party not undergoing the change of control will have an
opportunity to either consent to the change or to require the other to elect to
purchase such party's beneficially owned shares of Telewest stock for a
specified price, or to sell the shares of Telewest beneficially owned by it to
the party not undergoing the change of control at the same price.
TINTA and U S WEST have also agreed to certain restrictions on the
acquisition of any additional equity interests in Telewest other than pursuant
to the pre-emptive rights or Anti-dilution Options described under "--
Stockholding in Telewest; Anti-Dilution Rights" above.
Restrictions on Telewest's Business. Telewest has agreed that, subject
to certain exceptions, its business will be limited to cable television, cable
telephony and wireless telephony services in the United Kingdom and all matters
incidental thereto, including engaging in television programming in the United
Kingdom incidental to Telewest's cable television business. Any change in its
business would require the consent of TINTA and U S WEST (for so long as they
collectively beneficially own in excess of 50% of the outstanding Telewest
ordinary shares) or the prior consent of Telewest's shareholders. Telewest has
also agreed, (i) for so long as TINTA beneficially owns 5% or more of the
outstanding Telewest ordinary shares, not to take any action that would violate
Flextech's right of first refusal with respect to offers made to UAEH, the
subsidiary of TINTA which holds TINTA's interest in Flextech, which offers
relate to English language cable and satellite programming in the United
Kingdom and Europe described above under "Flextech p.l.c.--Interrelationships
with Flextech--Right of First Refusal", and (ii) for so long as U S WEST
beneficially owns 5% or more of the outstanding Telewest ordinary shares, not
to engage in any business, activity or practice that would violate certain
contractual arrangements to which U S WEST or its affiliates are a party
(including an arrangement that prohibits Telewest from engaging in wireless
telephony other than "Fixed Wireless Telephony"). In addition, Telewest has
agreed not to engage in any business outside of the UK that would violate any
contractual obligation of any subsidiary of TINTA or U S WEST, respectively,
that holds (or at any time held) any Telewest ordinary shares, entered into at
a time when the beneficial ownership of Telewest ordinary shares by TINTA or U
S WEST, respectively, was more than 25% of the outstanding Telewest ordinary
shares. Any restriction imposed on Telewest pursuant to the foregoing sentence
would expire when the beneficial ownership of Telewest ordinary shares by TINTA
or U S WEST, respectively, decreases to 5% or less.
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<PAGE> 38
Restrictions on TINTA's Business. TINTA has agreed with Telewest that,
for so long as TINTA beneficially owns more than 25% of the outstanding
Telewest ordinary shares and for a period of two years thereafter, neither
TINTA, TCI nor any of TCI's controlled affiliates will own assets comprising
cable television or cable telephony systems in the United Kingdom without
Telewest's consent or without first offering Telewest the opportunity to
undertake such activity. TINTA, TCI and TCI's controlled affiliates are also
prohibited from acquiring entities owning cable television or cable telephony
systems in the United Kingdom (other than Telewest). The foregoing restrictions
do not prohibit affiliates which are not controlled affiliates of TCI from
owning such assets nor do they prohibit TCI or its affiliates (including TINTA)
from making additional equity investments in any such affiliate, provided that
if such affiliate becomes a controlled affiliate of TCI at a time when it owns
such assets, TCI would be required to cause such assets to be offered for sale
to Telewest. U S WEST and its controlled affiliates are subject to similar
restrictions.
Notwithstanding the foregoing business restriction and first-offer
obligation, TINTA will not be prohibited from, and the first-offer obligation
will not apply to: (a) owning or acquiring 10% or less of the outstanding
equity of any entity that engages in cable television or cable telephony in the
UK, (b) owning or acquiring any interest in an entity engaged in (i) wireless
telephony, (ii) billing, validation or call authorization services and related
or ancillary services for use by any provider of telecommunications services or
(iii) any subscriber voice or data telecommunications transmission service that
interconnects a Telewest network with other telecommunications networks outside
the licensed territory of a Telewest network but does not compete with a
Telewest network for cable telephony customers, (c) directly or indirectly
providing any subscriber voice or data telecommunications transmission service
(including, but not limited to, wireless telephony) that operates only in part
by cable links to subscribers' premises (except in respect of the
interconnection of such service to cable links that service customers in the
licensed territory of any Telewest network), (d) owning or acquiring, directly
or indirectly, an interest in any entity that provides programming services in
the UK or (e) acquiring an interest in any entity whose annual gross revenues
from cable television and cable telephony in the UK constitute 20% or less of
its total gross revenues, provided that if TINTA controls the entity, it offers
Telewest an opportunity to acquire the interest in cable television and cable
telephony assets in the UK of that entity. The business restriction and
first-offer obligations applicable to U S WEST are subject to similar
exceptions.
The foregoing restrictions do not apply to TINTA's existing
investments in companies that operate in the UK cable television and broadcast
industry, including TINTA's interest in Flextech. None of the contractual
arrangements involving TINTA, TCI or any of its affiliates and Telewest
restricts the ability of Flextech, or any company in which Flextech has an
interest, to operate in the UK cable television and telephony industry or to
expand their operations, including through acquisitions of cable businesses or
franchises.
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<PAGE> 39
UNITED INTERNATIONAL INVESTMENTS
TINTA's ownership interest in Tevel Israel International
Communications Ltd. ("Tevel"), Princes Holdings Limited ("PHL") and Melita
Cable TV Limited ("Melita"), the operating companies that own cable systems in
Israel, Ireland and Malta, respectively, are held through United International
Investments ("UII"), a partnership between TINTA and United and Phillips
Communications B.V. ("UPC"). Each of TINTA and UPC have the right to appoint
one half of the members of UII's management committee with UPC presently acting
as the managing partner. In addition, under the UII partnership agreement,
each of UPC and TINTA (and certain of their affiliates) have agreed that,
subject to certain exceptions, for so long as it remains a partner in the
partnership and for a period of three years thereafter, it will not participate
in any business that distributes television broadcast signals through cable or
any other means, that provides certain programming services, or that otherwise
competes with an operating company of UII, in each case, in any country where
an operating company of UII does business without first offering such
opportunity to UII. TINTA is also subject to certain transfer restrictions
with respect to its investment in UII. The UII partnership agreement also
contains liquidity rights that, after a certain "offer date" for each asset
(PHL, Tevel, Melita) is passed, allow each partner to propose a sale of the
asset to the other partner or force the sale or dissolution of the entity
holding the asset. The "offer date" for each asset is noted below.
Tevel is a corporation formed under the laws of Israel. At December
31, 1997, TINTA had a 50.0% ownership in UII with respect to UII's 46.6%
indirect ownership interest in Tevel. Currently, a subsidiary of UII is
entitled to designate two of the five directors of Tevel. Certain actions,
including budget and business plan approval, require a 70% vote of the
directors. The "offer date" for Tevel under the UII agreement was May 31,
1997.
PHL is a corporation formed under the laws of the Republic of Ireland.
At December 31, 1997, TINTA had a 55.6% interest in UII with respect to UII's
indirect 45.0% interest in PHL. A subsidiary of UII has the right to designate
four of the eight directors of PHL; pursuant to the UII partnership agreement,
two are designated by TINTA and two by UPC. Certain extraordinary actions
require the approval of such UII subsidiary and the other shareholder of PHL,
and at any time after June 30, 1998 (which is the "offer date" for PHL under
the UII agreement), either such UII subsidiary or the other shareholder of PHL
may require PHL to effect an initial public offering if one shareholder is
unable to sell its interest in PHL to another shareholder as a private company.
Melita is a limited liability company formed under the laws of Malta.
At December 31, 1997, TINTA had a 50% interest in UII with respect to UII's 50%
interest in Melita. All of the interests in Melita are pledged as security for
Melita's obligations in connection with its debt financing. A subsidiary of
UII has the right to designate six of the nine directors of Melita; a majority
of the other non-UII directors must consent to certain material actions,
including payments of partnership distributions and dividends. The "offer
date" for Melita is tied to the system's market penetration.
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<PAGE> 40
Certain statistical information concerning Tevel, PHL and Melita as of
and for the year ended December 31, 1997 is set forth below:
<TABLE>
<CAPTION>
Israel- Ireland- Malta-
Tevel PHL Melita
-------- -------- --------
<S> <C> <C> <C>
Homes in service area 354,000 462,000 158,000
Homes passed 350,000 350,000 154,000
Basic subscribers 242,000 136,000 60,000
Basic penetration percentage 69% 39% 39%
Average churn rate (1) 15% 15% 12%
Average monthly revenue per subscriber(2) $ 25 $ 24 $ 18
Exchange Rates at December 31, 1997(3) 0.2829 1.4249 2.5575
</TABLE>
- ----------
(1) Represents the number of subscribers who terminated basic service or
whose service was terminated during the year ended December 31, 1997,
divided by the average number of basic subscribers during such period.
(2) Represents the December 31, 1997 U.S. dollar equivalent of the average
monthly revenue per subscriber for the year ended December 31, 1997.
Such amounts are calculated as (i) one-twelfth of the total cable
television revenue for such period, divided by (ii) the average number
of basic cable television subscribers during such period. Amounts are
translated using the exchange rate in effect on December 31, 1997.
(3) Represents U.S. dollars per local currency unit.
BRESNAN INTERNATIONAL PARTNERS (POLAND), L.P.
In September 1994, TINTA entered the Polish cable market when it
acquired an indirect 49% interest in Aster City, a cable operator serving
primarily the City of Warsaw. TINTA's interest in Aster City is held through
its 44.0% interest in BIP Poland. In September 1997, BIP Poland acquired from
local Polish investors an additional 48% interest in Aster City for
approximately $29 million. As a result of such transaction, BIP Poland's
ownership interest in Aster City increased to approximately 98%. Aster City is
currently rebuilding its cable network in order to permit it to offer its
customers enhanced cable and, subject to regulatory approval, telephony
services.
BIP Poland also holds a 100% ownership interest in two cable
television systems, Regionala Telewizja Kablowa Autocom Sp. z o. o. ("RTK
Autocom"), and Przedsiebiorstwo Rozwoju Handlui TeleKomunikacji Sp zo. o.
("PRHT"), serving the communities of Krakow and Warsaw, respectively. BIP
Poland also owns a 77.9% economic interest in Katowicka Telewizja Kablowa S.A.
("KTK"), a cable television operator in Katowice, Poland.
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<PAGE> 41
Certain statistical information concerning Aster City, RTK Autocom,
KTK and PRHT as of and for the year ended December 31, 1997 is set forth below:
<TABLE>
<CAPTION>
Aster RTK
City Autocom KTK PRHT
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Homes in service area 710,000 246,000 20,000 (4)
Homes passed 371,000 91,000 18,000 176,000
Basic Subscribers 195,000 42,000 18,000 76,000
Basic penetration percentage 53% 46% 100% 43%
Average churn rate(1) 2% 10% 6% 2%
Average monthly revenue per subscriber (2) $ 5.00 $ 4.00 $ 7.00 (4)
Exchange Rate at December 31, 1997(3) 0.2847
</TABLE>
- ----------
(1) Represents the number of subscribers who terminated basic service or
whose service was terminated during the year ended December 31, 1997,
divided by the average number of basic subscribers during such period.
(2) Represents the December 31, 1997 U.S. dollar equivalent of the average
monthly revenue per subscriber for the year ended December 31, 1997.
Such amounts are calculated as (i) one-twelfth of the total cable
television revenue for such period, divided by (ii) the average number
of basic cable television subscribers during such period. Amounts are
translated using the exchange rate in effect on December 31, 1997.
(3) Represents U.S. dollars per local currency unit.
(4) Not available.
In addition to its interests in RTK Autocom, PRHT, Aster City, and
KTK, BIP Poland also held, at December 31, 1997, a 95% interest in Telefonia
Polska Zachod Sp. z o. o. ("TPZ"), a joint venture between BIP Poland and a
local Polish partner. In March 1995, TPZ was granted a telephone license for
the Gorzow Wielkopolski province, which has a population of approximately
520,000. In Gorzow Wielkopolski, TPZ has secured a headend building, finalized
negotiations for a telephony switch and has constructed 34 kilometers of
network. TPZ has entered into an interconnect agreement with Telekomunikacja
Polska S.A. ("TPSA") and began providing telephony services during 1997. In
June 1995, TPZ was granted a second telephone license for the Szczecin province
(exclusive of the city of Szczecin), which has a population of approximately
600,000. In Szczecin, TPZ has acquired a headend site and is in negotiations
with TPSA for an interconnect agreement. TPZ expects to begin providing
telephony services in Szczecin during 1998.
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<PAGE> 42
On December 31, 1996, pursuant to an amended and restated agreement of
limited partnership of BIP Poland, (i) TINTA converted the principal balance of
a revolving loan it had made to BIP Poland ($23.8 million) to equity and made
an additional equity contribution of $10.0 million and (ii) BCI Poland (an
entity in which TINTA has no ownership interest and which prior to December 31,
1996 held a 20% general partnership interest in BIP Poland), contributed $18.5
million to BIP Poland, thereby reducing TINTA's ownership percentage from 80%
to 44.0%. The amended and restated agreement of limited partnership also
provides that each partner shall earn a return of 15% per annum on the average
of such partner's Unreturned Capital (as defined). Through December 31, 1997,
TINTA's Unreturned Capital in BIP Poland was $34.8 million.
Cash distributions from the partnership are first made to the partners
in accordance with the preferred return of 15% on the Unreturned Capital of the
respective partners accruing from the date of the capital funding (in the case
of TINTA's revolving loan that was converted to equity, from the date amounts
were loaned to the partnership) and second to the partners in accordance with
any remaining Unreturned Capital. Thereafter, distributions are made in
proportion to the partners' respective ownership percentages. The BIP Poland
partnership agreement provides that most significant transactions require the
approval of each partner for such period of time as such partner has at least a
20% ownership interest. The term of the partnership agreement expires in 2020.
TINTA is currently in discussions to sell its 44% interest in BIP
Poland to an affiliate of its partner in BIP Poland for $39.5 million. For a
description of these discussions, see "General Development of Business."
LATIN AMERICA AND THE CARIBBEAN
Programming Operations
STRATEGIC VENTURES
TINTA, along with News Corp., Organizacoes Globo ("Globo") and Grupo
Televisa S.A. ("Televisa"), have begun to form strategic partnerships for the
development and operation of direct-to-home satellite services for Brazil,
Mexico, and other Central and South American countries (collectively, the "DTH
Ventures"). Globo is Brazil's largest media company with interests in
entertainment programming, broadcasting, cable distribution and publishing.
Televisa, based in Mexico, is the largest media conglomerate in the
Spanish-speaking world with interests in numerous businesses, including
international programming, broadcast and cable distribution, music recording
and feature film production. The DTH Ventures launched a Brazilian platform,
NetSat, in October 1996 providing 51 video, 32 audio and 20 pay per view
channels throughout Brazil, and a Mexican platform, Innova, in December 1996
providing 84 video, 48 audio and 18 pay per view channels throughout Mexico.
The DTH Ventures launched the third and final platform, Multicountry, in
December 1997, which is currently offering DTH satellite services in Columbia
and provides 42 video, 32 audio, and 25 pay per view channels. DTH Ventures
intends to expand Multicountry to other countries in Central and South America
(excluding Brazil and Mexico). TINTA owns a 10% interest in the NetSat and
Multicountry platforms, and TINTA intends to purchase a 10% interest in Innova.
Through December 31, 1997, TINTA had contributed $24.9 million to the DTH
Ventures.
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<PAGE> 43
FOX SPORTS INTERNATIONAL AND TORNEOS Y COMPETENCIAS S.A.
Fox Sports International
Effective April 29, 1996, TINTA, Liberty and News Corp. formed Fox Sports
International, a joint venture including a number of partnerships or other
entities under common ownership, to operate currently existing sports services
in Latin America and Australia and a variety of new sports services throughout
the world (collectively, the "International Sports Territory"), excluding the
United States, Japan, England, Canada and certain other defined geographic
areas. News Corp. owns a 50% interest in Fox Sports International and the
remaining 50% is owned by Liberty/TINTA. TINTA contributed to Liberty/TINTA
its 35% equity interest in Torneos and Liberty contributed to Liberty/TINTA
its interests in Latin American and Australian sports programming services and
its rights under various television sports programming agreements.
Liberty/TINTA contributed such non-cash assets contributed to it by TINTA and
Liberty to Fox Sports International. News Corp. contributed various
international sports rights and certain trademark rights in exchange for its
50% interest in Fox Sports International. TINTA acquired its 35% ownership
interest in Torneos from the selling stockholders of Torneos (the "Torneos
Stockholders") on July 28, 1995 for aggregate consideration of $30 million
(exclusive of certain contingent obligations to pay additional consideration,
which obligations were assumed by Fox Sports International). During the third
quarter of 1997, Fox Sports International distributed (i) its 35% interest in
Torneos to Liberty/TINTA (along with the contingent obligation to pay
additional consideration which Fox Sports International had previously
assumed) and (ii) certain Australian sports rights to News Corp. As of
December 31, 1997, TINTA had made cash contributions to Torneos on behalf of
Liberty/TINTA of $48 million. It is anticipated that Liberty's portion of
such capital calls will be repaid to TINTA either in cash or other economic
consideration to be determined at some future date. In October, 1997, TINTA
purchased a direct 5% interest in Torneos for $12.0 million.
As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of STAR
Television Limited. Upon the delivery of such stock to Liberty/TINTA, News
Corp. is entitled to receive from Liberty/TINTA 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 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. In particular, TINTA acquired worldwide distribution rights outside of
Argentina for Clasico del Domingo and worldwide distribution rights (excluding
Buenos Aires) for Futbol de Primera and Torneos de Verano (Summer Games). The
rights under the TINTA/Torneos Sports Agreement have been assigned to Fox
Sports International.
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<PAGE> 44
News Corp. is entitled to nominate the principal officers of Fox
Sports International, who are subject to approval by Liberty/TINTA. All
matters not in the ordinary course of the business of Fox Sports International
are to be determined by the unanimous vote of the partners. Prior to November
1, 2000, News Corp. and Liberty/TINTA cannot transfer their interests in Fox
Sports International other than to certain of their respective affiliates.
Thereafter, any transfer to a non-affiliate is subject to a right of first
refusal in favor of the non-transferring partner. In addition, each of News
Corp., Liberty and TINTA has agreed that Fox Sports International will be the
exclusive vehicle through which they will engage in international sports
programming businesses in the International Sports Territory, subject to
certain exceptions.
Torneos y Competencias S.A.
Liberty/TINTA (in which TINTA owns a 50% interest) owns a 35% interest
in Torneos. As a result of TINTA's acquisition of a 5% direct interest in
Torneos in October 1997, TINTA now owns a 22.5% beneficial interest in Torneos.
See "General Development of Business." On October 10, 1997, CEI and TISA each
acquired a 20% interest in Torneos. As a result, CEI, TISA and TINTA now
together own controlling interests in both Torneos and Cablevision. TINTA's
ownership of Torneos is consistent with TINTA's strategy of owning programming
interests in areas where TINTA also has a meaningful presence in the
distribution business.
Historically, Torneos has primarily been involved in the production of
Argentine sports programming. Recently, Torneos has begun implementing a
strategy to expand its operations into the broadcast, radio and print media
industries. In furtherance of that strategy, in December 1997, Torneos acquired
50.0% and 40.0%, respectively, of the capital stock of Television Satelital
Codificada S.A. and Tele-Red Imagen S.A., the companies that distribute a
significant percentage of its sports programming for an aggregate purchase price
of $107.5 million. In December 1997, Torneos also acquired through Prime
Argentina S.A. ownership interest in Telearte S.A., the owner and operator of
Channel 9 of Buenos Aires, as well as interests in television programming and
distribution businesses and three television broadcasting affiliates of Channel
9 based in the cities of Mar Del Plata, Parana and Resistencia. Torneos paid
$49.0 million in cash, and will pay an additional $21.0 million within one year
of the purchase and an additional $4.0 million payable in equal monthly
installments over the next eight years, for its interest in such companies. On
February 25, 1998, the Board of Directors of Torneos voted in favor of acquiring
a 10% interest in Editorial Atlantida S.A., an Argentine media company. On March
6, 1998, Torneos signed the MOU to purchase Pramer, one of Argentina's leading
cable programmers. The MOU also provides that Torneos (through Pramer) will
acquire a 7.2% interest in a number of companies included in MultiMedios
America. For a more detailed description of these transactions, see "General
Development of Business." If all of the above described transactions are
consummated, the acquisitions should serve to transform Torneos into a full
service programming company. Torneos will continue to produce significant
amounts of sports programming for Fox Sports International.
CABLEVISION S.A.
In April 1995, TINTA acquired a 51% equity interest in Cablevision.
On October 9, 1997, the Cablevision Sale was consummated which resulted in a
reduction of TINTA's ownership interest in Cablevision to 26.2%. See
discussion under "General Development of Business." As described in more
detail below, following the Cablevision Sale, TINTA continues to have the right
to manage Cablevision pursuant to a renewable five-year management contract
that was entered into in connection with the Cablevision Sale, and all material
corporate transactions of Cablevision require TINTA's approval, so long as
TINTA maintains at least a 16% ownership interest in Cablevision.
I-41
<PAGE> 45
Cablevision began offering cable television service to subscribers in
Buenos Aires in 1981 and is currently one of the two largest providers of cable
television services in Argentina based on the number of subscribers served by
its cable systems and those of its equity affiliates. At February 1, 1998,
Cablevision provided, on an equity basis, cable television service to an
aggregate of approximately 1.5 million subscribers. Cablevision's operations
and networks are concentrated primarily in the City of Buenos Aires and the
surrounding metropolitan area (such surrounding area, "Greater Buenos Aires"),
the wealthiest and most populous regions in Argentina. Cablevision also
operates systems in Buenos Aires Province and certain interior regions in
northern Argentina.
In October 1997, Cablevision acquired a 50% ownership interest in the
cable systems of VCC and a 50% ownership interest in the cable systems of the
UIH Companies, and in January 1998, Cablevision acquired all of the cable
systems of Mandeville. As a result of these acquisitions, Cablevision added
approximately 850,000 equity subscribers. For a description of the Fintelco
Acquisition, the UIH Acquisition and the Mandeville Acquisition, see "General
Development of Business."
The Argentine cable television industry has experienced a period of
significant consolidation. Currently, two multiple system operators,
Cablevision and Multicanal S.A. ("Multicanal"), collectively serve
approximately 3.1 million of Argentina's approximately 5.1 million cable
subscribers. To date, most of the consolidation has taken place in the
country's urban centers, particularly in the City of Buenos Aires and Greater
Buenos Aires. Cable television service in Argentina's inner regions and
provinces, however, remains highly fragmented with over 600 small operators
serving an estimated 1.8 million cable households. In connection with the
Fintelco Acquisition, the remaining 50% of Fintelco was acquired by Multicanal,
and Multicanal also purchased the remaining 50% of the UIH Companies.
Cablevision and Multicanal have agreed in principle to divide equally
the assets, liabilities and subscribers of Fintelco and the UIH Companies and
have established a committee comprised of representatives of both companies to
develop a "split up" plan. The committee is expected to submit its plan to the
respective boards of directors of Cablevision and Multicanal in April 1998. If
approved, it is expected that Cablevision and Multicanal will thereafter begin
to exercise management control over the respective systems and subscribers
allocated to them under the split up plan. Full legal division of Fintelco and
the UIH Companies is not expected to occur until the fourth quarter of 1998, by
which time all required contractual and regulatory consents and approvals are
expected to have been obtained or requested. Cablevision and Multicanal are
not under any contractual obligation to proceed with a division of Fintelco or
the UIH Companies. Accordingly, no assurance can be given that such division
will be effected or that the subscribers of Fintelco and the UIH Companies will
be divided on an equal basis. Also, no assurance can be given that all
regulatory consents and approvals that are required to be obtained will be
obtained.
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<PAGE> 46
The following table presents certain information concerning the
operations of Cablevision and the cable systems in which it has recently
acquired an interest as of and for the year ended December 31, 1997.
<TABLE>
<CAPTION>
VCC UIH
CABLEVISION SYSTEMS COMPANIES MANDEVILLE
(1) (2) (2) SYSTEMS
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Homes passed 1,682,278 860,000 132,000 683,000
Basic subscribers 622,912 349,000 75,000 430,000 (3)
Basic penetration rate 45% 41% 57% 63%
Average churn rate (4) 22% 28% 21% 16%
Average monthly revenue per subscriber (5) $ 33 $ 33 $ 33 $ 30
</TABLE>
- ----------
(1) Excludes other cable systems listed in this table.
(2) Information presented reflects Cablevision's equity interest.
(3) Mandeville also provides MMDS service to approximately 11,000
subscribers.
(4) Represents the number of subscribers who terminated basic service or
whose service was terminated during the year ended December 31, 1997,
divided by the average number of basic subscribers during such period.
(5) Represents the average monthly revenue per subscriber for the year
ended December 31, 1997. Such amounts are calculated as (i)
one-twelfth of the total cable television revenue for such period,
divided by (ii) the average number of basic cable television
subscribers during such period.
Construction
Cablevision believes that its cable distribution network is among the
most technologically advanced systems in Argentina. Since 1995, Cablevision
has invested more than $47.2 million towards the construction of approximately
2,117 miles of cable plant. Approximately 50% of Cablevision's network consists
of a combination of coaxial and fiber optic cable utilizing 750 MHz bandwidth
capacity. This infrastructure provides Cablevision with a unique platform from
which it can offer enhanced entertainment, telecommunications and information
services. Cablevision is currently offering subscribers passed by 750 MHz cable
in the City of Buenos Aires and Greater Buenos Aires Internet access utilizing
high speed cable modems. As new revenue generating products and services, such
as pay-per-view events and movies and video- on-demand, become available in the
future, Cablevision expects to aggressively market those services to
subscribers in areas utilizing 750 MHz architecture. Cablevision is
undertaking to upgrade additional portions of its cable systems to 750 MHz
capacity, and anticipates that 75% of its systems will be upgraded to that
bandwidth by 2002. Following the anticipated division and integration into
Cablevision's operations of 50% of the VCC Systems and 50% of the cable systems
operated by the UIH Companies, both of which are expected to occur in the
fourth quarter of 1998, Cablevision expects that more than 50% of its
subscribers will be receiving signals utilizing a combination of fiber optic
and coaxial cable with 750 MHz bandwidth capacity.
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<PAGE> 47
Pricing
As of December 31, 1997, Cablevision was offering its subscribers
basic cable service which typically includes between 40 and 65 channels,
depending on the particular system. The basic service offered by substantially
all of Cablevision's systems (exclusive of Mandeville) is priced at an average
of approximately $33 per month. Monthly prices for basic service in the
Mandeville Systems, VCC Systems and the systems operated by the UIH Companies
average $30, $33 and $33, respectively. To receive premium programming,
subscribers must either rent or purchase from Cablevision an addressable set
top unit or utilize readily available low quality decoding devices known as
traps (for which subscribers pay an installation fee), and pay an incremental
monthly fee for such programming. The only premium services currently offered
by Cablevision are Friday and Sunday soccer matches and adult movies. In an
effort to enhance revenue opportunities associated with premium service,
Cablevision plans to roll out residential pay-per-view movie channels in those
parts of its service area that have been upgraded to 750 MHz, increase the
deployment of addressable converters and gradually begin "tiering" its program
offerings. No assurance can be given that Cablevision will be successful in
generating additional revenues as a result of these efforts.
Regulation
Cable television and broadcast companies in Argentina are required to
obtain a non-exclusive broadcast license from the Comite Federal de
Radiodifusion ("COMFER"). COMFER has broad regulatory authority over
broadcasting in Argentina, including suitability of content. Broadcast licenses
are required in order for a programmer to broadcast its channels and in order
for a cable operator to carry programming over its cable network. A license is
granted for a 15- year term and the licensee has the right to a 10-year
extension at the end of the initial term. Licenses may be revoked for breach
of regulations pertaining to broadcast licenses, or if such revocation would be
in the "public interest." There is currently no regulation of cable
subscription rates in Argentina.
In November 1990, the Argentine telephone system was privatized and
two companies, Telefonica de Argentina S.A. ("Telefonica") and Telecom
Argentina - France Telecom S.A. ("Telecom"), were granted exclusive licenses to
provide local and long distance telephony service. Each such license covered
separate areas of Argentina. On March 10, 1998, the Executive Branch of the
Argentine national government issued Decree #264. Although much of the decree
requires clarification, it appears to permit two new licenses for wire-line
telephone and international data transmission services in Argentina beginning
in October/November, 1999. It also ends the division of the country between
Telecom and Telefonica Argentina and permits each of the two incumbent
operators to offer nationwide basic telephone service and to compete directly
with each other. If none of the licenses has been granted by November 1999,
direct competition between the two incumbent operators will be postponed until
November 8, 2000.
Neither Telecom nor Telefonica (or any of their direct and/or indirect
affiliates) may apply for either of the two new telephone licenses. Moreover,
as a result of TISA's and CEI's ownership interest in both COINTEL (owner of
51% of Telefonica Argentina) and Cablevision, it appears that (even if it
determined to do so) Cablevision would not be permitted to bid for such
licenses or to own an interest in any company that obtained such licenses. The
Decree also appears not to have eliminated Telefonica's and Telecom's
prohibition from entering the cable television business directly.
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<PAGE> 48
In October 1994, a bilateral treaty between Argentina and the United
States concerning the reciprocal encouragement and protection of investments
took effect. Under this treaty, there is no limitation on the amount a United
States company may acquire of an Argentine company, including one that holds
broadcast licenses issued by COMFER. However, all investments in Argentine
broadcasting and cable companies must receive prior approval from COMFER.
Until recently, the Argentine congress was considering new legislation
relating to, among other things, limitations on foreign ownership of media
companies (which limitations would not apply to U.S. companies or U.S.
citizens) and certain restrictions preventing basic telephony licensees from
owning interests in radio and television broadcasting. Passage of such
legislation has not progressed and the Ministry of Economy has requested that a
new draft be prepared under more deregulated guidelines, although it is
anticipated that certain limitations may be imposed on basic telephony
licensees' ability to enter the broadcasting business.
Competition
The multi-channel television industry in Argentina is extremely
competitive. The Argentine government does not grant exclusive broadcast
licenses to cable operators which has produced substantial overlapping cable
services and network buildout areas ("overbuilds"), particularly in the City of
Buenos Aires and Greater Buenos Aires. As a result, certain of Cablevision's
cable systems have been overbuilt by one or more competing cable networks.
Approximately 75% of the homes passed by Cablevision's cable distribution
network at December 31, 1997, were passed by a competing cable operator,
primarily Multicanal. Competition among cable systems is based primarily on
price, program offerings, customer satisfaction and quality of the system
network. Management believes that Cablevision is competitive in each of these
areas and, in addition, can compete effectively against other segments of the
pay television industry.
Terms of Cablevision Investment
On April 25, 1995, TINTA acquired a 51% interest in Cablevision. On
October 9, 1997, the Cablevision Sale was consummated which resulted in a
reduction of TINTA's ownership interest in Cablevision to 26.2%. Following the
Cablevision Sale, the other shareholders of Cablevision are CEI (33.3% equity
interest), TISA (33.3% equity interest) and Martin Eurnekian ("Eurnekian")
(7.2% equity interest). CEI is a publicly held Argentine holding company
engaged in the telecommunications, cable television and media businesses in
Argentina. TISA is the international holding company of Telefonica de Espana
S.A., the Spanish telephone company.
In connection with the Cablevision Sale, TINTA and Cablevision entered
into a renewable five-year management contract (the "Cablevision Management
Agreement") pursuant to which TINTA agreed to manage Cablevision and its
subsidiaries' business and provide services, expertise and know-how with
respect to Cablevision's entire range of activities. For its management
services, TINTA is entitled to receive a quarterly fee of 1.3% of Cablevision's
earnings before interest, taxes, depreciation and amortization. Such
management fee will in no event be less than $450,000 per quarter.
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<PAGE> 49
TINTA and the other shareholders of Cablevision entered into a
shareholders agreement in connection with the Cablevision Sale, pursuant to
which TINTA has the right to appoint two of Cablevision's ten directors (so
long as TINTA maintains at least a 20% interest in Cablevision) and all
material corporate transactions of Cablevision require TINTA's approval, so
long as TINTA maintains at least a 16% interest in Cablevision. In addition,
each shareholder has (i) a first negotiation right in respect of its pro rata
portion of shares of Cablevision offered for sale by any other shareholder to
any third party and (ii) a right of first refusal to acquire its pro rata
portion of any shares owned by any other shareholder in respect of which an
offer to purchase has been received from any third party or any other
shareholder. Transfers to affiliates are not subject to such first negotiation
right and right of first refusal, provided that certain prescribed procedures
are followed. None of the shareholders shall, without written consent of the
others, allow any encumbrance on any of their shares. Each shareholder owning
at least 10% of Cablevision's capital stock has the right to veto transfers of
Cablevision shares to certain third parties. Subject to certain exceptions,
the shareholders have also agreed to carry out, through Cablevision, all their
future activities related to the video entertainment distribution business
through per subscriber cable systems, MMDS, DTH and UHF in Argentina, Uruguay
and such other countries as the parties may determine in the future, and have
agreed not to compete in the same business with Cablevision within such
territories.
Subject to certain conditions, TINTA may require CEI and TISA to
purchase their pro rata portion of TINTA's shares in Cablevision at fair market
value (i) at any time after October 9, 1998 and prior to October 9, 1999 and
(ii) in the event the Cablevision Management Agreement is not renewed. In
addition, in certain circumstances, Eurnekian may require each of CEI, TISA and
TINTA to purchase their pro rata portion of Eurnekian's shares in Cablevision
at fair market value at any time after October 9, 1998. Finally, at any time
after October 9, 1998, any of CEI, TISA or TINTA (the "Offeror") may, so long
as it owns more than 10% of Cablevision's outstanding capital stock, require
any or both of the others to purchase from the Offeror all of its shares of
Cablevision or may require the others to sell to the Offeror all of its shares
of Cablevision, in each case at the option of the offerees and at the price
specified by the Offeror.
METROPOLIS - INTERCOM S.A. AND CORDILLERA COMUNICACIONES LIMITADA
TINTA owns an indirect 40% interest in Cordillera Comunicaciones
Limitada ("Cordillera") through its 80% interest in BIP Chile, a limited
partnership between a subsidiary of TINTA and BCI Chile, L.P., the managing
partner of BIP Chile and an entity in which TINTA has no ownership interest.
BIP Chile and Cristalerias de Chile ("Cristalerias"), a large, publicly traded
Chilean company with significant media interests, each indirectly own a 50%
interest in Cordillera.
On February 7, 1996, Cordillera and Compania de Telecomunicaciones de
Chile S.A. ("CTC") (a subsidiary of the Spanish telephone company Telefonica de
Espana S.A.) entered into agreements (the "Chile Restructuring Agreements")
that resulted in, among other things, the contribution of substantially all of
the cable distribution assets and the associated cable subscribers within each
party's cable systems (the "Contributed Systems") to Metropolis-Intercom S.A.
("Metropolis-Intercom"), a recently formed Chilean corporation. Cordillera
owns 60% of the voting securities of Metropolis-Intercom while CTC and one
other corporation own, in the aggregate, the remaining 40% of the voting
securities of Metropolis-Intercom. Accordingly, TINTA has an indirect 24%
interest in Metropolis-Intercom through its indirect 40% interest in
Cordillera.
I-46
<PAGE> 50
Under the Chile Restructuring Agreements, the cable distribution
assets (excluding headends) contributed by Cordillera were sold to CTC, and CTC
entered into a long-term lease agreement with Metropolis-Intercom (expiring in
2026, with an option to renew at the mutual agreement of both parties) for use
of CTC's cable plant. CTC services Metropolis-Intercom's analog channels (or
their equivalent) and provides technical support to Metropolis-Intercom.
Metropolis-Intercom operates the Contributed Systems and is one of
Chile's largest cable operators based on its 257,000 basic subscribers at
December 31, 1997. Metropolis-Intercom operates cable systems in nine of the
most densely populated cities within Chile, including Santiago (the capital of
Chile), Vina del Mar and Temuco. At December 31, 1997, Metropolis-Intercom's
leased network covered approximately 5,800 miles and passed an aggregate of
approximately 979,000 homes (an average of 169 homes per mile). The network
currently has an average capacity of 77 channels, and an average of 60
activated channels of programming are offered. At December 31, 1997, the U.S.
dollar equivalent of Metropolis- Intercom's monthly cable subscription fees
averaged approximately $30 per subscriber. The present cable plant is composed
of fiber and coaxial cable.
Cable television companies in Chile are required to obtain a broadcast
license to provide cable service. Only non-exclusive franchises are granted in
Chile. As a consequence, competition in the more populated regions of Chile is
intense. A portion of Metropolis-Intercom's customer base is passed by at least
one other cable operator, in addition to the local telephone company. Telephone
companies in Chile are permitted to offer cable television services over their
own networks or the networks of cable operators that they acquire.
The Board of Directors of Metropolis-Intercom consists of ten members,
six of which are designated by Cordillera. All material matters require the
affirmative vote of the representatives of both CTC and Cordillera. BIP Chile
and its partner in Cordillera each designate one-half of the managers of
Cordillera and all actions by such managers require the consent of
representatives of each partner. With certain exceptions, TINTA, BIP Chile and
Cordillera have each agreed not to compete with Metropolis-Intercom and not to
pursue telephony opportunities in Chile; and CTC has agreed to refrain from
pursuing cable-related opportunities in Chile (other than through Metropolis-
Intercom).
Under the BIP Chile partnership agreement, certain transactions
require the approval of both partners of BIP Chile. Cash distributions of BIP
Chile are first made to TINTA to reduce the outstanding principal amount under
any loans extended by TINTA to BIP Chile. At December 31, 1997, $60.8 million
principal amount was outstanding under a term loan which is due and payable on
December 31, 2004. Interest accrues on the outstanding principal amount at the
rate of 12% per annum and is payable semi-annually. To the extent any amount
of interest is not paid currently, such unpaid amount is added to the
outstanding principal amount and compounded quarterly. Repayment of amounts
outstanding under the term loan is required before any distributions may be
made to the partners of BIP Chile.
TINTA is currently in discussions to purchase the remaining 20%
interest in BIP Chile which it does not own for $700,000, which would give
TINTA an indirect 50% interest in Cordillera. For a description of these
discussions, see "General Development of Business." There can be no assurance
that this transaction will be consummated.
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<PAGE> 51
PUERTO RICO ENTITIES
TINTA owns and operates cable television franchises in Puerto Rico
serving the communities of Luquillo, Arecibo, Florida, Caguas, Humacao, Cayey
and Barranquitas. Prior to January 1, 1997, TINTA's interests in the
franchises serving the communities of Luquillo, Arecibo and Florida were held
by three of its wholly-owned subsidiaries; such subsidiaries were merged
together into the Puerto Rico Subsidiary as of January 1, 1997. The systems
serving the Caguas, Humacao, Cayey and Barranquites communities (the "Caguas
Franchises") were previously owned by Caguas, in which TINTA held a 50%
interest. TINTA acquired the remaining 50% of Caguas in May 1997. For a
description of the Caguas Acquisition, see "General Development of Business."
The Luquillo franchise was constructed using both coaxial and fiber
optic cable. The Arecibo and Florida systems were originally constructed
exclusively with coaxial cable. However, in 1996 construction of a fiber optic
network was completed thereby reducing the number of headends and improving the
technical quality and operation of the systems. The cable networks serving the
Caguas Franchises contain both coaxial and fiber optic cable.
At December 31, 1997, the Puerto Rico franchises passed an aggregate
of approximately 264,000 homes and served approximately 110,000 basic
subscribers. At December 31, 1997, the Luquillo and Arecibo franchises offered
a basic package consisting of 22 channels at a cost of $16.22 per month, an
expanded package which included an additional 27 channels offered at a cost of
$13.63 per month and six additional premium services offered at prices ranging
from $1.50 to $9.40 per channel per month. At December 31, 1997, the Florida
system offered a basic package consisting of 48 channels at a cost of $28.28
per month and seven premium channels offered at prices ranging from $1.50 to
$9.40 per channel per month. At December 31, 1997, the Caguas Franchises
provided 35 channels on a basic service tier and 15 channels on an expanded
basic tier, for which subscribers were charged a monthly fee of $22.45 and an
additional $8.95, respectively. Customers in the Caguas Franchises could also
subscribe to any of six premium channels offered at prices ranging from between
$4.95 to $15.30 per channel per month; discount packages of multiple premium
services were also offered to such subscribers.
ASIA AND AUSTRALIA
Programming Operations
JUPITER PROGRAMMING CO., LTD.
In February 1996, TINTA and Sumitomo Corporation ("Sumitomo") formed
JPC, Japan's first multi-channel programming company. JPC is owned equally
(50/50) by TINTA and Sumitomo. At December 31, 1997, each of TINTA and
Sumitomo had made aggregate contributions to JPC of Y. 3.9 billion ($34 million
using the applicable exchange rates). Additionally, TINTA and Sumitomo
contributed their respective 18% and 82% ownership interests in the Cable Soft
Network to JPC. TINTA made an equalizing payment in the amount of Y. 444
million ($4.0 million using the applicable exchange rate) in connection with
the above-described contribution of the Cable Soft Network.
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<PAGE> 52
On February 18, 1997, JPC announced its acquisition of the
distribution rights for the J-League, the national professional soccer league
in Japan. These distribution rights, which are exclusive for both cable and
DTH satellite distribution during the first year and exclusive for cable
distribution thereafter, are effective for five years and include coverage of
J-League games as well as J-League championship games. In addition, on June 30,
1997, JPC acquired the rights to the professional Sumo wrestling tour. JPC
broadcasts the J-League matches and the Sumo wrestling tournaments via
satellite and cable on its new sports channel, J-Sports.
The following table sets forth the name and a description of each
programming service in which JPC had an interest as of December 31, 1997:
<TABLE>
<CAPTION>
JPC
Ownership Interest/
Channel Management Services Description
------- ------------------- -----------
<S> <C> <C>
Cable Soft Network 100%/Management control General entertainment featuring
American, European and Asian
movies
Golf Network 70%/Management control American and Japanese golf
tournaments coverage with
exclusive PGA coverage
Shop Channel 70%/Management control (1) Home shopping (live and in
Japanese)
Discovery Japan 50%/Shared management control (2)(3) Japanese version of Discovery
Channel
CNBCAsia Business News-Japan 19.9%/No management control (3) Japanese version of CNBC Asia
Business News
</TABLE>
- ----------
(1) A subsidiary of TCI has an indirect equity interest in USA Networks,
Inc., another owner in Shop Channel.
(2) A subsidiary of TCI has a 49% interest in Discovery Communications,
Inc., another owner in Discovery Japan. JPC appoints one-half of the
board of directors of Discovery Japan and shares management control.
(3) Material transactions are subject to the veto power of JPC.
In addition, on February 18, 1998, J-Sport was launched on PerfecTV
and cable. Later in the year, it will also be available on DirecTV. J-Sport
seeks to be the premium sports channel in the Japanese market and carries
coverage of J-League matches, Sumo wrestling and baseball. The channel also
carries coverage of certain popular international sports including Spanish,
Argentinean and French soccer, boxing and tennis. JPC has a 66.7% interest in
and management control of J-Sport. A subsidiary of TCI owns the remaining
33.3% interest.
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<PAGE> 53
THE PREMIUM MOVIE PARTNERSHIP
The Premium Movie Partnership ("PMP") is a partnership formed on
November 19, 1994 to provide two movie programming services for the Australian
market. One of the services, Showtime, features current movies and made-for-
television movies and the other service, Encore, features movies and
made-for-television movies from the 1960s to the present day. Although these
services carry the same name as the services in the U.S., their programming is
unique.
The partners of PMP include TINTA, Australis Movies Pty Limited (a
subsidiary of Australis Media Limited) and four movie studios (affiliates of
Fox Broadcasting, Sony, Paramount and Universal). Each partner in PMP
(including TINTA) holds an approximate 16.7% interest in the partnership. The
studio partners have agreed to provide movie product to PMP. In return, TINTA
and Mr. H. F. Lenfest (President, Chief Executive Officer and a major
shareholder of the company that is a principal shareholder of Australis Media
Limited) have provided financial guarantees, jointly and severally, in the
amount of approximately $46 million to the movie studios for the payment of
studio license fees. Pursuant to the terms of the guarantees with such
studios, Australis Media Limited ("Australis") is required to deliver letters
of credit, reasonably satisfactory to the studios, in an amount aggregating
$33.5 million. To the extent that Australis is able to provide acceptable
letters of credit to the studios, the guarantee liability of TINTA and Mr.
Lenfest will be reduced on a dollar for dollar basis. To date, the studios
have not accepted any letters of credit which have been provided to the studios
by Australis, and TINTA believes it is doubtful that the studios will accept
any letters of credit which may be submitted by Australis in the future.
Although TINTA has not had to perform under such guarantees to date, TINTA
cannot be certain that it will not be required to perform thereunder in the
future.
Each of the partners' maximum mandatory capital commitment to PMP
(including TINTA's) is approximately $3.3 million. Through December 31, 1997,
TINTA had funded approximately $2.1 million of its capital commitment. PMP's
movie channels were launched on March 3, 1995 and served approximately 554,000
subscribers as of December 31, 1997.
PMP distributes the Showtime and Encore services through a
distribution agreement (the "Galaxy Distribution Agreement") with Galaxy Media
Pty. Limited ("Galaxy"), a subsidiary of Australis. Galaxy in turn distributes
the services to various operators including Foxtel, a partnership comprised of
subsidiaries of News Corp. and Telstra Corporation Limited. The distribution
agreement between Foxtel and Galaxy is known as the TNC Agreement. In the
fourth quarter of 1997, a proposed merger between Australis and Foxtel was
disallowed by government regulatory authorities, and Australis has announced
that it must restructure and secure additional funding in order to continue as
a going concern.
To ensure uninterrupted distribution of the services, in February
1998, PMP entered into a "back-up" distribution agreement with Foxtel (the
"Foxtel Distribution Agreement"). The Foxtel Distribution Agreement becomes
effective only upon the lawful termination of the Galaxy Distribution Agreement
and the TNC Agreement. Foxtel may revoke the Foxtel Distribution Agreement if
it does not become effective by September 30, 1998.
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<PAGE> 54
The partners of PMP other than Australis Movies Pty Limited have
commenced litigation in New South Wales, Australia to determine whether PMP may
lawfully terminate the Galaxy Distribution Agreement. While TINTA does not
expect any of such litigation, the termination of the Galaxy Distribution
Agreement or the acceptance of the Foxtel Distribution Agreement to have an
adverse effect on TINTA or its guarantees, no assurances can be given.
Cable Television and Telephony Operations
JUPITER TELECOMMUNICATIONS CO., LTD.
Management believes that the Japanese market offers opportunities to
adapt elements of the strategy, which has been implemented by TINTA through its
subsidiaries and affiliates in the UK, of building an integrated group of (i)
thematic cable and satellite channels, specifically targeted at Japanese cable
subscribers, supported by a multi-channel programming management company and
(ii) broadband cable networks capable of delivering both cable television
services and cable telephony.
In Japan, TINTA and Sumitomo have formed Jupiter Telecommunications
Co., Ltd. ("Jupiter"). Sumitomo is one of the largest globally-diversified
Japanese trading companies with trading relationships throughout Asia. Sumitomo
also holds a 50% interest in JPC, another joint venture with TINTA. TINTA
holds a 40% interest and Sumitomo holds the remaining 60% interest in Jupiter.
TINTA and Sumitomo formed Jupiter as Japan's first multi-system
operator ("MSO") of cable television systems. Prior to Jupiter, cable
television franchises in Japan (including those in which Sumitomo has an
interest) have been managed on a stand-alone basis, with ownership generally
held by many local investors holding minority interests. Until early 1994
Japanese policy was such that it was not possible to establish a Japanese MSO
operating structure to generate the kind of financial and economic efficiencies
that are available to MSO cable operators in other markets. This restriction on
the formation of MSOs has now been removed. See "Government Regulation" below.
As of December 31, 1997, TINTA had contributed Y. 11.1 billion ($101.2
million at the applicable exchange rates) and Sumitomo had contributed Y. 16.6
billion ($151.9 million using the applicable exchange rates) to Jupiter. In
connection with the formation of Jupiter and Sumitomo's transfer of its cable
systems interests to Jupiter, TINTA agreed to pay Sumitomo Y. 200 million ($1.6
million), which payment was made on March 31, 1997.
Jupiter's business plan focuses on the logistic and operating benefits
that can be derived from operating under the MSO model in Japan and emphasizes
marketing and subscriber acquisition. Accordingly, personnel seconded by TINTA
to Jupiter are working with Sumitomo's secondees and Jupiter staff to train
Jupiter's management team in the development and implementation of MSO
management and operational practices. Over the next two years, Jupiter intends
to aggressively implement the MSO model in its Suginami and Nerima franchises
and, assuming the implementation is successful, roll out the MSO model to all
of its cable systems. Management of TINTA estimates that Jupiter may require
additional funding which additional funding may be significant. TINTA
anticipates that the 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
subsidiaries and affiliates.
I-51
<PAGE> 55
Current Jupiter Franchises
As of December 31, 1997, Jupiter had ownership interests in 23
companies that own franchises clustered in three main areas: Tokyo, Osaka and
Kyushu. At December 31, 1997, Jupiter operated and managed 20 of the 23
companies. Of the 23 total companies, Jupiter acquired 11 of the companies
from Sumitomo covering approximately 1,786,000 franchise homes, approximately
1,415,044 homes passed, and approximately 163,391 cable subscribers. The
remaining franchises were either granted from Japan's Ministry of Post and
Telecommunications (the "MPT") or acquired from third parties. These remaining
franchises cover approximately 1,756,000 franchise homes, approximately 288,969
homes passed, and approximately 31,001 cable subscribers.
The following table presents certain information, as of and for the
year ended December 31, 1997, concerning Jupiter's major clusters.
<TABLE>
<CAPTION>
Tokyo Osaka Kyushu
Cluster Cluster Cluster Totals
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Franchise homes 1,451,000 1,375,000 716,000 3,542,000
Homes passed 1,084,565 331,677 287,771 1,704,013
Basic subscribers 140,326 24,920 29,146 194,392
Basic penetration rate 13% 8% 10% 11%
Average churn rate(1) 14% 9% 15% 14%
Average monthly revenue per subscriber(2) $ 38.00 $ 40.00 $ 38.31 $ 38.27
</TABLE>
- ----------
(1) Represents the number of subscribers who terminated basic service or
whose service was terminated during the year ended December 31, 1997,
divided by the average number of basic subscribers during such period.
(2) Represents the December 31, 1997 U.S. dollar equivalent of the average
monthly revenue per subscriber for the year ended December 31, 1997.
Such amounts are calculated as (i) one-twelfth of the total cable
television revenue for such period, divided by (ii) the average number
of basic cable television subscribers during such period. Amounts are
translated using the exchange rate in effect on December 31, 1997.
Telephony
Jupiter was granted a license to offer telephony services in its
Suginami franchise (a Western suburb of Tokyo) by the MPT in October 1996, and
on July 1, 1997, Jupiter began providing commercial local and long distance
telephone services over its cable infrastructure in its Suginami franchise.
Jupiter has 74 separate interconnect agreements with Nippon Telephone and
Telegraph ("NTT") and several other carriers which enable routing of its long
distance and international calls. Jupiter currently has no intention to expand
telephony outside the Suginami franchise in 1998.
I-52
<PAGE> 56
Pricing
At December 31, 1997, Jupiter's basic cable television service was
typically priced between Y. 3,000 and Y. 3,600 per month ($23.07 and $27.68,
respectively), for basic service and Y. 1,800 to Y. 2,500 per premium channel
($13.84 and $19.22, respectively), and generally consisted of a basic package
of 31 to 37 channels and a premium package that offered an additional 4
channels. Jupiter has launched a marketing campaign targeted at multiple
dwelling unit customers whereby customers can receive basic service plus one
premium channel and one additional outlet for Y. 4,800 per month ($36.92).
Jupiter seeks to provide its telephony customers in its Suginami
franchise with a minimum 15% savings on the cost of local and long distance
calls compared to NTT (although the long distance savings may be as high as 43%
in certain cases) and a 25% savings on line rental charges as compared to NTT.
An additional savings of Y. 600 ($4.62) is offered for cable/telephone
customers (Y. 500 for cable customers; Y. 100 for telephone customers).
Construction
The cable plant of each of Jupiter's cable systems, other than the
Suginami system, consists primarily of coaxial cable. The Suginami system was
constructed with a fiber optic backbone or "trunk," with the local distribution
portion, or final "drop" to the home, consisting of coaxial cable. The
architecture of the Suginami system has been designed to be state-of-the-art,
with the specific goal of being telephone-capable, and its design and
construction was managed by TINTA, prior to its investment in Jupiter, under a
design-and-build contract with Sumitomo.
To the extent economically feasible, Jupiter intends to expand its
cable networks, and rebuild its existing cable systems, with the same network
architecture as that which currently exists in its Suginami system. This system
design and plant would permit Jupiter to deliver 77 analog channels of
programming, including premium and pay-per-view channels, cable telephony
services and a wide range of interactive and integrated entertainment,
telecommunications and information services as they become available in the
future. These new services may include video games, near video-on- demand,
video-on-demand and on-line interactive services.
Government Regulation
Cable television franchise licenses are granted by the MPT. The MPT
generally grants only one franchise license per franchise area; however, it has
the authority to issue multiple franchise licenses in a franchise area.
Franchise licenses are generally indefinite in duration, and no royalties are
payable to the Japanese government.
Cable companies may apply for a "Type 1 Carrier" License, which
permits carriage of telephony services on a commercial basis over their cable
networks. Applications must be submitted to and approved by the MPT. Jupiter
currently only has a Type 1 Carrier License for its Suginami franchise.
The Japanese government does not regulate the amount of foreign
programming that may be shown on Japanese television. Foreign ownership of
broadcast and DBS program services is restricted, while ownership of
cable-exclusive program services is not.
I-53
<PAGE> 57
In December 1993, Japan increased permitted foreign ownership from 20%
to 33 1/3% of a Japanese company that provides direct cable television and
telephony services and permitted the creation of MSO operating platforms
involving foreign MSOs and local Japanese partners. These restrictions on
foreign ownership were removed in 1997 as part of the World Trade Organization
agreements; accordingly, 100% foreign ownership of such companies is now
permitted in Japan. As the Japanese government has opened the Japanese
telephone market to competition, this will encourage the national telephone
company, NTT, to look at other related businesses, including the cable
television market. Given its size, financial resources and position in the
Japanese market, if NTT were to enter the cable television business (either
alone or with others), it would be a formidable competitor for Jupiter. The
MPT remains responsible for regulating the industry.
Terms of Jupiter Investment
Pursuant to a shareholders agreement, TINTA has the right to designate
three directors and Sumitomo has the right to designate six directors of the
current nine member board of directors. For as long as TINTA and Sumitomo each
own directly or indirectly not less than 30% of the shares of Jupiter, material
actions relating to Jupiter require the unanimous consent of all of the
directors appointed by TINTA and Sumitomo. In accordance with the shareholders
agreement, and subject to certain exceptions, neither Sumitomo nor TINTA may
transfer its shares in Jupiter prior to March 31, 2000. After March 31, 2000,
Sumitomo or TINTA may only transfer shares to a publicly-quoted third party
transferee after first giving the other the opportunity to acquire such shares.
Sumitomo and TINTA have agreed that Jupiter will be their primary
vehicle for investment or participation in any cable television or telephony
business in Japan. If Sumitomo or TINTA decides to invest or otherwise
participate in any cable television or telephony business in Japan to the
extent of 10% or more of the equity of such business, it is obligated to first
offer such opportunity to Jupiter.
General
Legislative, administrative and/or judicial action may change all or
portions of the foregoing statements relating to competition and regulation.
TINTA has not expended material amounts during the last three fiscal
years on research and development activities.
Compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of material into the environment or
otherwise relating to the protection of the environment has had no material
effect upon the capital expenditures, results of operations or competitive
position of TINTA.
As of December 31, 1997, Tele-Communications International, Inc. had
27 employees and TINTA's consolidated subsidiaries had an aggregate of
approximately 350 employees. None of TINTA's employees are covered by
collective bargaining agreements. TINTA believes that its relations with its
employees are good. Pursuant to a services agreement, certain of TCI's
personnel provide administrative and operational services to TINTA.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
I-54
<PAGE> 58
TINTA, through its subsidiaries and affiliates, is engaged in the
cable and programming businesses in various geographic regions as described
under "Narrative Description of Business" above. For financial information
concerning such geographic segments, see the footnotes to TINTA's financial
statements included in Part II of this Report.
ITEM 2. Properties
With the exception of its corporate offices in Englewood, Colorado
(which it leases from TCI), Los Angeles, California and London, TINTA does not
own or lease any real or personal property other than through its interests in
its operating subsidiaries and affiliates. TINTA's operating companies and
affiliates own or lease the fixed assets necessary for the operation of their
respective businesses, including office space, transponder space, headends,
cable television and telecommunications distribution equipment (including
fiber-optic and coaxial cables), telecommunications switches and customer
equipment (including converter boxes).
TINTA believes that all of its facilities are adequate for its current
and anticipated needs.
ITEM 3. Legal Proceedings
Neither TINTA nor any of its consolidated subsidiaries is a party to
any material legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on October 20,
1997, the following matter was voted upon by the stockholders
of Tele-Communications International, Inc.:
The election of Brendan Clouston to the Board of Directors
by 99.9% of the votes cast at such meeting (216,278,921
for; 60,334 withheld), the election of Pierre Lescure to
the Board of Directors by 99.9% of the votes cast at such
meeting (216,278,921 for; 60,334 withheld) and the
election of Fred Vierra to the Board of Directors by 99.9%
of the votes cast at such meeting (216,278,921 for; 60,334
withheld). Election of directors required a plurality of
the votes of the outstanding shares of Tele-Communications
International, Inc. Series A Common Stock and Tele-
Communications International, Inc. Series B Common Stock,
voting as a single class. Additionally, subsequent to the
meeting, Messrs. Paul Gould, John Malone, Tomiichi
Akiyama, Jerome Kern and Adam Singer continued to serve as
members of the Board of Directors subject to re-election
over staggered three-year terms.
I-55
<PAGE> 59
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
On July 13, 1995, shares of Tele-Communications International, Inc.'s
Series A common stock, $1 par value per share ("Series A Common Stock")
commenced trading on the Nasdaq National Market tier of the Nasdaq Stock Market
under the symbol "TINTA." The following table sets forth the range of high and
low sale prices in United States dollars of shares of Series A Common Stock for
the periods indicated as furnished by Nasdaq. The prices have been rounded up to
the nearest eighth, and do not include retail markups, markdowns, or
commissions.
<TABLE>
<CAPTION>
High Low
---- ---
1996:
----
<S> <C> <C>
First quarter 24-3/4 19-1/2
Second quarter 22-1/4 16-1/2
Third quarter 18-1/8 15
Fourth quarter 16-3/4 12-1/2
1997:
----
First quarter 16-1/8 12-5/8
Second quarter 17 10-5/8
Third quarter 17-1/2 14
Fourth quarter 18-7/8 15-3/8
</TABLE>
As of January 31, 1998, there were 56 holders of the Series A Common
Stock (which amounts do not include the number of shareholders whose shares are
held of record by brokerage houses but include each brokerage house as one
shareholder). All of Tele-Communications International, Inc.'s Series B common
stock, $1 par value per share ("Series B Common Stock"), is owned by
Tele-Communications, Inc. and is not publicly traded.
Tele-Communications International, Inc. ("TINTA") has not paid cash
dividends on its Series A Common Stock and has no present intention of so doing.
Payment of cash dividends, if any, in the future will be determined by the board
of directors in light of TINTA's earnings, financial condition and other
relevant considerations.
Item 6. Selected Financial Data.
During the fourth quarter of 1994 and the first quarter of 1995,
Tele-Communications, Inc. ("TCI") contributed its indirect ownership interests
in substantially all of its international cable and telephony assets and certain
of its international programming assets to TINTA (the "Contributions"). For
purposes of this discussion, except to the extent the context otherwise
requires, the term the "Company" refers to (i) such contributed ownership
interests before the date of the Contributions and (ii) TINTA and its direct and
indirect subsidiaries and affiliates on and after the date that the
Contributions were completed.
II-1
<PAGE> 60
The following table presents selected information relating to the
financial condition and results of operations of the Company for the past five
years. Such financial information should be read in conjunction with the
financial statements of the Company, included elsewhere herein.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997(1) 1996(2) 1995(3) 1994 (4) 1993
------------- ------------ ----------- --------- ----------
(amounts in thousands)
Summary Balance Sheet Data:
- --------------------------
<S> <C> <C> <C> <C> <C>
Cash, receivables and prepaid expenses $ 6,582 148,126 188,640 38,810 11,506
Investment in Telewest Communications
plc ("Telewest")(5) 324,417 488,495 550,216 454,614 229,130
Investment in Cablevision S.A.
("Cablevision") 239,379 -- -- -- --
Investment in other affiliates
accounted for under the equity
method, and related receivables 602,325 421,853 354,133 128,700 46,111
Deferred income tax asset 54,547 -- -- -- --
Property and equipment, net
of accumulated depreciation 57,521 202,527 112,989 47,737 39,515
Franchise costs and other
assets, net of amortization 109,229 728,300 644,733 103,378 53,856
------------- ------------ ----------- ---------- ----------
Total assets $ 1,394,000 1,989,301 1,850,711 773,239 380,118
============= ============ =========== ========== ==========
Payables, accruals and other
liabilities $ 39,647 128,338 72,284 16,503 10,338
Debt 390,042 511,128 192,718 15,842 --
MultiThematiques Obligation(6) -- 47,902 65,876 -- --
Deferred income tax liability -- 193,748 186,126 -- 4,034
------------- ------------ ----------- ---------- ----------
Total liabilities 429,689 881,116 517,004 32,345 14,372
Minority interests in equity of
subsidiaries -- 142,187 122,358 24,451 51
Equity 964,311 965,998 1,211,349 716,443 365,695
------------- ------------ ----------- ---------- ----------
Total liabilities and equity $ 1,394,000 1,989,301 1,850,711 773,239 380,118
============= ============ =========== ========== ==========
</TABLE>
II-2
<PAGE> 61
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------
1997(1) 1996(2) 1995(3) 1994 (4) 1993
------- ------- ------- -------- ----
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Summary Statement of
Operations Data:
Revenue $ 219,834 314,560 190,533 43,982 20,616
Operating, selling, general and
administrative expenses (161,477) (279,170) (165,388) (62,196) (26,943)
Depreciation and amortization (53,481) (58,747) (36,360) (8,590) (7,375)
------------ ------------ ------------ ------------ ------------
Operating income (loss) 4,876 (23,357) (11,215) (26,804) (13,702)
Share of losses of Telewest(5) (145,264) (109,357) (70,274) (42,520) (29,750)
Share of losses of Cablevision (3,377) -- -- -- --
Share of losses of other
affiliates (99,729) (70,054) (53,674) (35,571) (42,010)
Interest expense (33,051) (35,153) (20,870) (651) --
Gain on issuance of stock by
Telewest(7) -- 258 164,900 161,481 --
Gain on disposition of assets 109,463 12,284 51,139 -- --
Other, net 1,779 49,348 1,737 10,285 2,186
------------ ------------ ------------ ------------ ------------
Earnings (loss) before income
taxes (165,303) (176,031) 61,743 66,220 (83,276)
Income tax benefit (expense) 44,954 45,611 (31,702) (32,534) 20,101
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ (120,349) (130,420) 30,041 33,686 (63,175)
============ ============ ============ ============ ============
Basic and diluted earnings (loss) attributable to common shareholders:
Pro forma (8) .28 .35
============ ============
Historical $ (1.04) (1.10)
=========== ============
</TABLE>
- ----------------
II-3
<PAGE> 62
(1) The summary balance sheet data as of December 31, 1997 and the summary
statement of operations for the year ended December 31, 1997 reflect
the effects of the deconsolidation of (i) Flextech p.l.c. ("Flextech")
in January 1997 as a result of the Company's decreased voting interest
in Flextech and (ii) Cablevision S.A. ("Cablevision") in October 1997
as a result of the sale of a portion of the Company's interest in
Cablevision.
(2) The summary balance sheet data as of December 31, 1996 and the summary
statement of operations for the year ended December 31, 1996 reflect
the effects of (i) Flextech's acquisition in April 1996 of a
controlling interest in HSN Direct International Limited ("HSN
Direct"), a 100% interest in TVS Television Limited ("TVS") and the 61%
interest in Maidstone Broadcasting ("Maidstone"), which Flextech did
not already own and (ii) Cablevision's acquisition in October 1996 of
99.99% of Oeste Cable Color S.A. ("OCC").
(3) The summary balance sheet data as of December 31, 1995 and the summary
statement of operations data for the year ended December 31, 1995
reflect the effects of the Company's April 25, 1995 acquisition of a
51% ownership interest in Cablevision.
(4) The summary balance sheet data as of December 31, 1994 and the summary
statement of operations data for the year ended December 31, 1994,
reflect the effects of the February 2, 1994 combination of certain of
the Company's UK programming assets with Flextech (the "Flextech
Combination").
(5) In connection with the November 1994 initial public offering (the
"Old Telewest IPO") of the predecessor of Telewest Communications plc
("Old Telewest"), the Company and certain affiliates of U S WEST, Inc.
contributed their respective 50% interests in the TCI/U S WEST Cable
Communications Group (the "Telewest UK Joint Venture") to Old
Telewest. As a result of the Old Telewest IPO, TINTA's 50% ownership
interest in the Telewest UK Joint Venture was converted into a 37.8%
interest in Old Telewest. On October 3, 1995, Old Telewest consummated
a business combination (the "SBCC Transaction") with SBC CableComms
(UK) ("SBCC") pursuant to which a new entity, Telewest Communications
plc ("Telewest"), acquired all of the outstanding share capital of Old
Telewest and SBCC. The SBCC Transaction effectively resulted in the
conversion of TINTA's 37.8% indirect ownership interest in Old
Telewest into a 26.8% indirect ownership interest in Telewest. All
references herein to "Telewest" include Telewest and its predecessor
entities (Old Telewest and the Telewest UK Joint Venture) unless the
context indicates otherwise.
(6) Represents the estimated net present value of TINTA's obligation to
contribute an additional 264 million French francs to MultiThematiques
S.A. Such obligation was completely satisfied during 1997.
(7) In connection with the dilution of the Company's ownership interest in
Telewest that occurred in 1996, 1995 and 1994, the Company recognized
non-cash gains of $258,000, $164.9 million and $161.5 million (before
deducting the related tax expense of $90,000, $57.7 million and $56.5
million, respectively). The 1995 gain was recognized in connection with
the SBCC Transaction, and the 1994 gain was recognized in connection
with the Old Telewest IPO.
II-4
<PAGE> 63
(8) On July 18, 1995, TINTA completed its initial public offering (the
"IPO"), in which 20,000,000 shares of Series A Common Stock were sold
to the public for net proceeds of approximately $301.3 million. In
connection with the IPO, TINTA amended and restated its Certificate of
Incorporation on July 12, 1995 to, among other things, (i) increase
its authorized capital stock and (ii) divide its common stock into two
series. At the same time, TINTA effected a reclassification (the
"Reclassification") pursuant to which the 1,000 shares of TINTA common
stock held by TCI were reclassified and changed into 85,800,000 shares
of Series A Common Stock and 11,700,000 shares of Series B Common
Stock (together with the Series A Common Stock, the "Common Stock").
The pro forma earnings (loss) per common share calculations give
effect to the Reclassification as if it had occurred on January 1,
1994, and accordingly, assume 106.8 million and 97.5 million weighted
average shares of Common Stock were outstanding during the years ended
December 31, 1995 and 1994, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
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.
During the period from January 1, 1995 through December 31, 1997, the
most significant entities that were reflected in the Company's financial
statements on a consolidated basis were engaged in (i) the operations of
multi-channel video and telecommunication distribution networks (the "cable"
business) in Puerto Rico and in Buenos Aires, Argentina (from the April 25, 1995
acquisition of a 51% ownership interest in Cablevision through the October 9,
1997 sale of a portion of the Company's 51% interest in Cablevision) and in the
United Kingdom (sometimes referred to herein as the "UK") (through October 17,
1995); and (ii) the distribution and production of programming for multi-channel
video distribution (the "programming" business) in the UK and other parts of
Europe through the Company's subsidiary, Flextech (through December 31, 1996).
Effective January 1, 1997 the Company's three consolidated Puerto Rico
entities were merged together into 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 three consolidated Puerto Rico
entities prior to such merger and the Puerto Rico Subsidiary following such
merger.
Each of TINTA's operating subsidiaries and affiliates operates in a
distinct environment that is generally characterized by rapidly changing
competitive, regulatory, technological, political, economic and other external
factors. These factors are generally outside TINTA's control and TINTA is unable
to predict what effect, if any, such factors might have on the respective
financial condition and results of operations of its operating subsidiaries and
affiliates.
II-5
<PAGE> 64
Year 2000
During 1997, TCI began an enterprise-wide comprehensive review of its
computer systems and related software to ensure systems properly recognize the
year 2000 and continue to process business information. The systems being
evaluated include all internal use software and devices and those systems and
devices that manage the distribution of TINTA's products. Additionally, TINTA
has initiated a program of communications with all of its significant suppliers
and affiliated companies to determine the readiness of third parties and the
impact on TINTA if those third parties fail to remediate their own year 2000
issues.
Over the past three years, TCI began an effort to convert a substantial
portion of its financial applications to widely available year 2000 ready
commercial products, or to outsource portions of financial applications to year
2000 ready vendors. Notwithstanding such effort, TINTA is in the process of
finalizing its assessment of the impact of year 2000. TINTA is utilizing both
internal and external resources to identify, correct or reprogram, and test
systems for year 2000 readiness. Confirmations have been received from select
primary suppliers indicating that they are either year 2000 ready or have plans
in place to ensure readiness. As part of TINTA's assessment of its year 2000
issue, it is evaluating the level of validation it will require of third parties
to ensure their year 2000 readiness. TINTA's manual assessment of the impact of
the year 2000 date change should be complete by mid-1998.
Management of TINTA has not yet determined the cost associated with its
year 2000 readiness efforts and the related potential impact on TINTA's results
of operations. Amounts expended to date have not been material, although there
can be no assurance that costs ultimately required to be paid to ensure TINTA's
year 2000 readiness will not have an adverse effect on TINTA's results of
operations. Additionally, there can be no assurance that the systems of other
companies on which TINTA relies will be converted in time or that any such
failure to convert by another company will not have an adverse effect on TINTA's
financial condition or position.
Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 128, Earnings Per Share, ("SFAS 128") in
February of 1997. SFAS 128 establishes new computation, presentation and
disclosure requirements for earnings per share ("EPS"). SFAS 128 requires
companies with complex capital structures to present basic and diluted EPS.
Basic EPS is measured as the income or loss available to common shareholders
divided by the weighted average outstanding common shares for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per
share basis of potential common shares (e.g., convertible securities, options,
etc.) as if they had been converted at the beginning of periods presented.
Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from diluted
EPS. The Company adopted SFAS 128 as of December 31, 1997 and has restated all
prior period EPS data, as required. SFAS 128 did not have a material impact on
EPS for all periods presented.
During 1997, the FASB also issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying of comprehensive income and
its components in the financial statements. It does not, however, require a
specific format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining its preferred format.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
II-6
<PAGE> 65
Summary of Operations
As further described under "Liquidity and Capital Resources", 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 year ended December 31, 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 Flextech's results of operations that were included in the Company's
consolidated financial statements for the indicated periods:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1996 1995
------------- ------------
amounts in thousands
<S> <C> <C>
Revenue $ 94,397 49,092
Operating costs and expenses before
depreciation and amortization (131,182) (63,176)
Depreciation and amortization (8,042) (5,009)
------------- -----------
Operating loss $ (44,827) (19,093)
============= ===========
</TABLE>
On April 25, 1995, the Company acquired a 51% ownership interest in
Cablevision (the "Cablevision Acquisition"). In accordance with the purchase
method of accounting, Cablevision has been included in the Company's financial
statements since the April 25, 1995 acquisition date. As further described under
"Liquidity and Capital Resources", the October 9, 1997 sale of a portion of
TINTA's 51% interest in Cablevision reduced TINTA's ownership interest in
Cablevision to 26.24%. As a result of TINTA's decreased ownership in
Cablevision, effective October 1, 1997, TINTA ceased to consolidate Cablevision
and began to account for Cablevision using the equity method of accounting. The
following table sets forth summary information with respect to Cablevision's
results of operations that were included in the Company's consolidated financial
statements for the indicated periods:
<TABLE>
<CAPTION>
April 25, 1995
Nine months ended Year ended through
September 30, 1997 December 31, 1996 (1) December 31, 1995
------------------ ---------------------- ---------------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 173,517 189,548 118,864
Operating costs and expenses
before depreciation and
amortization (105,020) (114,139) (69,258)
Depreciation and amortization (40,882) (41,429) (25,060)
------------- ------------- ------------
Operating income $ 27,615 33,980 24,546
============= ============= ============
</TABLE>
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(1) On October 1, 1996, Cablevision acquired 99.99% of the issued
and outstanding stock of OCC (the "OCC Acquisition"). In
accordance with the purchase method of accounting, OCC has
been included in Cablevision's financial statements since the
October 1, 1996 acquisition date.
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 which the Company did
not already own (the "Caguas Acquisition").
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<PAGE> 66
Revenue
Cable revenue remained relatively constant during the year ended
December 31, 1997 as compared to 1996 as the decrease in revenue attributable to
the deconsolidation of Cablevision in October 1997, as described above, was
offset by an $11.7 million or 42% increase in the revenue of the Puerto Rico
Subsidiary. The increase in revenue from the Puerto Rico Subsidiary is due
primarily to the Caguas Acquisition ($10.0 million). In addition, the Puerto
Rico Subsidiary experienced a 13% increase in the average number of its basic
subscribers (exclusive of the basic subscribers acquired in the Caguas
Acquisition) and an 11% increase in basic rates.
Cable revenue increased $77.7 million or 55% during the year ended
December 31, 1996, as compared to the corresponding prior year period. Such
increase is primarily attributable to the effect of the Cablevision Acquisition
and the OCC Acquisition. In addition, an 8% increase in Cablevision's average
number of basic subscribers (exclusive of the effect of acquisitions) more than
offset a 2% decrease in Cablevision's rates resulting from promotional packages
offered in response to increasing competition. A $5.5 million or 25% increase in
the revenue of the Puerto Rico Subsidiary also contributed to the increase in
cable revenue. Such increase in the revenue of the Puerto Rico Subsidiary is due
to (i) a 10% increase in rates, (ii) a 3% increase in the number of basic
subscribers and (iii) a $750,000 increase in advertising revenue resulting
primarily from political advertisements surrounding local elections.
As described above, TINTA did not report programming revenue in 1997
due to the deconsolidation of Flextech. Programming revenue increased $46.4
million or 97% during the year ended December 31, 1996, as compared to the
corresponding prior year period. A significant portion of such increase is
attributable to certain acquisitions made by Flextech in 1996. In addition,
certain of Flextech's operating subsidiaries experienced gains in viewerships
and programming rate increases during 1996.
During the years ended December 31, 1996 and 1995, 30%, and 36%,
respectively, of the Company's programming revenue was derived from British Sky
Broadcasting Group plc.
Operating Costs and Expenses
Cable operating costs and expenses decreased $3.2 million or 2% during
the year ended December 31, 1997 as compared to 1996. Such decrease is
attributable to the net effects of (i) the deconsolidation of Cablevision in
October 1997 and (ii) a $5.4 million or 27% increase in the operating costs and
expenses of the Puerto Rico Subsidiary. The increase in operating costs and
expenses of the Puerto Rico Subsidiary is primarily attributable to the Caguas
Acquisition ($5.7 million).
Cable operating costs and expenses increased $43.6 million or 48%
during the year ended December 31, 1996, as compared to the corresponding prior
year period. Such increase is primarily attributable to the effect of the
Cablevision Acquisition and the OCC Acquisition, and an increase in
Cablevision's programming costs. Such increased programming costs are
attributable to a higher number of subscribers and an increase in rates in
connection with the renewal of certain programming agreements. A $2.7 million or
16% increase in the operating costs and expenses of the Puerto Rico Subsidiary
accounted for the remaining increase in cable operating costs and expenses.
The Puerto Rico Subsidiary purchases 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 the Puerto Rico Subsidiary.
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As described above, TINTA did not report programming costs and expenses
in 1997 due to the deconsolidation of Flextech. Programming operating costs and
expenses increased $63.8 million or 103% during the year ended December 31,
1996, as compared to the corresponding prior year period. Such increase is
attributable to (i) certain acquisitions made by Flextech in 1996, (ii) higher
programming costs and (iii) increased general and administrative expenses which
are primarily the result of stock compensation expense of $5.1 million in 1996.
Increases in programming costs are attributable to (i) the amortization of the
cost of programming rights acquired by Flextech in 1995 and 1996 pursuant to
agreements with Hallmark Entertainment, Inc. and (ii) the acquisition of higher
quality programming.
During 1996, the Company revised its estimate of future revenue to be
earned from certain programming rights. As a result of such revisions, the
Company recorded an adjustment of $8.7 million to reduce the carrying value of
the affected programming rights.
TINTA incurred corporate, general and administrative expenses of $30.7
million, $10.6 million and $13.0 million during the years ended December 31,
1997, 1996 and 1995, respectively, of which $14.2 million, $1.2 million and $4.4
million, 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 $17.0 million, $(3.2 million) and $4.0 million during the
years ended December 31, 1997, 1996 and 1995, respectively, of which $12.4
million, $(1.8 million) and $2.5 million, respectively, were allocated from TCI.
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.
Depreciation and amortization expense decreased $5.3 million or 9%
during the year ended December 31, 1997, as compared to 1996, reflecting a lower
depreciable property and equipment balance resulting from the effects of the
deconsolidation of Flextech and Cablevision. Depreciation and amortization
expense of the Puerto Rico Subsidiary increased $2.3 million or 33% during the
year ended December 31, 1997 as compared to 1996. Such increase is primarily
attributable to the Caguas Acquisition ($1.7 million).
The $22.4 million or 62% increase in depreciation and amortization
expense during the years ended December 31, 1996, as compared to the
corresponding prior year period, is the result of increases in the Company's
assets that are subject to depreciation and amortization. The increases in such
assets were primarily attributable to acquisitions, as described above, and
capital expenditures.
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Other Income and Expense
Telewest, an entity in which the Company has a 26.6% indirect interest,
has incurred losses since its inception. The Company's share of Telewest's net
losses increased $35.9 million or 33% and $39.1 million or 56% during 1997 and
1996, respectively. Such increases are attributable to (i) increases in
depreciation and amortization resulting from Telewest's construction and
acquisition of cable and telephony networks, (ii) interest expense due to an
increase in Telewest's outstanding debt balances and (iii) changes in foreign
currency transaction losses. In connection with the SBCC Transaction, Telewest
issued U.S. dollar denominated senior debentures having a principal amount at
maturity of $1.8 billion (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 gains (losses) of $(39.1
million), $1.7 million and $(23.0 million) during 1997, 1996 and 1995,
respectively. It is anticipated that Telewest will continue to experience
realized and unrealized foreign currency transaction gains and losses throughout
the term of the Telewest Debentures, which mature in 2006 and 2007, if not
redeemed earlier.
As described above, effective October 1, 1997, TINTA ceased to
consolidate Cablevision and began to account for Cablevision using the equity
method of accounting. TINTA's share of Cablevision's net losses for the period
from October 1, 1997 through December 31, 1997 was $3.4 million.
The Company's share of the losses of affiliates other than Telewest and
Cablevision (the "Other Affiliates") increased $29.7 million or 42% and $16.4
million or 31% during the years ended December 31, 1997 and 1996, as compared to
the corresponding prior year periods. The 1997 increase is attributable to
increased losses of Jupiter Programming Co., Ltd., Jupiter Telecommunications
Co., Ltd., MultiThematiques, Liberty/TINTA LLC and Asia Business News
(Singapore) PTE Ltd. ("ABN"). The Company expects that such entities will
continue to incur losses as they continue to expand their operations and/or
launch new services. As of December 31, 1997, the Company surrendered all of its
shares of ABN in exchange for a $25 million unsecured note receivable.
Accordingly, effective December 31, 1997, ABN will no longer be accounted for
under the equity method of accounting. In addition, as described above, the
Company, effective January 1, 1997, ceased to consolidate Flextech and began to
account for Flextech using the equity method of accounting. The majority of the
1996 increase is attributable to (i) increased losses of certain of its
affiliates in 1996 and (ii) the Company's share of losses of affiliates that
were acquired in 1996 and late 1995. For additional information concerning the
Other Affiliates, see note 9 to the accompanying financial statements.
Interest income decreased $15.0 million or 62% and increased $15.3
million or 170% during the years ended December 31, 1997 and 1996, respectively.
The 1997 decrease is attributable to a decrease in the outstanding balance of
amounts loaned to TCI and a decrease in the Company's cash and cash equivalents
as a result of the deconsolidation of Flextech and Cablevision, as described
above. The 1996 increase is primarily attributable to $14.0 million of interest
income earned on amounts loaned to TCI. During 1996, TINTA loaned to TCI the net
proceeds received upon the issuance of TINTA's 4-1/2% Convertible Subordinated
Debentures (the "Debentures").
Interest expense remained relatively constant during the year ended
December 31, 1997 as compared to 1996. Increases in interest expense
attributable to the Puerto Rico Subsidiary's bank credit facility (the "Puerto
Rico Bank Facility") and the Debentures were offset by a reduction in interest
expense that is attributable to the deconsolidation of Flextech and Cablevision.
Interest expense increased $14.3 million or 68% during the year ended December
31, 1996, as compared to 1995. Such increase is primarily attributable to the
issuance of the Debentures. See "Liquidity and Capital Resources."
II-10
<PAGE> 69
In connection with the dilution of the Company's ownership interest in
Telewest that occurred in connection with the October 1995 SBCC Transaction, the
Company recognized a non-cash gain of $164.9 million (before deducting the
related tax expense of $57.7 million) during the year ended December 31, 1995.
During 1996, the Company also recognized a non-cash gain of $258,000 in
connection with the issuance of stock by Telewest. Such gains represent the
differences, at the respective transaction dates, between the Company's recorded
cost for its ownership interest in Telewest and the Company's proportionate
share of Telewest's net assets. No assurance can be given that any such gains
will be recognized in the future.
The Company recognized net gains upon the disposition of assets of
$109.5 million, $12.3 million and $51.1 million during 1997, 1996, and 1995,
respectively. During 1997, the Company recognized a gain of $58.4 million from
the sale of its indirect 13% interest in Sky Network Television New Zealand,
Ltd. ("Sky") and a $48.8 million gain from the sale of a portion of its 51%
interest in Cablevision. The 1996 gain is primarily attributable to the
dissolution of the TeleWest Europe Group, an entity in which TINTA held a 50%
ownership interest. The 1995 gain is attributable to the sale of the cable
television subsidiaries of IVS Cable Holdings Limited ("IVS"), a subsidiary of
Flextech. For additional information, see "Liquidity and Capital Resources"
below.
The minority interests' share of net losses (earnings) was $(8.6
million), $22.8 million and $(4.0 million) during the years ended December 31,
1997, 1996, and 1995, respectively. The minority interests' share of net losses
(earnings) relate to Cablevision in 1997 and Flextech in 1996 and 1995. As
described above, the Company, effective January 1, 1997 and October 1, 1997,
ceased to consolidate Flextech and Cablevision, respectively, and began to
account for Flextech and Cablevision using the equity method of accounting.
Accordingly, the minority interests' share of net losses (earnings) for Flextech
and Cablevision are no longer included in the Company's statement of operations.
Prior to 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. If the minority interest's historical cost
basis had been positive since the Company's April 25, 1995 acquisition of
Cablevision, the Company would have allocated an additional $12.9 million, $15.9
million and $11.7 million during the nine months ended September 30, 1997, the
year ended December 31, 1996 and the period from April 25, 1995 through December
31, 1995, respectively, of Cablevision's net earnings to the minority interest.
The Company recognized realized and unrealized foreign currency
transaction gains (losses) of $224,000, $7.1 million and $(2.5 million) during
the years ended December 31, 1997, 1996, and 1995, respectively. Such gains
(losses) resulted primarily from the remeasurement into the U.S. dollar of (i)
the French franc denominated MultiThematiques Obligation and (ii) the UK pound
denominated intercompany debt owed by Flextech to an indirect subsidiary of
TINTA.
During 1997 and 1996, holding losses on certain available-for-sale
securities were determined to be other than temporary. Accordingly, the Company
recognized losses of $1.2 million and $6.6 million during 1997 and 1996,
respectively, in connection with the write-off of such securities.
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Income Taxes
The Company's income tax benefit (expense) was $45.0 million, $45.6
million and $(31.7 million) during the years ended December 31, 1997, 1996 and
1995, respectively. The effective tax rates associated with such benefits
(expenses) were 27.2%, 25.9% and (51.4)%, respectively.
At December 31, 1997, the Company had net deferred tax assets of $54.5
million. Management considers it more likely than not that the Company will
realize the full amount of its net deferred tax assets as a result of certain
investments having an estimated fair value in excess of their related tax basis
and the availability of potential tax planning strategies that management
considers both prudent and feasible.
Net Losses
The Company reported net earnings (losses) of $(120.3 million), $(130.4
million), and $30.0 million during the years ended December 31, 1997, 1996 and
1995, respectively. Without the recognition of certain non-operating gains
aggregating $109.5 million, $12.5 million and $216.0 million during 1997, 1996
and 1995, respectively, the Company would have incurred net losses of $191.5
million, $142.9 million, and $95.9 million, respectively. Such 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 cable
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.
Liquidity and Capital Resources
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.
II-12
<PAGE> 71
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 had, at December 31, 1997 (i) $88.7 million due from TCI Ventures
Group, LLC ("TVG LLC") pursuant to an unsecured promissory note (the "TVG LLC
Note Receivable"), (ii) $200 million of borrowing availability pursuant to a
revolving credit facility with TVG LLC (the "TVG LLC Credit Facility") and (iii)
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 affiliates.
TINTA believes that amounts due under the TVG LLC Note Receivable,
borrowing availability pursuant to the TVG LLC 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.
The Company's consolidated operating activities provided cash of $35.2
million, $24.5 million and $10.8 million during the years ended December 31,
1997, 1996 and 1995, respectively. Included in the 1997 amount is $40.0 million
of cash provided by Cablevision's operations during the year ended December 31,
1997. As discussed under "General" above, effective October 1, 1997,
Cablevision's cash flows are no longer included in the Company's consolidated
statements of cash flows. In addition, as discussed under "General" above,
effective January 1, 1997, Flextech's cash flows are no longer included in the
Company's consolidated statements of cash flows. Flextech's operating activities
used cash of $46.5 million in 1996.
Cash used by the Company's investing activities aggregated $87.6
million, $198.0 million and $368.0 million during the years ended December 31,
1997, 1996 and 1995, respectively, and exceeded net cash provided by operating
activities in each year. The 1997, 1996 and 1995 amounts include $197.4 million,
$166.1 million and $174.0 million, respectively, of cash used by the Company to
fund investments in, and loans to, affiliates. The 1997 amount also includes
reductions in the Company's cash and cash equivalents of $1.0 million and $38.1
million resulting from the deconsolidation of Cablevision and Flextech,
respectively.
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<PAGE> 72
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.
The Company is exposed to foreign exchange risk caused by unfavorable
and potentially volatile fluctuations of the United States (sometimes referred
to herein as the "U.S.") dollar (the functional currency of TINTA) against the
UK pound sterling, the Japanese yen ("(Y)"), the Argentine peso and various
other foreign currencies that are the functional currencies of TINTA's operating
subsidiaries and affiliates. Since the enactment of a convertibility plan in
April 1991, the Argentine government has maintained an exchange rate of one
Argentine peso to one U.S. dollar. No assurance can be given that such an
exchange rate will be maintained in future periods. Changes in the value of the
U.S. dollar against any foreign currency that is the functional currency of an
operating subsidiary or affiliate of TINTA will cause the Company to experience
unrealized foreign currency translation losses (gains) with respect to amounts
already invested in such foreign currencies. TINTA and certain of its operating
subsidiaries and affiliates are also exposed to foreign currency risk to the
extent that they enter into transactions denominated in currencies other than
their respective functional currencies. As of December 31, 1997, TINTA was not
exposed to material near-term losses in future earnings, fair values or cash
flows resulting from derivative financial instruments.
At December 31, 1997, the Company had aggregate debt of $390.0 million
of which $45.0 million (12%) bears interest at variable rates. Accordingly, in
an environment of rising interest rates, the Company would experience an
increase in interest expense. For additional information concerning the terms of
such debt, see note 11 to the accompanying financial statements.
Because TINTA 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. With
respect to funding commitments that are denominated in currencies other than the
U.S. dollar, the Company historically has sought to reduce its exposure to
short-term (generally no more than 90 days) movements in the applicable exchange
rates once the timing and amount of such funding commitments become fixed.
Although the Company monitors foreign currency exchange rates with the objective
of mitigating its exposure to unfavorable fluctuations in such rates, the
Company believes that, given the nature of its business, it is not possible or
practical to eliminate the Company's exposure to unfavorable fluctuations in
foreign currency exchange rates.
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<PAGE> 73
TINTA has formed strategic partnerships with News Corp., Organizacoes
Globo and Grupo Televisa S.A. to develop and operate a direct-to-home satellite
service for Latin America, Mexico, and various Central and South American
countries (collectively, the "DTH Ventures"). Through December 31, 1997, TINTA
had contributed $24.9 million to the DTH Ventures. It is anticipated that TINTA
could be required to make additional cash contributions to the DTH Ventures.
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
ordinary shares of Flextech (the "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. The consummation
of the BBC Joint Ventures resulted in, among other things, a reduction of
TINTA's economic ownership interest in Flextech to 35.9% and the issuance to the
Company by Flextech of a special voting share (the "Special Voting Share"). The
Special Voting Share when combined with the Company's other share capital in
Flextech allows the Company to cast 50% of the votes on most matters brought to
the shareholders of Flextech for vote. The Special Voting Share will terminate
upon the occurrence of the earlier of (i) the third anniversary of issuance or
(ii) any transfer of Flextech shares by 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 (pound)7.20
($11.89) 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.
Flextech had issued convertible non-preference shares ("Flextech
Non-Preference Shares") in connection with previous acquisition transactions due
to TINTA'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.
Immediately following such conversion, and the issuance of additional Flextech
Ordinary Shares in connection with the UKGL and UKLL transactions described
above, (i) TINTA's interest in the equity share capital of Flextech was 35.9%
and (ii) TINTA's voting interest was approximately 50%. TINTA had put
obligations with respect to Flextech Non-Preference Shares which were issued in
connection with certain Flextech acquisitions. Such put obligations were
eliminated with the conversion of Flextech Non-Preference Shares into Flextech
Ordinary Shares.
II-15
<PAGE> 74
Flextech has undertaken to finance the working capital requirements of
one of the BBC Joint Ventures (the "Principal Joint Venture"). Flextech has also
agreed to make available to the other BBC Joint Venture (the "Second Joint
Venture"), if required, funding of up to (pound)10 million ($16.5 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 TINTA
assume all of Flextech's funding obligations to the Principal Joint Venture (the
"Standby Commitment"). In addition to Flextech's April 1997 purchase of
(pound)22 million ($36.3 million) of ordinary shares in the Principal Joint
Venture, Flextech is obligated to provide the Principal Joint Venture with a
primary credit facility of (pound)88 million ($145.3 million) and, subject to
certain restrictions, a standby credit facility of (pound)30 million ($49.5
million).
If BBC Worldwide requires TINTA to perform Flextech's funding
obligations pursuant to the Standby Commitment, then TINTA will acquire
Flextech's entire equity interest in the Principal Joint Venture for
(pound)1.00, and will replace Flextech's directors on the board of the Principal
Joint Venture with representatives of TINTA. Flextech will pay commitment and
standby fees to TINTA for its undertaking under the Standby Commitment. If
Flextech repays to TINTA all loans it makes to the Principal Joint Venture (plus
interest at TINTA's marginal cost of funds plus 2% per annum) within 180 days
after TINTA first becomes obligated to perform Flextech's financial obligations,
it may reacquire its interest in the Principal Joint Venture for (pound)1.00.
TINTA may also, within the same period, require Flextech to reacquire its
interest on the same terms. The Standby Commitment will terminate on the
earliest of (i) the date on which Flextech has met all of its required financial
obligations to the Principal Joint Venture under the primary and standby credit
facilities, or (ii) the date on which Flextech delivers a bank guarantee of all
of its funding obligations to the Principal Joint Venture.
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 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.
As of December 31, 1997, TINTA had made cash contributions to Torneos
y Competencias S.A. ("Torneos") on the behalf of Liberty/TINTA LLC ("Liberty/
TINTA"), a limited liability company owned in equal parts by TINTA and Liberty
Media Corporation ("Liberty"), of $48 million and purchased a direct 5%
interest in Torneos for $12 million. It is anticipated that Liberty's portion
of such capital calls will be repaid to TINTA either in cash or other economic
consideration to be determined at some future date.
The Company and/or other subsidiaries of TCI have guaranteed notes
payable and other obligations of certain of the Company's affiliates (the
"Guaranteed Obligations"). At December 31, 1997, the U.S. dollar equivalent of
the amounts borrowed pursuant to the guaranteed obligations was $26 million. The
Company has also guaranteed the obligation of an affiliate (The Premium Movie
Partnership) to pay fees for the license to exhibit certain films through the
year 2000. If the Company were to fail to fulfill its obligations under the
guarantees, the beneficiaries have the right to demand an aggregate payment of
approximately $46 million. 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.
II-16
<PAGE> 75
Additionally, agreements relating to the Company's investment in
certain 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. In connection with the IPO, TINTA agreed to indemnify
TCI for any loss, claim or liability that TCI may incur by reason of any
guarantees made by TCI of financial, contractual or debt obligations for the
benefit of the Company.
Certain of the Company's 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.
During the year ended December 31, 1997, Cablevision and the Puerto
Rico Subsidiary accounted for $41.7 million and $9.0 million, respectively, of
the Company's aggregate capital expenditures of $50.7 million. As described
below, effective October 1, 1997, the capital expenditures and other cash flows
of Cablevision 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 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 the Puerto Rico Subsidiary generally
will be sufficient to satisfy its foreseeable capital expenditure requirements.
On February 8, 1996, the Company received net cash proceeds of
approximately $336 million from the issuance of the Debentures. The Debentures
bear interest at a fixed interest rate of 4-1/2%, are due in 2006 and have an
aggregate principal amount of $345.0 million. 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. 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. Such amounts were
repaid in their entirety during 1997. The net proceeds from the Debentures were
used to fund capital contributions to the Company's affiliates and to fund
certain other liquidity requirements of TINTA.
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 $46.4 million principal amount
of secured negotiable promissory notes (the "OCC Notes"). The OCC Notes were
repaid by Cablevision in their entirety in 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. As of December 31, 1997, the Company had
repurchased 3,370,000 shares under such program for an aggregate purchase price
of $42.0 million.
II-17
<PAGE> 76
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 11 to the
accompanying consolidated financial statements.
On September 26, 1997, the Company sold its indirect interest in Sky
for cash proceeds of $53.0 million. TINTA owned its interest in Sky through a
25.5% ownership interest in HKP Partners of New Zealand.
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision to CEI Citicorp Holdings Sociedad Anonima ("CEI") and T.I.
Telefonica Internacional de Espana S.A. ("Telefonica," together with CEI, the
"Buyers") for cash proceeds of $120 million. In addition, on October 9, 1997,
Cablevision issued 3,541,829 shares of stock in the aggregate to the Buyers for
$80 million in cash and notes receivable with an aggregate principal amount of
$240 million, plus accrued interest at LIBOR, due within the earlier of two
years or at the request of Cablevision's board of directors. The above
transactions (collectively, the "Cablevision Sale") further reduced TINTA's
interest in Cablevision to 26.24%. Cash proceeds received by TINTA from the
Cablevision Sale of $120 million were based on a negotiated value of $210
million for approximately one-half of TINTA's 51% interest in Cablevision. TINTA
recognized a gain of $48.8 million on the Cablevision Sale. TINTA will continue
to have the right to manage Cablevision (pursuant to a renewable five-year
management contract that was entered into in connection with the Cablevision
Sale), and all material corporate transactions of Cablevision will require
TINTA's approval, so long as TINTA maintains at least a 16% interest in
Cablevision. The Buyers also purchased the additional 39% interest in
Cablevision that TINTA currently had the right to acquire. As a result of the
Cablevision Sale, effective October 1, 1997, TINTA ceased to consolidate
Cablevision and began to account for Cablevision using the equity method of
accounting.
Pending its use by TINTA, $102 million of proceeds from the Cablevision
Sale were loaned to TCI pursuant to an unsecured promissory note. Effective
December 5, 1997, amounts outstanding under such promissory note were assigned
to TVG LLC. Amounts outstanding under the promissory note ($88.7 million at
December 31, 1997) bear interest at variable rates (6.7% at December 31, 1997).
Principal and interest are due and payable as mutually agreed from time to time
by TVG LLC and TINTA.
On January 16, 1998, TINTA sold its 49% interest in TeleCable Nacional,
CXA for $10 million in cash.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company are filed under this item
beginning on page II-19. All financial statement schedules are omitted as they
are not required or are not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
II-18
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tele-Communications International, Inc.:
We have audited the accompanying consolidated balance sheets of
Tele-Communications International, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Tele-Communications
International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 20, 1998
II-19
<PAGE> 78
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- --------------
amounts in thousands
<S> <C> <C>
Assets
Cash and cash equivalents (note 4) $ -- 44,192
Trade and other receivables, net 5,065 38,185
Film inventory and other prepaid expenses 1,517 65,749
Investment in Telewest Communications plc
("Telewest"), accounted for under the equity
method (note 8) 324,417 488,495
Investment in Cablevision S.A. ("Cablevision"),
accounted for under the equity method (note 6) 239,379 --
Investments in other affiliates, accounted for
under the equity method, and related
receivables (note 9) 602,325 421,853
Other investments (note 10) 33,012 20,873
Deferred income tax asset (note 13) 54,547 --
Property and equipment, at cost:
Land 415 277
Distribution systems 78,185 216,172
Support equipment and buildings 11,269 51,111
----------------- -----------------
89,869 267,560
Less accumulated depreciation 32,348 65,033
----------------- -----------------
57,521 202,527
----------------- -----------------
Franchise costs and other intangible assets (note 5) 76,890 755,914
Less accumulated amortization 11,494 61,576
----------------- -----------------
65,396 694,338
----------------- -----------------
Deferred financing costs and other assets, net
of amortization 10,821 13,089
----------------- -----------------
$ 1,394,000 1,989,301
================= =================
</TABLE>
(continued)
II-20
<PAGE> 79
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Consolidated Balance Sheets, continued
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
amounts in thousands
<S> <C> <C>
Liabilities and Stockholders' Equity
Cash overdraft $ 1,003 --
Accounts payable 672 35,467
Accrued liabilities 19,490 75,173
Debt (note 11) 390,042 511,128
MultiThematiques Obligation (note 9) -- 47,902
Deferred income tax liability (note 13) -- 193,748
Other liabilities 18,482 17,698
--------------- -------------
Total liabilities 429,689 881,116
--------------- -------------
Minority interests in equity of subsidiaries -- 142,187
--------------- -------------
Stockholders' Equity (note 12):
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 106,997,880 shares
and 106,960,873 shares in
1997 and 1996, respectively 106,998 106,961
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 1,285,904 1,186,788
Accumulated deficit (325,805) (205,456)
Cumulative foreign currency translation
adjustment, net of taxes 5,640 26,146
--------------- --------------
1,084,437 1,126,139
Treasury stock, at cost, 3,370,000 shares of
Series A Common Stock in 1997 (42,014) --
Due from related parties (notes 1 and 14) (78,112) (160,141)
--------------- --------------
Total stockholders' equity 964,311 965,998
--------------- --------------
Commitments and contingencies
(notes 9, 14 and 15)
$ 1,394,000 1,989,301
=============== ==============
</TABLE>
See accompanying notes to financial statements.
II-21
<PAGE> 80
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------ -----------
amounts in thousands
<S> <C> <C> <C>
Revenue:
Cable $ 219,834 220,163 142,494
Programming -- 94,397 48,039
-------------- ------------ -----------
219,834 314,560 190,533
-------------- ------------ -----------
Operating costs and expenses:
Cable (note 14) 130,794 133,991 90,367
Programming -- 125,844 62,030
Programming rights provision -- 8,706 --
General and administrative:
Allocated from related parties
(notes 12 and 14) 14,216 1,160 4,374
Other 16,467 9,469 8,617
Depreciation 25,905 24,649 15,315
Amortization 27,576 34,098 21,045
-------------- ------------ -----------
214,958 337,917 201,748
-------------- ------------ -----------
Operating income (loss) 4,876 (23,357) (11,215)
Other income (expense):
Share of losses of Telewest (note 8) (145,264) (109,357) (70,274)
Share of losses of Cablevision (note 6) (3,377) -- --
Share of losses of other affiliates
(note 9) (99,729) (70,054) (53,674)
Interest income:
Related parties (note 14) 5,782 14,044 --
Other 3,519 10,241 8,989
Interest expense:
Related parties (note 14) (1,912) (1,408) (4,259)
Other (31,139) (33,745) (16,611)
Gain on issuance of stock by Telewest (note 8) -- 258 164,900
Gain on disposition of assets, net
(notes 7 and 9) 109,463 12,284 51,139
Minority interests' share of losses (earnings) (8,616) 22,847 (4,000)
Foreign currency transaction gains (losses) 224 7,101 (2,480)
Recognized holding loss for available-for-sale
securities (note 10) (1,194) (6,575) --
Other, net (notes 9 and 14) 2,064 1,690 (772)
-------------- ------------ -----------
(170,179) (152,674) 72,958
-------------- ------------ -----------
Earnings (loss) before income taxes (165,303) (176,031) 61,743
Income tax benefit (expense) (note 13) 44,954 45,611 (31,702)
-------------- ------------ -----------
Net earnings (loss) $ (120,349) (130,420) 30,041
============== ============== ===========
Basic and diluted net earnings (loss) per common
share (note 3):
Historical $ (1.04) (1.10) --
=============== ============= ===========
Pro forma $ -- -- .28
=============== ============== ===========
</TABLE>
See accompanying notes to financial statements.
II-22
<PAGE> 81
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional
Preferred Common stock paid-in Combined Accumulated
stock Series A Series B capital equity deficit
----------- -------- -------- ---------- -------- -----------
amounts in thousands
<C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- -- -- -- 823,993 (103,897)
Contributions -- -- -- 53,298 42,380 --
Net earnings -- -- -- -- -- 30,041
Foreign currency translation
adjustment -- -- -- -- -- --
Unrealized holding losses for
available-for-sale securities -- -- -- -- -- --
Adjustment to reflect completion
of Contributions (see note 1) -- 85,800 11,700 768,873 (866,373) --
Adjustment to reflect implementation
of tax sharing agreement (see note
13) -- -- -- 12,545 -- --
Adjustment in connection with the
issuance of ordinary shares by
Flextech p.l.c. (note 9) -- -- -- 50,900 -- --
Issuance of common stock in initial
public offering (see note 1) -- 20,000 -- 281,343 -- --
Issuance of common stock as partial
consideration for investment -- 688 -- 10,312 -- --
Adjustment to reflect elimination of
reporting delay with respect to
Flextech p.l.c. (note 2) -- -- -- -- -- (1,180)
Change in due from related parties -- -- -- -- -- --
--------- ---------- ---------- --------- --------- -----------
Balance at December 31, 1995 $ -- 106,488 11,700 1,177,271 -- (75,036)
========= ========== ========== ========= ========= ===========
Unrealized
Cumulative holding
foreign losses for
currency available-
translation for-sale Treasury Due from Total
adjustment, securities, stock, related stockholders'
net of taxes net of taxes at cost parties equity
------------ ------------ --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (3,653) -- -- -- 716,443
Contributions -- -- -- -- 95,678
Net earnings -- -- -- -- 30,041
Foreign currency translation
adjustment (4,897) -- -- -- (4,897)
Unrealized holding losses for
available-for-sale securities -- (152) -- -- (152)
Adjustment to reflect completion
of Contributions (see note 1) -- -- -- -- --
Adjustment to reflect implementation
of tax sharing agreement (see note
13) -- -- -- -- 12,545
Adjustment in connection with the
issuance of ordinary shares by
Flextech p.l.c. (note 9) -- -- -- -- 50,900
Issuance of common stock in initial
public offering (see note 1) -- -- -- -- 301,343
Issuance of common stock as partial
consideration for investment -- -- -- -- 11,000
Adjustment to reflect elimination of
reporting delay with respect to
Flextech p.l.c. (note 2) -- -- -- -- (1,180)
Change in due from related parties -- -- -- (372) (372)
---------- --------- ------- ------- ---------
Balance at December 31, 1995 (8,550) (152) -- (372) 1,211,349
=========== ========== ======= ======== =========
</TABLE>
See accompanying notes to financial statements.
II-23
<PAGE> 82
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995 (continued)
<TABLE>
<CAPTION>
Cumulative
foreign
currency
translation
Additional adjustment,
Preferred Common stock paid-in Combined Accumulated net of
stock Series A Series B capital equity deficit taxes
--------- ---------- ---------- ---------- --------- ----------- -----------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- 106,488 11,700 1,177,271 -- (75,036) (8,550)
Net loss -- -- -- -- -- (130,420) --
Issuance of common stock -- 473 -- 9,517 -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- 34,696
Change in unrealized holding
loss for available-for-sale
securities -- -- -- -- -- -- --
Change in due from related parties
(note 14) -- -- -- -- -- -- --
--------- ---------- ---------- --------- --------- ----------- ----------
Balance at December 31, 1996 -- 106,961 11,700 1,186,788 -- (205,456) 26,146
Net loss -- -- -- -- -- (120,349) --
Open market repurchases of common
stock -- -- -- -- -- -- --
Issuances of common stock -- 37 -- 561 -- -- --
Adjustment in connection with the
issuance of ordinary shares by
Flextech p.l.c. (note 9) -- -- -- 98,555 -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- (20,506)
Change in due from related parties -- -- -- -- -- -- --
--------- ---------- ---------- --------- --------- ----------- ----------
Balance at December 31, 1997 $ -- 106,998 11,700 1,285,904 -- (325,805) 5,640
========= ========== ========== ========= ========= =========== ==========
Unrealized
holding
losses for
available-
for-sale Treasury Due from Total
securities, stock, related stockholders'
net of taxes at cost parties equity
------------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 (152) -- (372) 1,211,349
Net loss -- -- -- (130,420)
Issuance of common stock -- -- -- 9,990
Foreign currency translation
adjustment -- -- -- 34,696
Change in unrealized holding
loss for available-for-sale
securities 152 -- -- 152
Change in due from related parties
(note 14) -- -- (159,769) (159,769)
--------- -------- --------- ---------
Balance at December 31, 1996 -- -- (160,141) 965,998
Net loss -- -- -- (120,349)
Open market repurchases of common
stock -- (42,014) -- (42,014)
Issuances of common stock -- -- -- 598
Adjustment in connection with the
issuance of ordinary shares by
Flextech p.l.c. (note 9) -- -- -- 98,555
Foreign currency translation adjustment -- -- -- (20,506)
Change in due from related parties -- -- 82,029 82,029
--------- -------- ------- ---------
Balance at December 31, 1997 -- (42,014) (78,112) 964,311
========= ======== ======= =========
</TABLE>
See accompanying notes to financial statements
II-24
<PAGE> 83
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
amounts in thousands
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (120,349) (130,420) 30,041
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 53,481 58,747 36,360
Programming rights provision -- 8,706 --
Stock compensation 15,566 (3,185) 4,037
Share of losses of Telewest 145,264 109,357 70,274
Share of losses of Cablevision 3,377 -- --
Share of losses of other affiliates 99,729 70,054 53,674
Gain on issuance of stock by Telewest -- (258) (164,900)
Gain on disposition of assets (109,463) (12,284) (51,139)
Recognized holding loss for available-for-sale
securities 1,194 6,575 --
Minority interests' share of earnings (losses) 8,616 (22,847) 4,000
Unrealized foreign currency transaction losses
(gains) (2,151) (6,287) 1,761
Accretion of discount on MultiThematiques
Obligation 2,911 5,751 271
Deferred income tax expense (benefit) (62,407) (48,444) 31,084
Intercompany income tax expense (benefit) 7,529 (10,187) (4,881)
Changes in operating assets and liabilities, net
of the effect of acquisitions and the effects
of the deconsolidation of Flextech p.l.c. and
Cablevision:
Change in receivables (459) (4,497) 210
Change in film inventory and other prepaid
expenses (2,800) (12,168) (32,064)
Change in payables and accruals (2,262) 15,876 33,844
Net cash used in Flextech p.l.c.'s operating
activities during one-month period ended
September 30, 1995 (note 2) -- -- (1,726)
------------- ------------- -------------
Net cash provided by operating activities $ 37,776 24,489 10,846
------------- ------------- -------------
</TABLE>
(continued)
II-25
<PAGE> 84
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Statements of Cash Flows, continued
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
amounts in thousands
<S> <C> <C> <C>
Cash flows from investing activities:
Effect of the deconsolidation of Flextech p.l.c.
and Cablevision on cash and cash equivalents $ (39,097) -- --
Investments in and loans to affiliates and others (197,400) (166,067) (173,971)
Cash paid for acquisitions, net (23,559) (62,177) (170,309)
Capital expended for property and equipment (50,744) (55,285) (57,914)
Cash paid to purchase minority interests -- (4,636) (24,735)
Proceeds from dispositions of assets 175,842 72,099 98,895
Proceeds from repayment of loans by affiliates
and others 46,886 20,342 5,502
Other, net 517 (2,296) 5,239
Net cash used in Flextech p.l.c.'s investing
activities during one-month period ended
September 30, 1995 (note 2) -- -- (50,729)
--------------- --------------- --------------
Net cash used in investing activities (87,555) (198,020) (368,022)
--------------- --------------- --------------
Cash flows from financing activities:
Borrowings of debt 206,360 179,353 314,696
Repayments of debt (243,692) (277,763) (301,325)
Issuance of debentures -- 345,000 --
Loan to Tele-Communications, Inc. ("TCI") (102,000) (336,375) --
Repayments received on loan to TCI 189,794 159,874 --
Open market repurchases of common stock (42,014) -- --
Net proceeds from initial public offering -- -- 301,343
Net proceeds from issuance of common stock -- 9,990 --
Payment of deferred financing costs (950) (9,524) (2,105)
Change in cash overdraft 1,003 -- --
Other changes in due from related parties (2,914) 5,311 (4,082)
Cash proceeds from issuance of shares by
Flextech p.l.c. -- -- 74,779
Contributions from parent -- -- 95,678
Contributions from minority interest owners -- 4,822 --
Net cash provided by Flextech p.l.c.'s financing
activities during one-month period ended
September 30, 1995 (note 2) -- -- 8,707
--------------- --------------- --------------
Net cash provided by financing activities 5,587 80,688 487,691
--------------- --------------- --------------
Effect of exchange rate changes on cash -- 3,926 (3,142)
--------------- --------------- ---------------
Net increase (decrease) in cash and
cash equivalents (44,192) (88,917) 127,373
Cash and cash equivalents:
Beginning of year 44,192 133,109 5,736
--------------- --------------- --------------
End of year $ -- 44,192 133,109
=============== =============== ==============
</TABLE>
See accompanying notes to financial statements.
II-26
<PAGE> 85
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(1) Basis of Presentation
Tele-Communications International, Inc. ("TINTA"), 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.
During the fourth quarter of 1994 and the first quarter of 1995, TCI
contributed its indirect ownership interests in substantially all of
its international cable and telephony assets and certain of its
international programming assets to TINTA (the "Contributions"). For
purposes of this discussion, except to the extent the context otherwise
requires, the term the "Company" refers to (i) such contributed
ownership interests before the February 28, 1995 completion date of the
Contributions and (ii) TINTA and its direct and indirect subsidiaries
and affiliates on and after such completion date. 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 for
aggregate cash consideration of $320.0 million, before deducting
related expenses (approximately $18.7 million). The shares of TINTA's
common stock owned by TCI at December 31, 1997 represented
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.
In connection with the IPO, TINTA amended and restated its Certificate
of Incorporation on July 12, 1995 to, among other things, (i) increase
its authorized capital stock and (ii) divide its common stock into two
series. At the same time, TINTA effected a reclassification pursuant to
which the 1,000 shares of common stock held by TCI were reclassified
and changed into 85,800,000 shares of Series A Common Stock and
11,700,000 shares of Series B common stock, $1 par value per share
("Series B Common Stock"). See note 12.
TCI's common stock, par value $1.00 per share, is comprised of six
series: Tele-Communications, Inc. Series A TCI Group Common Stock ("TCI
Group Series A Stock"), Tele-Communications, Inc. Series B TCI Group
Common Stock, (collectively, the "TCI Group Common Stock"),
Tele-Communications, Inc. Series A Liberty Group Common Stock ("Liberty
Group Series A Stock"), Tele-Communications, Inc. Series B Liberty
Group Common Stock, (collectively, the "Liberty Group Common Stock"),
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock
("TCI Ventures Group Series A Stock") and Tele-Communications, Inc.
Series B TCI Ventures Group Common Stock, (collectively, the "TCI
Ventures Group Common Stock").
(continued)
II-27
<PAGE> 86
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
The TCI Group Common Stock is intended to reflect the separate
performance of the "TCI Group," which is comprised of TCI's domestic
distribution and communications businesses (other than the investments
attributed to the TCI Ventures Group), and any other businesses and
assets of TCI not attributed to either the Liberty Group or the TCI
Ventures Group. The Liberty Group Common Stock is intended to reflect
the separate performance of the "Liberty Media Group," which is
comprised of TCI's businesses, and investments in entities, that are
engaged in the production, acquisition and distribution through all
available formats and media of branded entertainment, educational and
informational programming and software, including multimedia products,
and its investments in entities engaged in electronic retailing, direct
marketing, advertising sales relating to programming services,
informercials and transaction processing, and the operation of UHF
television stations. The TCI Ventures Group Common Stock is intended to
reflect the separate performance of the "TCI Ventures Group," which is
comprised of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming domestic
assets and businesses. TINTA is a member of the TCI Ventures Group.
On August 28, 1997, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue the TCI Ventures Group Common
Stock which reflects the separate performance of the TCI Ventures
Group. TCI's 85% equity interest in TINTA has been attributed to the
TCI Ventures Group along with substantially all of TCI's non-cable and
non-programming domestic assets. In connection with the formation of
the TCI Ventures Group, the shares of TINTA common stock held by TCI
were transferred to TCI Ventures Group, LLC ("TVG LLC"), a wholly-owned
subsidiary of TCI, effective October 1, 1997. On September 10, 1997,
TCI consummated an exchange offer (the "Exchange Offer") whereby TCI
issued 377,322,600 shares (as adjusted for a dividend) of TCI Ventures
Group Series A Stock and 32,532,800 shares (as adjusted for a dividend)
of Tele-Communications, Inc. Series B TCI Ventures Group Common Stock
in exchange for 188,661,300 shares of TCI Group Series A Stock and
16,266,400 shares of Tele-Communications, Inc. Series B TCI Group
Common Stock, respectively.
The most significant entities that are reflected in the Company's
financial statements on a consolidated basis for the periods presented
herein are engaged in (i) the multi-channel video and
telecommunications distribution business (the "cable" business) in
Puerto Rico and in Buenos Aires, Argentina (since the April 25, 1995
acquisition of Cablevision through September 30, 1997, see related
discussion below) and (ii) the distribution and production of
programming for multi-channel video distribution systems (the
"programming" business) in the United Kingdom ("UK") and other parts
of Europe in 1995 and 1996 through the Company's subsidiary, Flextech
p.l.c. See related discussion below.
(continued)
II-28
<PAGE> 87
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to 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 60.4% through May 1995, 48.8% from June
1995 through March 1996, 46.5% from April 1996 through March, 1997,
35.9% from April 1997 to July 1997, 36.3% from July 1997 to September
1997 and 36.8% from September 1997 to the present. The Company's voting
interest in Flextech was 60.4% through May 1995, 50.9% from June 1995
through December 1996 and approximately 50% from January 1997 through
the present.
In January 1997, the Company reduced its voting interest in Flextech to
50% by issuing to a nominee an irrevocable proxy to vote 960,850
Flextech ordinary shares ("Flextech Ordinary Shares") at any
shareholder meeting to be held through December 31, 1997. In April
1997, Flextech and BBC Worldwide Limited formed two separate joint
ventures (the "BBC Joint Ventures") and entered into certain related
transactions. Such transactions resulted in, among other things, a
reduction of TINTA's ownership interest in Flextech to 35.9% and the
maintenance of TINTA's voting interest in Flextech to approximately
50%. 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. See note 9.
As further described in note 6, on October 9, 1997, TINTA sold a
portion of its 51% interest in Cablevision. Such sale reduced TINTA's
interest in Cablevision to 26.24%. In light of TINTA's decreased
ownership in Cablevision, effective October 1, 1997, TINTA ceased to
consolidate Cablevision and began to account for Cablevision using the
equity method of accounting.
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 three consolidated Puerto Rico entities prior to such
merger and the Puerto Rico Subsidiary following such merger.
Due to timing considerations, Cablevision and Flextech were included in
the Company's financial statements on a one-month time delay through
the third quarter of 1995. The Company eliminated such time delay from
its December 31, 1995 financial statements. See note 2.
As further described in note 14, the accompanying statements of
operations include 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.
(continued)
II-29
<PAGE> 88
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(2) Elimination of Reporting Delay
Through the third quarter of 1995, the Company included Cablevision and
Flextech in its financial statements on a one-month time delay. The
Company eliminated such time delay from its December 31, 1995 financial
statements. As a result, the Company's combined statement of operations
for the year ended December 31, 1995 includes (i) Cablevision's results
of operations for the period commencing on the April 25, 1995
acquisition date through December 31, 1995 and (ii) Flextech's results
of operations for the period commencing December 1, 1994 through
December 31, 1995 (exclusive of the one-month period ended September
30, 1995). The Company's combined statement of cash flows for the year
ended December 31, 1995 includes the cash flows of Cablevision and
Flextech for the same periods except that Flextech's cash flows for the
one-month period ended September 30, 1995 are included therein on a
summarized basis. In connection with the elimination of the
above-described reporting delays, the Company charged Flextech's net
loss for the one-month ended September 30, 1995 directly to the
Company's accumulated deficit so that the Company's combined statement
of operations for the year ended December 31, 1995 would not include
more than 12 months of Flextech's operating results. Summarized
operating results of Flextech (as adjusted to reflect the Company's
historical cost basis in Flextech) for the one-month ended September
30, 1995 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Revenue $ 4,502
==========
Operating loss $ (2,488)
==========
Net loss $ (1,180)
==========
</TABLE>
(3) Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance was not material at December 31, 1997 and 1996.
Investments
For those investments in affiliates in which the Company's voting
interest is 20% to 50%, the equity method of accounting is generally
used. Under this method, the investment, originally recorded at cost,
is adjusted to recognize the Company's share of the net earnings or
losses of the affiliates as they occur rather than as dividends or
other distributions are received. The Company's share of net earnings
or losses of affiliates includes the amortization of purchase
adjustments.
(continued)
II-30
<PAGE> 89
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Investments in debt securities and marketable equity securities in
which the Company's voting interest is less than 20% are classified as
available-for-sale and are carried at fair value. Any unrealized
holding gains and losses (net of the related deferred income tax
effect) are carried as a separate component of equity. Any unrealized
holding losses which are deemed to be other than temporary are charged
to operations. Other investments in which the Company's ownership
interest is less than 20% are generally carried at cost.
Changes in the Company's proportionate share of the underlying equity
of a subsidiary or equity method investee, which result from the
issuance of additional equity by such subsidiary or equity method
investee, are generally recognized as gains or losses in the Company's
statements of operations. See notes 8 and 9.
Film Inventory
Film inventory for Flextech as of December 31, 1996 includes exhibition
and other exploitation rights acquired under license agreements or
through production and output agreements. Such rights, along with the
related obligation, were recorded at the face amount of the contract at
the time the programming becomes available.
Film inventory was carried at the lower of unamortized cost or net
realizable value. Exhibition rights were amortized on a straight-line
basis over the available runs in the contract period. Other
exploitation rights were amortized based on the percentage that current
year revenues bear to estimated future revenues on a program-by-program
basis. Estimates of future revenues are periodically reviewed by
management and revised when warranted by changing conditions, such as
changes in the distribution marketplace or changes in the expected
usage of a program.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction and initial
subscriber installation costs, including interest during construction,
material, labor and applicable overhead, are capitalized. Interest
capitalized during 1997, 1996 and 1995 was not material.
Depreciation is computed on a straight-line basis using estimated
useful lives of 3 to 20 years for distribution systems (3 to 5 years
for converters and in-home wiring and 10 to 20 years for the remaining
components of the distribution system) and 3 to 40 years for support
equipment and buildings (3 to 5 years for support equipment and 10 to
40 years for buildings and improvements).
Repairs and maintenance are charged to operations, and additions are
capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such
property are charged to accumulated depreciation, and salvage, if any,
is credited thereto. Gains and losses are only recognized in connection
with sales of systems in their entirety.
(continued)
II-31
<PAGE> 90
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Franchise Costs and Other Intangible Assets
Franchise costs and other intangible assets generally include the
difference between the cost of acquiring cable, telephony and
programming companies and amounts allocated to their tangible assets.
Such amounts are amortized on a straight-line basis over their useful
lives (10 to 40 years).
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amount of its property,
plant and equipment and its intangible assets to determine whether
current events or circumstances warrant adjustments to such carrying
amounts. If an impairment adjustment is deemed necessary, such loss is
measured by the amount that the carrying value of such assets exceeds
their fair value. Considerable management judgment is necessary to
estimate the fair value of assets, accordingly, actual results could
vary significantly from such estimates. Assets to be disposed of are
carried at the lower of their financial statement carrying amount or
fair value less costs to sell.
Foreign Currency Translation
The functional currency of TINTA is the United States ("U.S.") dollar.
The functional currency of the Company's foreign operations generally
is the applicable local currency for each foreign subsidiary and equity
method investee. In this regard, the functional currency of certain of
TINTA's foreign subsidiaries and foreign equity investees is the
Argentine peso, the UK pound sterling ("(pound)" or "pounds"), the
French franc ("FF") and the Japanese yen ("(Y)"). All amounts presented
herein with respect to operations in Argentina are stated in U.S.
dollars because the Argentine government has maintained an exchange
rate of one U.S. dollar to one Argentine peso since April of 1991.
However, no assurance can be given that the Argentine government will
maintain such an exchange rate in future periods. Assets and
liabilities of foreign subsidiaries and equity investees are translated
at the spot rate in effect at the applicable reporting date, and the
combined statements of operations and the Company's share of the
results of operations of its equity affiliates are translated at the
average exchange rates in effect during the applicable period. The
resulting unrealized cumulative translation adjustment, net of
applicable income taxes, is recorded as a separate component of equity.
Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses which are reflected in the statements of
operations as unrealized (based on the applicable period end
translation) or realized upon settlement of the transactions.
Cash flows from the Company's consolidated foreign subsidiaries are
calculated in their functional currencies. The effect of exchange rate
changes on cash balances held in foreign currencies is reported as a
separate line item in the accompanying statements of cash flows.
(continued)
II-32
<PAGE> 91
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Unless otherwise indicated, convenience translations of foreign
currencies into U.S. dollars are calculated using the applicable spot
rate at December 31, 1997, as published in The Wall Street Journal.
Foreign Currency Derivatives
From time to time, the Company uses certain derivative financial
instruments to manage its foreign currency risks. Amounts receivable or
payable pursuant to derivative financial instruments that qualify as
hedges of existing assets, liabilities and firm commitments are
deferred and reflected as an adjustment of the carrying amount of the
hedged item. Market value changes in all other derivative financial
instruments are recognized currently in the combined statements of
operations. At December 31, 1997 and 1996, the Company had no material
deferred hedging gains or losses and was not exposed to material
near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments.
Acquisition, Transaction and Development Costs
The Company capitalizes direct and incremental costs incurred relative
to potential investments. If an investment is made, these costs are
either reimbursed to the Company by the affiliated company or
capitalized as part of the cost basis of the Company's investment. If
the potential investment is abandoned, these costs are expensed in the
period of abandonment.
Revenue Recognition
Cable and programming revenue is recognized in the period that services
are delivered. Cable installation revenue is recognized in the period
the related services are provided to the extent of direct selling
costs. Any remaining amount is deferred and recognized over the
estimated average period that subscribers are expected to remain
connected to the cable television system.
Earnings (Loss) Per Common and Potential Common Share
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS
128") in February of 1997. SFAS 128 establishes new computation,
presentation and disclosure requirements for earnings per share
("EPS"). SFAS 128 requires companies with complex capital structures to
present basic and diluted EPS. Basic EPS is measured as the income or
loss available to common share holders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options, etc.)
as if they had been converted at the beginning of the periods
presented. Potential common shares that have an anti-dilutive effect
(i.e., those that increase income per share or decrease loss per share)
are excluded from diluted EPS. TINTA adopted SFAS 128 as of December
31, 1997 and has restated all prior period EPS data, as required. SFAS
128 did not have a material impact on EPS for any period presented.
(continued)
II-33
<PAGE> 92
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
As described in note 1, TINTA changed its historical capital structure
in connection with the IPO. The pro forma net earnings per share amount
set forth in the accompanying combined statements of operations for the
year ended December 31, 1995 was computed using historical earnings and
a weighted average share number that reflects pro forma common shares
outstanding of 97.5 million for the period ended on the July 18 closing
date of the IPO and actual weighted average shares outstanding for the
remainder of 1995. Accordingly, the calculation of the pro forma net
earnings per share assumes weighted average shares outstanding of 106.8
million during the year ended December 31, 1995. The weighted average
number of common shares used to compute the historical net loss per
share for the years ended December 31, 1997 and 1996 was 116.2 million
and 118.5 million, respectively. Potential common shares were not
included in the weighted average common shares outstanding because
their inclusion would be anti-dilutive.
At December 31, 1997, 1996, and 1995, there were 14.9 million, 14.0
million and 1.4 million potential common shares, respectively,
consisting of convertible securities and fixed and nonvested
performance awards that could potentially dilute future EPS
calculations in periods of net income. That number does not take into
account the assumed number of shares that would be repurchased by the
Company upon the exercise of the fixed and nonvested performance
awards. No material changes in the weighted average outstanding shares
or potential common shares occurred after December 31, 1997.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB
in October 1995. Statement No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans
as well as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. As
allowed by Statement No. 123, the Company continues to account for
stock-based employee compensation pursuant to Accounting Principles
Board Opinion No. 25 ("APB Opinion No. 25"). TINTA has included the
disclosures required by Statement No. 123 in note 12.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts have been reclassified to conform with the 1997
presentation.
(continued)
II-34
<PAGE> 93
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(4) Supplemental Disclosures to Statements of Cash Flows
Cash paid for interest was $27.0 million, $20.4 million and $17.1
million for years ended December 31, 1997, 1996 and 1995, respectively.
Cash paid for income taxes was $11.7 million and $12.5 million during
the years ended December 31, 1997 and 1996 and was not material during
the year ended December 31, 1995.
The net cash paid by the Company for acquisitions is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- ------------
amounts in thousands
<S> <C> <C> <C>
Recorded value of assets acquired $ 63,556 229,656 542,638
Issuance of notes payable -- (51,727) (86,755)
Liabilities assumed (including debt of $32.3 million
in 1997 and deferred income tax liabilities of
$36.6 million and $174.7 million in 1996 and 1995,
respectively) (38,482) (72,529) (285,574)
Increase in minority interests in equity of
subsidiaries (1,515) (43,223) --
------------- ------------- -------------
Cash paid for acquisitions $ 23,559 62,177 170,309
============= ============= =============
</TABLE>
The effects of changing the method of accounting for the Company's
ownership interest in Flextech and Cablevision from the consolidation
method to the equity method at their respective dates of
deconsolidation are summarized below (amounts in thousands):
<TABLE>
<S> <C>
Change to equity investments $ (310,198)
Decrease in property and equipment, net 164,330
Decrease in franchise costs and other intangible
assets, net 633,649
Decrease in other assets 108,310
Decrease in debt (164,245)
Decrease in deferred income tax liabilities (226,617)
Decrease in other liabilities (93,049)
Decrease in minority interests in equity of
subsidiaries (151,277)
--------------
Decrease in cash and cash equivalents $ (39,097)
==============
</TABLE>
For a description of certain non-cash transactions, see notes 9, 13 and
14.
(continued)
II-35
<PAGE> 94
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(5) Acquisitions
(a) Caguas Acquisition
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 11.
(b) OCC Acquisition
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 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"). The OCC
Notes were repaid in their entirety during the second quarter
of 1997.
(continued)
II-36
<PAGE> 95
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(c) IFE Acquisitions
On April 22, 1996, Flextech acquired from International Family
Entertainment, Inc. ("IFE") (i) the 61% ownership interest in
Maidstone Broadcasting, which Flextech did not already own and
(ii) a 100% ownership interest in TVS Television Limited.
Excluding liabilities assumed, the total consideration paid by
Flextech to acquire such ownership interests was (pound)31.4
million ($47.8 million using the applicable exchange rate), of
which (pound)3.0 million ($4.5 million using the applicable
exchange rate) was paid in cash and the remaining balance was
satisfied by Flextech's issuance of 5,792,008 convertible
non-preference shares (the "IFE Consideration Shares"). In
connection with the above-described transactions
(collectively, the "IFE Acquisitions"), TINTA granted to IFE
the right to put the IFE Consideration Shares to TINTA under
certain circumstances. Due primarily to the Company's
contingent purchase obligations under the above-described put
option, the Company recognized no gain in connection with the
dilution of the Company's ownership interest in Flextech that
resulted from the issuance of the IFE Consideration Shares.
Accordingly, the full value ascribed to the IFE Consideration
Shares was reflected as an increase to "Minority interests in
equity of subsidiaries" as set forth in the accompanying
December 31, 1996 consolidated balance sheet. In connection
with the BBC Joint Ventures and certain related transactions,
all of the IFE Consideration Shares were converted into
Flextech Ordinary Shares thereby eliminating TINTA's put
obligation with respect to such shares. See note 9.
(6) Cablevision
On April 25, 1995, the Company acquired a 51% ownership interest in
Cablevision for an adjusted purchase price of $282.0 million, before
liabilities assumed (the "Cablevision Acquisition"). The purchase price
was paid with cash consideration of $195.2 million (including a
previously paid $20 million deposit) and the Company's issuance of
$86.8 million principal amount of secured negotiable promissory notes
payable (the "Cablevision Notes") to the selling shareholders. The
Cablevision Notes were repaid in their entirety during 1997.
(continued)
II-37
<PAGE> 96
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision to CEI Citicorp Holdings Sociedad Anonima ("CEI") and T.I.
Telefonica Internacional de Espana S.A. (together with CEI, the
"Cablevision Buyers") for cash proceeds of $120 million ($21 million of
which was received during the third quarter of 1997). In addition, on
October 9, 1997, Cablevision issued 3,541,829 shares of stock in the
aggregate to the Cablevision Buyers for $80 million in cash and notes
receivable with an aggregate principal amount of $240 million, plus
accrued interest at LIBOR, due within the earlier of two years or at
the request of Cablevision's board of directors. The above transactions
(collectively, the "Cablevision Sale") further reduced TINTA's interest
in Cablevision to 26.24%. Pending its use by TINTA, $102 million of
proceeds from the Cablevision Sale were loaned to TCI pursuant to an
unsecured promissory note. See note 14. TINTA recognized a gain of
$48.8 million (excluding related tax expense of $17.1 million) on the
Cablevision Sale. TINTA will continue to have the right to manage
Cablevision (pursuant to a renewable five-year management contract that
was entered into in connection with the Cablevision Sale), and certain
material corporate transactions of Cablevision will require TINTA's
approval, so long as TINTA maintains at least a 16% interest in
Cablevision. The Cablevision Buyers also purchased the additional 39%
interest in Cablevision that TINTA had the right to acquire. As a
result of the Cablevision Sale, effective October 1, 1997, TINTA ceased
to consolidate Cablevision and began to account for Cablevision using
the equity method of accounting.
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 net assets. During
the second quarter of 1997, Cablevision's 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, TINTA began allocating 49% of such net earnings to the
minority interest during the second quarter of 1997. If the minority
interest's historical cost basis had been positive since the April 25,
1995 acquisition date, TINTA would have allocated an additional $12.9
million, $15.9 million, and $11.7 million during the nine months ended
September 30, 1997, the year ended December 31, 1996 and the period
from April 25, 1995 through December 31, 1995, respectively, of
Cablevision's net earnings to the minority interest. As described
above, TINTA, effective October 1, 1997, ceased to consolidate
Cablevision and began to account for Cablevision using the equity
method of accounting. Accordingly, the minority interests' share of net
earnings for Cablevision are no longer included in the Company's
statement of operations.
The $154.1 million excess of the Company's aggregate historical cost
basis in Cablevision over the Company's proportionate share of
Cablevision's net assets is being amortized over an estimated useful
life of 20 years.
(continued)
II-38
<PAGE> 97
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Summarized financial information for Cablevision at December 31, 1997
and for the period Cablevision's operations have been accounted for
under the equity method is as follows:
<TABLE>
<CAPTION>
December 31,
1997
--------------------
amounts in thousands
<S> <C>
Consolidated Financial Position
Cash $ 7,933
Investments 232,382
Property and equipment, net 132,068
Franchise costs and other assets, net 635,858
-----------------
Total assets $ 1,008,241
=================
Debt $ 809,261
Other liabilities 109,973
Shareholder's equity 89,007
-----------------
Total liabilities and equity $ 1,008,241
=================
Three months ended
December 31, 1997
--------------------
Consolidated Operations amounts in thousands
Revenue $ 62,367
Operating, selling, general and
administrative expenses (40,208)
Depreciation and amortization (15,767)
-----------------
Operating income 6,392
Interest expense (14,124)
Other, net 2,296
-----------------
Net loss $ (5,436)
=================
</TABLE>
(continued)
II-39
<PAGE> 98
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(7) Dispositions
On October 17, 1995, IVS Cable Holdings Limited ("IVS"), a consolidated
subsidiary of Flextech, completed the sale of a group of cable
television subsidiaries to an unaffiliated third party for aggregate
cash proceeds of (pound)62.6 million ($98.9 million using the
applicable exchange rate) (the "IVS Subsidiary Sale"). Following the
IVS Subsidiary Sale, IVS's only remaining cable television asset
consisted of its 59.2% ownership interest in Jersey Cable Limited
("Jersey"), which owns the cable television franchise for the area of
Jersey, Channel Islands. Flextech, which, at the time, indirectly owned
91.7% of IVS, received (pound)59.3 million ($93.7 million using the
applicable exchange rate) of the cash proceeds from the IVS Subsidiary
Sale. In connection with the IVS Subsidiary Sale, (i) Flextech paid
(pound)3.3 million ($5.4 million) to acquire the remaining minority
interest in IVS that was not already owned by Flextech (the "IVS
Minority Interest Buyout"), (ii) IVS received cash and notes receivable
aggregating (pound)663,000 ($1.1 million) as consideration for the sale
of Flextech's ownership interest in Jersey to the former minority
interest owners of IVS (the "Jersey Sale"), and (iii) IVS received
(pound)643,000 ($1.1 million) in repayment of Jersey's intercompany
payable to IVS. Flextech's aggregate $1.7 million loss (before
deducting the minority interests' share) on the Jersey Sale and the IVS
Minority Interest Buyout were reflected as a reduction of the $52.8
million non-operating gain (before deducting the minority interests'
share) that was recognized by the Company during the fourth quarter of
1995 in connection with the IVS Subsidiary Sale.
(8) Investment in Telewest
At December 31, 1997, the Company indirectly owned through TW Holdings,
L.L.C., an entity in which TINTA and certain affiliates of U S WEST,
Inc. (the "U S WEST Affiliates") each hold an indirect 50% ownership
interest, 132,638,250 or 26.7% of Telewest's convertible preference
shares, 246,111,750 or 26.5% (assuming no conversion of the Telewest
convertible preference shares) of Telewest's ordinary shares, and 26.6%
of Telewest's aggregate convertible preference and ordinary share
capital. The rights and privileges of Telewest's convertible preference
shares are similar to those of the Telewest ordinary shares except that
the Telewest convertible preference shares may only be voted upon
resolutions involving the winding up of Telewest or resolutions
involving any modification of the rights or privileges of the Telewest
convertible preference shares. In accordance with the requirements of
the London Stock Exchange, the Telewest convertible preference shares
are convertible into Telewest ordinary shares on a one-for-one basis
only to the extent that, following conversion, at least 25% of the
Telewest ordinary shares remain publicly held. In connection with the
formation of TW Holdings, L.L.C., the Company and the U S WEST
Affiliates entered into certain agreements which contain provisions
regarding, among other matters, the voting and disposition of the
Telewest ordinary and convertible preference shares, which shares
represent the only assets of TW Holdings, L.L.C.
(continued)
II-40
<PAGE> 99
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
On October 3, 1995, the merger of Telewest's predecessor ("Old
Telewest") and SBC CableComms (UK) ("SBCC") was consummated whereby a
new entity, Telewest (formerly Telewest plc), acquired all of the
outstanding share capital of Old Telewest and SBCC (the "SBCC
Transaction"). The SBCC Transaction effectively resulted in the
conversion of the Company's 37.8% indirect ownership interest in Old
Telewest into a 26.8% indirect ownership interest in Telewest. As a
result of the SBCC Transaction, and the associated dilution of the
Company's ownership interest in Telewest, the Company recognized a
non-cash gain of $164.9 million (before deducting estimated deferred
income taxes of $57.7 million) during the fourth quarter of 1995. In
connection with the SBCC Transaction, Telewest received $1.2 billion of
net cash proceeds from the issuance of U.S. dollar denominated senior
debentures having an aggregate principal amount of $1.8 billion at
maturity (the "Telewest Debentures"). As a result of Telewest's
issuance of 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 years ended December 31, 1997 and 1996 and 1995, Telewest
experienced unrealized foreign currency transaction gains (losses) of
$(39.1 million), $1.7 million and $(23.0 million) respectively, with
respect to the Telewest Debentures.
On December 31, 1997, the reported closing price on the London Stock
Exchange of the Telewest ordinary shares was (pound)0.70 per share
($1.16 per share).
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 1.6431
to 1, 1.5718 to 1 and 1.5799 to 1 during the years ended December 31,
1997, 1996 and 1995, respectively. The spot rate used to translate the
Company's share of Telewest's net assets from UK pounds to U.S. dollars
was 1.6508 to 1 and 1.7125 to 1 at December 31, 1997 and 1996
respectively.
(continued)
II-41
<PAGE> 100
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Summarized financial information for Telewest is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
---------------- ------------------
amounts in thousands
<S> <C> <C>
Consolidated Financial Position
Cash and receivables, net $ 151,812 241,117
Investments 140,243 162,816
Property and equipment, net 2,801,658 2,478,030
Franchise costs and other assets, net 870,701 956,910
------------------ ------------------
Total assets $ 3,964,414 3,838,873
================ ==================
Debt $ 2,255,516 1,505,713
Other liabilities 495,353 499,635
Shareholders' equity 1,213,545 1,833,525
------------------ ------------------
Total liabilities and equity $ 3,964,414 3,838,873
================ ==================
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
amounts in thousands
<S> <C> <C> <C>
Consolidated Operations
Revenue $ 634,671 455,923 228,744
Operating, selling, general and
administrative expenses (553,255) (454,458) (264,014)
Depreciation and amortization (334,410) (245,566) (107,233)
-------------- -------------- --------------
Operating loss (252,994) (244,101) (142,503)
Interest expense (232,710) (164,757) (42,101)
Interest income 13,063 26,163 24,718
Share of losses of affiliates (35,650) (25,076) (20,186)
Foreign exchange gain (loss) (39,114) 1,670 (23,029)
Other, net (including realized loss
on interest rate swap of $13,601,000
in 1995) 1,368 242 (14,184)
-------------- -------------- --------------
Net loss $ (546,037) (405,859) (217,285)
============== ============== ==============
</TABLE>
(continued)
II-42
<PAGE> 101
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(9) Investments in Other Affiliates
The Company's affiliates other than Telewest and Cablevision (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 December 31, 1997, the U.S. dollar
equivalent of the amounts borrowed pursuant to the Guaranteed
Obligations aggregated $26 million.
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 14.
The following table reflects the Company's carrying value (including
receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
Carrying value
-----------------------------
December 31,
-----------------------------
1997 1996
------------ -------------
amounts in thousands
<S> <C> <C>
Flextech (a) $ 261,453 --
Liberty/TINTA LLC ("Liberty/TINTA")(b) 127,574 63,227
MultiThematiques S.A. ("MultiThematiques") (c) 68,335 84,007
Jupiter Telecommunications
Co., Ltd. ("Jupiter") (d) 49,197 47,251
United International Investments ("UII") (e) 26,966 25,598
Bresnan International Partners (Poland), L.P. ("BIP
Poland") (f) 26,110 27,951
Bresnan International Partners (Chile), L.P. ("BIP
Chile") (g) 22,863 34,408
Jupiter Programming Co., Ltd. ("JPC") (h) 15,582 8,552
Flextech Affiliates (i) -- 129,563
Other 4,245 1,296
------------- -------------
$602,325 421,853
============= =============
</TABLE>
(continued)
II-43
<PAGE> 102
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(a) Flextech
At December 31, 1997, the Company owned 57,889,033 Flextech
Ordinary Shares representing 36.8% of the issued and
outstanding Flextech share capital and 50% of the aggregate
voting interests attributable to such Flextech share capital.
Flextech is engaged in the distribution and production of
programming for multichannel video distribution systems in the
UK and other parts of Europe.
On June 5, 1995, Flextech completed the sale of newly issued
Flextech Ordinary Shares and newly issued convertible
non-preference shares ("Flextech Non-Preference Shares") to
subsidiaries of Hallmark Cards Incorporated ("Hallmark") (the
"Hallmark Subscription") and U S WEST, Inc. ("U S WEST") (the
"U S WEST Subscription") in exchange for (pound)48.4 million
($77.2 million using the applicable exchange rate) in cash and
convertible redeemable preferred shares of Thomson Directories
Limited, respectively. The Hallmark Subscription and the U S
West Subscription are collectively referred to herein as the
"Flextech Transactions".
In connection with the Flextech Transactions, the Company
recorded a $50.9 million increase to "Additional paid-in
capital" and a $93.2 million increase to "Minority interests
in equity of subsidiaries." No gain was recognized due
primarily to the existence of TINTA's contingent obligations
to purchase Flextech Non-Preference Shares and/or Flextech
Ordinary Shares from subsidiaries of U S WEST and Hallmark.
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. 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.
(continued)
II-44
<PAGE> 103
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to 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.
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 (pound)7.20
($11.89) 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.
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
(pound)10 million ($16.5 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 (pound)22 million ($36.3 million) of
ordinary shares in the Principal Joint Venture, Flextech is obligated to
provide the Principal Joint Venture with a primary credit facility of
(pound)88 million ($145.3 million) and, subject to certain restrictions, a
standby credit facility of (pound)30 million ($49.5 million).
(continued)
II-45
<PAGE> 104
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to 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 (pound)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 the
Company 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 (pound)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 in the
statement of operations due primarily to TINTA's contingent obligations
under the Standby Commitment.
On July 7, 1997, TINTA purchased from certain officers of Flextech 748,435
Flextech Ordinary Shares for a per share price of (pound)6.225 ($10.29 at
the applicable exchange rate) and on September 29, 1997, TINTA purchased
800,000 Flextech Ordinary Shares for a per share price of (pound)6.05
($9.76 at the applicable exchange rate). As a result of such purchases,
TINTA's ownership interest in the issued and outstanding share capital of
Flextech increased from 35.9% to 36.3% on July 7, 1997 and from 36.3% to
36.8% on September 29, 1997.
The $20.3 million excess of the Company's aggregate historical cost basis
in Flextech over the Company's proportionate share of Flextech's net assets
is being amortized over an estimated useful life of 20 years.
(continued)
II-46
<PAGE> 105
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Based upon the (pound)5.27 ($8.70) per share closing price of the
Flextech Ordinary Shares on the London Stock Exchange, the Flextech
Ordinary Shares owned by the Company had an aggregate market value of
(pound)305 million ($503 million) at December 31, 1997.
(b) Liberty/TINTA
Effective April 29, 1996, TINTA, Liberty Media Corporation ("Liberty")
and News Corporation Limited ("News Corp.") formed a joint venture
including a number of partnerships or other entities under common
ownership, ("Fox Sports International"), to operate currently existing
sports services in Latin America and Australia and a variety of new
sports services throughout the world, excluding the United States,
Canada and certain other defined geographic areas. News Corp. owns a
50% interest in Fox Sports International with the remaining 50% owned
by Liberty/TINTA, a limited liability company owned in equal parts by
subsidiaries of TINTA and Liberty. TINTA contributed to Liberty/TINTA
its 35% equity interest in Torneos y Competencias S.A. ("Torneos"), an
Argentinean sports programming production company, and Liberty
contributed to Liberty/TINTA its interests in Latin American and
Australian Sports programming services and its rights under various
television sports programming agreements. Liberty/TINTA contributed
such non-cash assets contributed to it by TINTA and Liberty to Fox
Sports International. News Corp. contributed various international
sports rights and certain trademark rights in exchange for its 50%
interest in Fox Sports International. The Company's share of earnings
(losses) of Torneos prior to its contribution to Liberty/TINTA have
been included with Liberty/TINTA in the table below. During the third
quarter of 1997, Fox Sports International distributed (i) its 35%
interest in Torneos to Liberty/TINTA and (ii) certain Australian
sports rights to News Corp. In addition, as of December 31, 1997,
TINTA had made cash contributions to Torneos on the behalf of
Liberty/TINTA of $48 million and purchased a direct 5% interest in
Torneos for $12 million. It is anticipated that Liberty's portion of
such capital calls will be repaid to TINTA either in cash or other
economic consideration to be determined at some future date.
The $43.1 million excess of the Company's aggregate historical cost
basis in Liberty/TINTA over the Company's 50% proportionate share of
Liberty/TINTA's net assets is being amortized over an estimated useful
life of 20 years.
(continued)
II-47
<PAGE> 106
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(c) MultiThematiques
On December 13, 1995, TINTA invested in MultiThematiques, a newly
formed European programming company that is one-third-owned by each of
the Company and two French media companies, CANAL + S.A. ("Canal +")
and Havas Images ("Havas") (formerly Generale d'Images S.A.). On
December 13, 1995, (i) TINTA contributed to MultiThematiques 123.1
million French francs ("FF") ($24.7 million at the applicable exchange
rate), (ii) Canal + and Havas contributed to MultiThematiques a
combined 70% interest in Planete (a French documentary channel), a
combined 85% interest in Canal Jimmy (a lifestyle and entertainment
channel targeted at young male audiences) and a combined 60% interest
in each of two movie services, Cine Cinema (featuring recent movies)
and Cine Cinefil (featuring classic movies), and (iii) Canal +
contributed to MultiThematiques a 50% ownership interest in Cine
Classics, a start-up classic movie service in Spain. In addition,
TINTA contributed FF105.0 million ($20.4 million at the applicable
exchange rate) and FF100.0 million ($19.5 million at the applicable
exchange rate) and FF164.0 million ($30.3 million at the applicable
exchange rate) on December 13, 1996, February 13, 1997 and December
13, 1997, respectively, to MultiThematiques.
TINTA's obligation to make the above-described additional FF 369.1
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 (using a discount rate of 10%) of such contributions was
reflected as a liability (the "MultiThematiques Obligation") in the
accompanying consolidated balance sheet at December 31, 1996. During
the years ended December 31, 1997 and 1996 and from December 13, 1995
through December 31, 1995, the Company experienced realized and
unrealized foreign currency transaction gains (losses) with respect to
the MultiThematiques Obligation of $991,000, $3.3 million and
$(968,000), respectively. The $58.6 million excess of the Company's
investment in MultiThematiques over the Company's proportionate share
of MultiThematiques' net assets is being amortized over an estimated
useful life of twenty years. The majority of such excess was created
in connection with the recognition of the MultiThematiques Obligation.
TINTA, Canal + and Havas have each agreed not to dispose of any shares
in MultiThematiques prior to November 21, 1999. Thereafter, each
shareholder may sell all (but not less than all) of its shares to a
third party subject to a pro rata right of first refusal by the
non-selling shareholders. In the event that any two shareholders
propose to sell their shares of MultiThematiques or jointly receive an
offer to purchase such shares, the other shareholder has the right to
participate in such sale by selling its shares to the prospective
buyer on the same terms.
(continued)
II-48
<PAGE> 107
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(d) Jupiter
On January 18, 1995, the Company and Sumitomo Corporation
("Sumitomo"), a company incorporated in Japan, formed Jupiter for the
purpose of owning and operating cable television and telephony
businesses in Japan and other parts of Asia. The Company and Sumitomo
own 40% and 60%, respectively of Jupiter. The functional currency of
Jupiter is the Japanese yen. Through December 31, 1997, the Company
had made aggregate contributions to Jupiter of (Y)11.1 billion ($101.2
million at the applicable exchange rates).
The Company estimates that Jupiter will require additional funding for
the acquisition of additional franchises and the development of its
network, which additional funding may be significant. The Company
anticipates that the additional funding will be obtained through a
combination of capital contributions by the Company and Sumitomo, on a
pro rata basis, and to the extent available on acceptable terms, debt
financing by Jupiter.
(e) UII
UII is a general partnership that was formed by TCI and United and
Philips Communications B.V. ("UPC") to acquire TCI's interest in Tevel
Israel International Communications Ltd. ("Tevel"), an Israeli
multi-channel television company, and UPC's interests in Melita Cable
TV Limited ("Melita"), a cable television system operator in the
republic of Malta. In addition, UII has an ownership interest in
Princes Holding Limited ("PHL") a multi-channel television concern in
Ireland. The functional currency of Melita, Tevel and PHL are the
applicable local currencies in Malta (lira), Israel (shekel) and
Ireland (punt), respectively.
At December 31, 1997, UII owned approximately 50.0%, 46.6% and 45.0%
of Melita, Tevel and PHL, respectively. Through UII, the Company owned
50.0%, 50.0% and 55.6% of the foregoing Melita, Tevel and PHL
ownership interests.
The $13.1 million excess of the Company's aggregate historical cost
basis in UII over the Company's proportionate share of UII's net
assets is being amortized over an estimated useful life of 20 years.
(continued)
II-49
<PAGE> 108
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(f) BIP Poland
As of December 31, 1997, the Company has general and limited
partnership interests in BIP Poland of 0.5% and 43.45%, respectively.
Prior to December 31, 1996, the Company had general and limited
partnership interests in BIP Poland of 0.5% and 79.5%, respectively.
BCI Poland, Inc. ("BCI Poland"), an entity in which the Company has no
ownership interest, has a 20% general partnership interest in BIP
Poland. BCI Poland is the managing general partner of BIP Poland. Due
to the veto powers of BCI Poland, the Company accounts for its
interest in BIP Poland using the equity method of accounting. Through
its acquired operating subsidiaries and affiliates, BIP Poland is
engaged in the cable business in Poland. The functional currency of
BIP Poland is the U.S. dollar.
The Company loaned funds to BIP Poland pursuant to a 12% subordinated
credit note (the "Poland Subordinated Credit Note") due on December
31, 2004. On December 31, 1996, pursuant to an amended and restated
agreement of limited partnership of BIP Poland, (i) TINTA converted
the principal balance of the Poland Subordinated Credit Note ($23.8
million) to equity and made an additional equity contribution of $10
million and (ii) BCI Poland contributed $18.5 million to BIP Poland,
thereby reducing TINTA's ownership percentage from 80% to 43.95%. The
amended and restated agreement of limited partnership also provides
that each partner shall earn a return of 15% per annum on the average
of such partner's Unreturned Capital (as defined). Through December 31
,1997, the Company's Unreturned Capital in BIP Poland was $34.8
million.
(g) BIP Chile
The Company owns general and limited partnership interests in BIP
Chile of 0.5% and 79.5%, respectively. BCI Chile, Inc. ("BCI Chile"),
an entity in which the Company has no ownership interest, owns a 20%
general partnership interest in BIP Chile. BCI Chile is the managing
partner of BIP Chile. BIP Chile has an indirect 50% ownership interest
in Cordillera Comunicaciones Limitada ("Cordillera"). Due to the veto
powers of BCI Chile, the Company accounts for its investment in BIP
Chile using the equity method of accounting. The functional currency
of BIP Chile is the U.S. dollar, while the functional currency of
Cordillera is the Chilean peso.
(continued)
II-50
<PAGE> 109
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
On February 7, 1996, Cordillera and Compania de Telecomunicaciones de
Chile S.A. ("CTC") (a subsidiary of the Spanish telephone company
Telefonica de Espana S.A.), entered into certain definitive agreements
(the "Chile Restructuring Agreements") that provided for, among other
matters, the contribution of all the cable subscribers within each
party's cable systems to a new Chilean company called
Metropolis-Intercom S.A. ("Metropolis-Intercom"). Cordillera owns a
60% interest in Metropolis-Intercom and CTC, Comercial Canelo S.A. and
Empresa El Mercurio S.A.P. own jointly a combined 40% interest. The
Chile Restructuring Agreements also provided that all of the cable
distribution assets excluding the headends (the "Acquired Distribution
Assets") of Cordillera be sold to CTC. In June 1996, the parties
finalized the transactions contemplated by the Chile Restructuring
Agreements and the Acquired Distribution Assets were sold to CTC for
cash proceeds of approximately $120 million. Approximately $30 million
of such cash proceeds (of which $17 million was received in 1996 and
$13 million was received in 1997) was used to reduce the amounts owed
by BIP Chile to TINTA pursuant to a subordinated loan agreement, as
described below.
The Company has loaned funds to BIP Chile pursuant to a 12%
subordinated credit note (the "Chile Subordinated Credit Note") due
December 31, 2004. The outstanding principal pursuant to the Chile
Subordinated Credit Note of $60.8 million and $61.8 million was
included in the Company's investment in BIP Chile at December 31, 1997
and 1996, respectively.
As there is no obligation on the part of BCI Chile to proportionately
fund losses in excess of its investment, the Company recognizes 100%
of BIP Chile's net losses to the extent that such losses are in excess
of BCI Chile's investment in BIP Chile. Interest income on the Chile
Subordinated Credit Note is eliminated against the corresponding
interest expense that is included in the Company's share of BIP
Chile's net losses.
(h) JPC
In February 1996, the Company and Sumitomo formed a joint venture to
create Japan's first multi-channel programming company. The new
company, JPC, is owned equally (50/50) by the Company and Sumitomo. As
of December 31, 1997, the Company has made contributions to JPC of
(Y)3.9 billion ($33.3 million using the applicable exchange rate).
Additionally, during 1996, the Company and Sumitomo contributed their
respective 18% and 82% ownership interests in the Cable Soft Network
to JPC. The Company made an equalizing payment in the amount of (Y)444
million ($4.0 million using the applicable exchange rate) in
connection with the above-described contribution of the Cable Soft
Network.
(continued)
II-51
<PAGE> 110
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(i) Flextech Affiliates
Due to the January 1, 1997 deconsolidation of Flextech described in
(a) above, Flextech's equity method affiliates (the "Flextech
Affiliates") are no longer included with the Other Affiliates, but
are included with Flextech.
Other
Asia Business News (Singapore) PTE Ltd.
On December 31, 1997, the Company surrendered all of its shares of Asia Business
News (Singapore) PTE Ltd. ("ABN") in exchange for a $25 million unsecured note
receivable from ABN (the "ABN Note"). The ABN Note is due on December 31, 2012.
Interest accrues on the ABN Note beginning December 31, 1999 at the rate of 7%
per annum. Due to uncertainty regarding collection of the ABN Note, the Company
recorded the ABN Note at an amount equal to its investment in ABN as of the date
of conversion. No gain was recognized on the above transaction. The ABN Note has
been included with "Other investments" in the consolidated balance sheet at
December 31, 1997.
Sky Network Television New Zealand, Ltd.
On September 26, 1997, the Company sold its indirect 13% interest in Sky Network
Television New Zealand, Ltd. ("Sky") for cash proceeds of $53.0 million. TINTA
owned its interest in Sky through a 25.5% ownership interest in HKP Partners of
New Zealand. The Company's basis in its interest in Sky prior to the sale had
been taken to a negative $5.4 million, as a result, the Company recognized a
gain on such sale of $58.4 million.
Telewest Europe Group
During the fourth quarter of 1996, the Company received a cash distribution of
$2.6 million and recognized a gain of $13.0 million in connection with the
dissolution of the Telewest Europe Group.
(continued)
II-52
<PAGE> 111
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
The following table reflects the Company's share of earnings (losses)
of the Other Affiliates:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
amounts in thousands
<S> <C> <C> <C>
Jupiter $ (23,371) (14,415) (7,137)
JPC (17,995) (5,759) --
Liberty/TINTA (16,153) (14,895) (950)
Flextech (15,678) -- --
MultiThematiques (12,383) (3,176) (282)
ABN (12,314) (9,427) (7,054)
BIP Chile (4,087) (5,395) (5,939)
BIP Poland (3,383) (4,185) (1,270)
Flextech Affiliates -- (2,726) (13,510)
Other 5,635 (10,076) (17,532)
---------------- --------------- ---------------
$ (99,729) (70,054) (53,674)
================ =============== ===============
</TABLE>
Summarized financial information of the Other Affiliates by geographic
region for the periods in which they were accounted for under the
equity method are as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------
Latin America
Asia and and The
Europe (a) Australia Caribbean Total
---------- --------- -------------- -----
Combined Financial Position amounts in thousands
---------------------------
<S> <C> <C> <C> <C>
Cash and receivables, net $ 180,418 74,909 29,378 284,705
Investments 457,001 40,034 63,056 560,091
Property and equipment, net 55,580 193,880 -- 249,460
Intangible and other assets, net 362,177 73,858 669 436,704
---------- ---------- ---------- ---------
Total assets $1,055,176 382,681 93,103 1,530,960
========== ========== ========== =========
Debt $ 183,530 173,285 60,746 417,561
Other liabilities 157,506 75,685 3,833 237,024
Owners' equity 714,140 133,711 28,524 876,375
---------- ---------- ---------- ---------
Total liabilities and equity $1,055,176 382,681 93,103 1,530,960
========== ========== ========== =========
</TABLE>
(continued)
II-53
<PAGE> 112
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Latin America
Asia and and The
Europe (a) Australia Caribbean (b) Total
---------- --------- -------------- -----
Combined Financial Position amounts in thousands
- ---------------------------
<S> <C> <C> <C> <C>
Cash and receivables, net $ 278,352 83,672 30,590 392,614
Investments 57,750 49,325 72,908 179,983
Property and equipment, net 101,612 158,924 13,019 273,555
Intangible and other assets, net 293,061 118,083 6,413 417,557
------------ ------------- ------------ ----------
Total assets $ 730,775 410,004 122,930 1,263,709
============ ============= ============ ==========
Debt $ 162,814 171,248 99,496 433,558
Other liabilities 200,069 107,653 7,807 315,529
Owners' equity (deficit) 367,892 131,103 15,627 514,622
------------ ------------- ------------ ----------
Total liabilities and equity $ 730,775 410,004 122,930 1,263,709
============ ============= ============ ==========
</TABLE>
(continued)
II-54
<PAGE> 113
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
Year ended December 31, 1997
------------------------------------------------------------
Latin America
Asia and and The
Europe (a) Australia Caribbean (b) Total
---------- --------- -------------- -----
Combined Operations amounts in thousands
- -------------------
<S> <C> <C> <C> <C>
Revenue $ 279,755 269,349 4,660 553,764
Operating, selling, general and
administrative expenses (329,295) (308,507) (3,091) (640,893)
Depreciation and amortization (21,153) (18,335) (1,361) (40,849)
------------ ------------- ------------ ----------
Operating income (loss) (70,693) (57,493) 208 (127,978)
Interest income (expense), net 5,326 (13,700) (6,481) (14,855)
Other, net (3,650) (26,171) (33,122) (62,943)
------------ ------------- ------------ ----------
Net loss $ (69,017) (97,364) (39,395) (205,776)
============ ============= ============ ==========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
------------------------------------------------------------
Latin America
Asia and and The
Europe (a) Australia Caribbean (c) Total
---------- --------- -------------- -----
Combined Operations amounts in thousands
- -------------------
<S> <C> <C> <C> <C>
Revenue $ 418,874 165,925 24,262 609,061
Operating, selling, general and
administrative expenses (437,048) (190,836) (16,882) (644,766)
Depreciation and amortization (18,330) (32,365) (3,411) (54,106)
------------ ------------- ------------ ----------
Operating income (loss) (36,504) (57,276) 3,969 (89,811)
Interest expense, net (7,623) (11,885) (11,199) (30,707)
Other, net 25,706 (86) (31,866) (6,246)
------------ ------------- ------------ ----------
Net loss $ (18,421) (69,247) (39,096) (126,764)
============ ============= ============ ==========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
------------------------------------------------------------
Latin America
Asia and and The
Europe (a) Australia Caribbean Total
---------- --------- -------------- -----
Combined Operations amounts in thousands
- -------------------
<S> <C> <C> <C> <C>
Revenue $ 333,487 84,445 28,911 446,843
Operating, selling, general and
administrative expenses (347,204) (90,817) (22,369) (460,390)
Depreciation and amortization (19,851) (26,861) (3,617) (50,329)
------------- ------------- ----------- --------
Operating income (loss) (33,568) (33,233) 2,925 (63,876)
Interest expense, net (20,966) (9,065) (11,148) (41,179)
Other, net 995 (1,672) (4,426) (5,103)
------------- ------------- ----------- --------
Net income (loss) $ (53,539) (43,970) (12,649) (110,158)
============= ============= =========== ========
</TABLE>
- --------------------
(continued)
II-55
<PAGE> 114
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(a) The summarized combined financial position at December 31,
1997 includes the financial position of Flextech. The summarized
combined operations for the year ended December 31, 1997 includes
the results of operations of Flextech but excludes the results
of operations of the Flextech Affiliates. The summarized
combined financial position at December 31, 1996 includes the
financial position of the Flextech Affiliates. The summarized
combined operations for the years ended December 31, 1996 and
1995 include the results of the Flextech Affiliates. See related
discussion above.
(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 5. The financial position of
Caguas at December 31, 1996, is included in the summarized
combined financial position at December 31, 1996.
(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 Fox
Sports International.
(10) Other Investments
The components of other investments are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
DTH Ventures (a) $ 24,933 17,945
Other 8,079 2,928
-------- -------
$ 33,012 20,873
======== =======
</TABLE>
(a) DTH Ventures
TINTA has formed strategic partnerships with News Corp.,
Organizacoes Globo and Grupo Televisa S.A. to develop and
operate a direct-to-home satellite service for Latin America,
Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). Through December 31, 1997,
TINTA had contributed $24.9 million to the DTH Ventures. It is
anticipated that TINTA could be required to make additional
cash contributions to the DTH Ventures.
During 1997 and 1996, holding losses on certain available-for-sale
securities were determined to be other than temporary. Accordingly, the
Company recognized losses of $1.2 million and $6.6 million during 1997
and 1996, respectively, with respect to such securities.
(continued)
II-56
<PAGE> 115
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(11) Debt
The components of debt are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
amounts in thousands
<S> <C> <C>
TINTA:
Debentures (a) $345,000 345,000
Cablevision Notes -- 13,013
-------- -------
345,000 358,013
-------- -------
Subsidiaries:
Puerto Rico Subsidiary (b) 45,042 --
Flextech -- 1,000
Cablevision (c) -- 152,115
-------- -------
$390,042 511,128
======== =======
</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 (the "Debentures") due 2006
having an aggregate principal amount of $345 million. 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. The Debentures
may be 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. See note 14.
(continued)
II-57
<PAGE> 116
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(b) At December 31, 1997, the Puerto Rico Subsidiary had amounts
outstanding under its bank credit facility (the "Puerto Rico
Bank Facility") of $45.0 million. 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 through March 31, 2006. Borrowings under the
Puerto Rico Bank Facility bear interest at variable rates (6.5%
at December 31, 1997). 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.
(c) Effective October 1, 1997, TINTA ceased to consolidate
Cablevision and began to account for Cablevision under the equity
method of accounting. Accordingly, Cablevision's debt is no
longer included in the consolidated financial position of the
Company. See note 6.
The total aggregate U.S. dollar amount of the annual maturities of the
Company's debt over the next five years is $42,000.
With the exception of the Debentures, which had a fair value of $295
million at December 31, 1997, the Company believes that the fair value
and the carrying value of the Company's debt were approximately equal
at December 31, 1997.
(12) Stockholders' Equity
Common Stock
The Series A Common Stock has one vote per share and the Series B
Common Stock has ten votes per share. Each share of Series B Common
Stock is convertible, at the option of the holder, into one share of
Series A Common Stock.
(continued)
II-58
<PAGE> 117
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
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. As of
December 31, 1997, the Company had repurchased 3,370,000 shares under
such program for an aggregate purchase price of $42.0 million.
Employee Benefit Plans
Employees of TINTA are eligible to participate in TCI's employee stock
purchase plans. The primary employee stock purchase plan provides for
eligible employees to contribute up to 10% of their compensation to a
trust for investment in several diversified investment choices
including investment in TCI common stock. TCI, by annual resolution of
the TCI Board of Directors, contributes up to 100% of the amount
contributed by employees. Such TCI contribution is invested in TCI
common stocks. TINTA's share of the contributions to the plans was not
material during the three years ended December 31, 1997, 1996 and 1995.
Preferred Stock
TINTA is authorized to issue 10,000,000 shares of Preferred Stock. The
Preferred Stock may be issued from time to time as determined by the
Board of Directors, without stockholder approval. Such Preferred Stock
may be issued in such series and with such designations, preferences,
conversion or other rights, voting powers, qualifications, limitations,
or restrictions as shall be stated or expressed in a resolution or
resolutions providing for the issue of such series adopted by the Board
of Directors. The Board of Directors has not authorized the issuance of
any shares of Preferred Stock and TINTA has no current plans for the
issuance of any shares of Preferred Stock.
Stock Options
TINTA adopted a stock option plan for the Company's directors (the
"Director Plan") on April 11, 1996. The Director Plan provides for
grants to be made of options to purchase a maximum of 1,000,000 shares
of Series A Common Stock. Under the Director Plan, each of the
Company's five directors who were not employees of the Company or any
subsidiary of the Company as of April 11, 1996 was granted an option to
purchase 50,000 shares of Series A Common Stock at an exercise price of
$16 per share. Such options had a fair value of $14.01 per share on the
date of grant. The options vest evenly over a five year period.
Subsequent to the grant date, one of the directors waived his right to
receive such option. At December 31, 1997, 200,000 options with respect
to the Director Plan were outstanding, 40,000 of which were
exercisable. Such options have a remaining contractual life of 9 years.
TINTA has also adopted the Tele-Communications International, Inc. 1995
Stock Incentive Plan (the "1995 Plan"). The 1995 Plan provides for
awards to be made in respect of a maximum of 3,000,000 shares of Series
A Common Stock (subject to certain anti-dilution adjustments). Awards
may be made as grants of stock options, stock appreciation rights,
restricted shares, units or any combination thereof.
continued)
II-59
<PAGE> 118
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
On December 13, 1995, stock options in tandem with stock appreciation
rights ("SARs") to purchase 1,302,000 shares of Series A Common Stock
were granted (the "December 1995 Grant") pursuant to the 1995 Plan. Of
such grant, 1,252,000 options in tandem with SARs were granted to
employees of TINTA. Additionally, on December 13, 1995 TCI granted to
one of its officers 50,000 options in tandem with SARs to acquire
Series A Common Stock owned by it. Such options vest evenly over five
years, first became exercisable August 4, 1996 and expire on August 4,
2005. During 1997, TINTA granted stock options in tandem with SARs to
purchase 1,130,000 shares of Series A Common Stock. Such options vest
evenly over five years, first become exercisable one year after date
of grant, and expire ten years after date of grant.
The following table presents the number and weighted average exercise
price ("WAEP") of certain options in tandem with SARs to purchase
Series A Common Stock pursuant to incentive plans:
<TABLE>
<CAPTION>
Series A
Common Stock WAEP
------------ ----------
<S> <C> <C>
Outstanding at
January 1, 1995 --
Granted 1,302,000 $ 16.00
Exercised --
---------
Outstanding at
December 31, 1995 1,302,000 16.00
Granted --
Exercised --
---------
Outstanding at
December 31, 1996 1,302,000 16.00
Granted 1,130,000 14.69
Exercised --
---------
Outstanding at
December 31, 1997 2,432,000 15.39
=========
Exercisable at
December 31, 1995 --
=========
Exercisable at
December 31, 1996 260,400 16.00
=========
Exercisable at
December 31, 1997 520,800 16.00
=========
Vesting Period 5 years
</TABLE>
On December 13, 1995, 40,000 restricted shares of Series A Common
Stock were awarded to certain officers and directors of TINTA. Such
restricted shares vest as to 50% in December 1999 and as to the
remaining 50% in December 2000. Such restricted shares had a fair
value of $25.375 per share on the date of grant.
(continued)
II-60
<PAGE> 119
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
On July 23, 1997, 150,000 restricted shares of Series A Common Stock
were awarded to a director of TINTA. Such restricted shares vest as to
50% in July 2001 and as to the remaining 50% in July 2002. Such
restricted shares had a fair value of $14.625 per share on the date of
grant.
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"). At December 31, 1997, stock options in tandem
with stock appreciation rights to purchase 406,770 shares of TCI Group
Series A Stock were outstanding, 298,522 of which were exercisable.
Such options had a range of exercise prices of $10.75 per share to
$14.19 per share, with a WAEP of $13.04 per share, and a weighted
average remaining contractual life of 6.6 years.
At December 31, 1997, stock options in tandem with stock appreciation
rights to purchase 253,911 shares of Liberty Group Series A Stock were
outstanding, 195,921 of which were exercisable. Such options had a
range of exercise prices of $11.16 per share to $14.67 per share, with
a WAEP of $13.16 per share, and a weighted average remaining
contractual life of 6.4 years.
At December 31, 1997, stock options in tandem with stock appreciation
rights to purchase 219,450 shares of Series A TCI Ventures Group Common
Stock were outstanding, 171,570 of which were exercisable. Such options
had a range of exercise prices of $10.75 per share to $14.19 per share,
with a WAEP of $12.63 per share, and a weighted average remaining
contractual life of 6.3 years.
Estimates of the compensation expense relating to the December 1995
Grant and the TCI Options and SARS have been included in "Operating
costs and expenses-General and administrative" in the accompanying
statements of operations pursuant to APB Opinion No. 25. Such estimate
is subject to future adjustment based upon the market value of the
underlying TINTA and TCI common stock, respectively 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 $12.4 million, $(1.8 million) and $2.5
million for the years ended December 31, 1997, 1996 and 1995,
respectively. The estimated compensation adjustment with respect to the
December 1995 Grant resulted in increases (decreases) to TINTA's stock
compensation liability of $4.6 million, $(1.4 million) and $1.5 million
during the years ended December 31, 1997, 1996 and 1995, respectively.
See note 14.
(continued)
II-61
<PAGE> 120
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Had TINTA accounted for its stock based compensation pursuant to the
fair value based accounting method in Statement No. 123, TINTA's net
loss and net loss per share would not have been materially changed as
indicated by the pro forma amounts below (amounts in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Pro forma net loss $ (120,992) (131,091)
============== =============
Pro forma basic and diluted
net loss per common share $ (1.04) (1.11)
============= ============
</TABLE>
Other
At December 31, 1997, shares reserved for issuance included 2,822,000
shares of Series A Common Stock pursuant to restricted stock awards and
exercise privileges related to stock options and 12,637,363 shares
pursuant to the conversion feature of the Debentures. In addition, one
share of Series A Common Stock is reserved for each share of
outstanding Series B Common Stock. See above and note 11.
(13) Income Taxes
TINTA and its 80%-or-more-owned domestic subsidiaries (the "TINTA Tax
Group") are included in the consolidated federal and state income tax
returns of TCI. The Company's income taxes include those items in the
consolidated calculation applicable to the TINTA Tax Group
("intercompany tax allocation") and any income taxes of TINTA's
consolidated foreign or domestic subsidiaries that are excluded from
the consolidated federal and state income tax returns of TCI.
Intercompany tax allocation represents an apportionment of tax expense
or benefit (other than deferred taxes) among subsidiaries of TCI in
relation to their respective amounts of taxable earnings or losses.
(continued)
II-62
<PAGE> 121
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI, TINTA
and certain other subsidiaries of TCI was implemented effective July 1,
1995. The Old Tax Sharing Agreement formalized certain of the elements of
a pre-existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes and
the settlement procedures with respect to the intercompany allocation of
current tax attributes. Under the Old Tax Sharing Agreement, TINTA was
responsible to TCI for its share of consolidated income tax liabilities
(computed as if TCI were not liable for the alternative minimum tax)
determined in accordance with the Old Tax Sharing Agreement, and TCI was
responsible to TINTA to the extent that the income tax attributes generated
by the TINTA Tax Group were utilized by TCI to reduce its consolidated
income tax liabilities (computed as if TCI were not liable for the
alternative minimum tax). The tax liabilities and benefits of such entities
so determined are charged or credited to an intercompany account between
TCI and TINTA. Such intercompany account is required to be settled only
upon the date that an entity ceases to be a member of TCI's consolidated
group for federal income tax purposes. Under the Old Tax Sharing Agreement,
TCI retains the burden of any alternative minimum tax and has the right to
receive the tax benefits from an alternative minimum tax credit
attributable to any tax period beginning on or after July 1, 1995 and
ending on or before October 1, 1997.
(continued)
II-63
<PAGE> 122
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Effective October 1, 1997, (the "Effective Date"), the Old Tax Sharing
Agreement was replaced by a new tax sharing agreement, as amended by the
First Amendment thereto (the "New Tax Sharing Agreement"), which governs
the allocation and sharing of income taxes by the TCI Group, the Liberty
Media Group and the TCI Ventures Group (each a "Group"). TINTA and its
subsidiaries are members of the TCI Ventures Group for purposes of the New
Tax Sharing Agreement. Effective for periods on and after the Effective
Date, federal income taxes will be computed based upon the type of tax paid
by TCI (on a regular tax or alternative minimum tax basis) on a separate
basis for each Group. Based upon these separate calculations, an allocation
of tax liabilities and benefits will be made such that each Group will be
required to make cash payments to TCI based on its allocable share of TCI's
consolidated federal income tax liabilities (on a regular tax or
alternative minimum tax basis, as applicable) attributable to such Group
and actually used by TCI in reducing its consolidated federal income tax
liability. Tax attributes and tax basis in assets would be inventoried and
tracked for ultimate credit to or charge against each Group. Similarly, in
each taxable period that TCI pays alternative minimum tax, the federal
income tax benefits of each Group, computed as if such Group were subject
to regular tax, would be inventoried and tracked for payment to or payment
by each Group in years that TCI utilizes the alternative minimum tax credit
associated with such taxable period. The Group generating the utilized tax
benefits would receive a cash payment only if, and when, the unutilized
taxable losses of the other Group are actually utilized. If the unutilized
taxable losses expire without ever being utilized, the Group generating the
utilized tax benefits will never receive payment for such benefits.
Pursuant to the New Tax Sharing Agreement, state and local income taxes are
calculated on a separate return basis for each Group (applying provisions
of state and local tax law and related regulations as if the Group were a
separate unitary or combined group for tax purposes), and TCI's combined or
unitary tax liability is allocated among the Groups based upon such
separate calculation.
Notwithstanding the foregoing, items of income, gain, loss, deduction or
credit resulting from certain specified transactions that are consummated
after the Effective Date pursuant to a letter of intent or agreement that
was entered into prior to the Effective Date will be shared and allocated
pursuant to the terms of the Old Tax Sharing Agreement as amended.
The intercompany tax account existing between TCI and TINTA for the period
beginning July 1, 1995 and ending September 30, 1997 will be required to be
settled between the TCI Ventures Group and TINTA if and when TINTA ceases to
be a member of TCI's consolidated group for federal income tax purposes. A
tax sharing arrangement between the TCI Ventures Group and TINTA covering
periods subsequent to September 30, 1997 is currently being negotiated. The
terms of such arrangement are not expected to be significantly different
than the terms contained in the New Tax Sharing Agreement.
(continued)
II-64
<PAGE> 123
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
Income tax benefit (expense) attributable to the Company's pre-tax
earnings (loss) for the years ended December 31, 1997, 1996 and 1995 consists
of:
<TABLE>
<CAPTION>
Current Deferred Total
------------ ------------ ------------
amounts in thousands
<S> <C> <C> <C>
December 31, 1997:
Intercompany tax allocation $ (7,529) -- (7,529)
Federal -- 58,025 58,025
Foreign (9,924) 4,382 (5,542)
------------ ------------ ----------
$ (17,453) 62,407 44,954
============ ============ ==========
December 31, 1996:
Intercompany tax allocation $ 10,187 -- 10,187
Federal -- 56,359 56,359
Foreign (13,020) (7,915) (20,935)
------------ ------------ ----------
$ (2,833) 48,444 45,611
============ ============ ==========
December 31, 1995:
Intercompany tax allocation $ 8,462 -- 8,462
Federal -- (16,391) (16,391)
Foreign (9,080) (14,693) (23,773)
------------ ------------ ----------
$ (618) (31,084) (31,702)
============ ============ ==========
</TABLE>
Income tax benefit (expense) attributable to the Company's pre-tax
earnings (loss) differs from the amounts computed by applying the U.S.
federal income tax rate of 35%, as a result of the following:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1996 1995
-------- -------- --------
amounts in thousands
<S> <C> <C>
Computed "expected" tax benefit
(expense) $ 57,856 61,611 (21,610)
Effect of foreign tax rate differential
on earnings of foreign subsidiary 772 1,051 4,516
Minority interest in earnings
of consolidated subsidiaries (2,998) -- (4,264)
Change in valuation allowance
for deferred tax assets relating to
foreign tax loss carryforwards 1,213 (12,575) (7,935)
Effect of deconsolidations to deferred
tax expense (11,548) -- --
Adjustment to deferred tax assets and
liabilities for enacted change in
foreign income tax rate
-- (952) --
Amortization not deductible for tax
purposes (584) (774) (537)
Other, net 243 (2,750) (1,872)
-------- -------- --------
$ 44,954 45,611 (31,702)
======== ======== ========
</TABLE>
(continued)
II-65
<PAGE> 124
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
-------------- ---------------
amounts in thousands
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 19,922 62,053
Less-valuation allowance (907) (51,311)
Investment tax credit carryforwards 696 696
Less-valuation allowance (410) (410)
Investments in affiliates, due principally
to losses of affiliates recognized for
financial statement purposes in excess of
losses recognized for tax purposes 56,294 49,150
Future deductible amounts, principally
due to accruals not currently deductible 5,149 1,370
------------- -------------
Net deferred tax assets 80,744 61,548
------------- -------------
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation (8,011) (32,768)
Franchise costs, not deductible for income tax
purposes (14,290) (189,852)
Foreign currency translation adjustments included
in equity but not recognized for income tax
purposes (3,036) (13,328)
Unrecognized gain on sale of assets -- (14,128)
Other (860) (5,220)
------------- --------------
Total gross deferred tax liabilities (26,197) (255,296)
------------- -------------
Net deferred tax asset (liability) $ 54,547 (193,748)
============= =============
</TABLE>
Management considers it more likely than not that the Company will
realize the full amount of its net deferred tax assets as a result of
certain investments having an estimated fair value in excess of their
related tax basis and the availability of potential tax planning
strategies that management considers both prudent and feasible.
(continued)
II-66
<PAGE> 125
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
At December 31, 1997, the Company had federal net operating loss
carryforwards for income tax purposes aggregating approximately $42.9
million which, if not utilized to reduce taxable income in future
periods, will begin to expire at various dates beginning in the year
2004.
In addition, the Company has net operating loss carryforwards of
approximately $12.6 million available in the Puerto Rico tax
jurisdiction. If unused, these net operating loss carryforwards expire
at various dates over the next 7 years.
(14) Related Party Transactions
Due from related parties
The components of "Due from (to) related parties" are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
----------- ----------
amounts in thousands
<S> <C> <C>
TVG LLC Note Receivable (a) $ 88,707 176,501
TVG LLC Promissory Note (b) -- (23,262)
TVG LLC Credit Facility (c) -- --
Non-Cash Intercompany Account (d) (4,823) 14,955
Cash Intercompany Account (e) (5,772) (8,053)
--------- ---------
$ 78,112 160,141
========= =========
</TABLE>
(a) Proceeds from the Debentures and the Cablevision Sale were
loaned to TCI pursuant to a note receivable pending their use
by TINTA. Effective December 5, 1997, amounts outstanding under
such note receivable from TCI were assigned to TVG LLC (the
"TVG LLC Note Receivable.") The TVG LLC Note Receivable bears
interest at variable rates (6.7% at December 31, 1997).
Principal and interest is due and payable as mutually agreed
from time to time by TVG LLC and TINTA. During the years ended
December 31, 1997 and 1996, interest income related to such
note receivable aggregated $5.8 million and $14.0 million,
respectively.
(continued)
II-67
<PAGE> 126
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(b) During 1996, TCI Communications, Inc. ("TCIC"), a subsidiary of
TCI, transferred, subject to regulatory approval, certain
distribution equipment to a subsidiary of TINTA in exchange for
a(pound)14,950,000 ($23.3 million using the applicable exchange
rate) principal amount promissory note (the "TVG LLC Promissory
Note"). The TVG LLC Promissory Note was contributed by TCIC to
TVG LLC in connection with the September 10, 1997 consummation of
the Exchange Offer. The distribution equipment was subsequently
leased back to TCIC over a five year term with semi-annual
payments of(pound)998,000 ($1.6 million), plus expenses.
Effective October 1, 1997, such distribution equipment was
transferred back to TCIC and the related lease and the TVG LLC
Promissory Note were canceled. During the years ended December
31, 1997 and 1996, (i) the U.S. dollar equivalent of interest
expense incurred with respect to the TVG LLC Promissory Note was
$1.2 million and $658,000, respectively, (ii) the U.S. dollar
equivalent of the lease revenue under the above-described lease
agreement aggregated $3.3 million and $1.4 million, respectively,
and (iii) the Company experienced foreign currency transaction
gains (losses) of $1.2 million and ($2.2 million), respectively,
with respect to the TVG LLC Promissory Note.
(c) The revolving subordinated credit agreement with TVG LLC, as
creditor, and TINTA, as borrower, (the "TVG LLC Credit Facility")
is a subordinated unsecured revolving credit facility that
provided for loans from TCI to the Company in an aggregate
outstanding principal amount of up to $200 million. As of
September 10, 1997, TCI assigned all of its rights, interests and
obligations in and to the TVG LLC Credit Facility to TVG LLC. At
the time of such assignment, no borrowings were outstanding under
TVG LLC Credit Facility. In connection with the assignment, the
parties agreed to extend the maturity date of the TVG LLC Credit
Facility to September 10, 2002, at which time all borrowings,
together with all accrued interest thereon, will be payable and
the parties reduced the interest rate on TVG LLC Credit Facility
from 13% to 10%. 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, TVG LLC may
terminate its obligation to make further loans under the TVG LLC
Credit Facility upon two business days prior notice to TINTA.
There were no borrowings outstanding pursuant to the TVG LLC
Credit Facility at December 31, 1997 and December 31, 1996. The
TVG LLC 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
$750,000, $750,000 and $279,000 during the years ended December
31, 1997, 1996 and 1995, respectively.
(continued)
II-68
<PAGE> 127
(d) At December 31, 1997, the non-cash intercompany account (the
"Non-Cash Intercompany Account") with TVG LLC was comprised of
$12.6 Million due to TVG LLC 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 $7.7 Million due from TVG LLC with respect to the
allocation of current intercompany income tax benefit pursuant to
a tax sharing agreement as described in note 13. 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. As described
below, changes in the TCI Compensation Liability have been
included in the accompanying statements of operations. Amounts
included in the Non-Cash Intercompany Account are non-interest
bearing.
(e) Amounts included in the cash intercompany account (the "Cash
Intercompany Account") with TVG LLC are required to be settled
within 30 days following notification. Any payable amounts that
remain outstanding after such 30-day period generally are treated
as adjustments of the outstanding borrowings pursuant to the TVG
LLC Credit Facility. Amounts included in the Cash Intercompany
Account are non-interest bearing.
Other Related Party Transactions
Corporate expenses are allocated to TINTA based upon the cost of
general and administrative services provided. Through September 9,
1997, such corporate expenses were allocated pursuant to a service
agreement between TINTA and TCI. In connection with the September 10,
1997 consummation of the Exchange Offers, TCI attributed its rights
and obligations under such services agreement to TVG LLC. The amounts
allocated to the Company for the years ended December 31, 1997, 1996
and 1995 aggregated $14.2 million, $1.2 million and $4.4 million,
respectively, of which $12.4 million, $(1.8 million) and $2.5 million,
respectively, reflected stock compensation expense.
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 $6.0 million, $4.3 million and $3.4
million during the years ended December 31, 1997, 1996 and 1995,
respectively. Through December 31, 1995, the Puerto Rico Subsidiary
also had management arrangements with certain subsidiaries of TCI
whereby such subsidiaries' management provided administrative services.
As compensation for these services, the Puerto Rico Subsidiary paid a
monthly fee calculated on a per-subscriber basis. Charges for such
services were $680,000 during the year ended December 31, 1995. The
above-described programming and management fee charges are included in
"Operating costs and expenses - Cable" in the accompanying statements
of operations.
(continued)
II-69
<PAGE> 128
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
As described further in note 6, effective October 1, 1997, the Company
ceased to consolidate Cablevision and began to account for Cablevision
under the equity method of accounting. Cablevision purchases programming
services from certain affiliates. The related charges generally are based
upon the number of Cablevision's subscribers that receive the respective
services. During the nine months ended September 30, 1997, the year ended
December 31, 1996 and the period from April 25, 1995 through December 31,
1995, such charges aggregated $11.8 million, $13.0 million and $9.4
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 $2.3 million, $3.9 million and $2.9 million
during the nine months ended September 30, 1997, the year ended December
31, 1996 and the period from April 25, 1995 through December 31, 1995,
respectively.
Prior to the Cablevision Sale, Cablevision also had a management
arrangement with TINTA and Cablevision's 49%-minority-interest-owner,
whereby Cablevision paid a dividend of 1% of revenue to TINTA and
Cablevision's 49%-minority-interest-owner for management services provided
to Cablevision. During the nine months ended September 30, 1997, dividends
paid to TINTA and the 49%-minority-interest-owner for such management fees
aggregated $1.5 million each. During the year ended December 31, 1996,
dividends paid to TINTA and the 49%-minority-interest-owner for such
management fees aggregated $966,000 and $929,000, respectively. TINTA's
dividend for such management fee has been eliminated in consolidation. The
49%-minority-interest-owner's dividend for such management fee is included
in "Other, net" in the accompanying statements of operations. In connection
with the Cablevision Sale, TINTA and Cablevision entered into a new
management agreement. During the three months ended December 31, 1997,
management fees under such agreement aggregated $450,000 and are included
in "Revenue" in the accompanying statements of operations.
As further described in notes 9 and 15, 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)
II-70
<PAGE> 129
(15) 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 $46 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 $150.0 million. If the Company's net worth
(as defined) were to fall below $150.0 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 notes 9 and 10.
As described in note 9, 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.
The Company leases business offices, has entered into pole rental
lease agreements, and uses certain equipment under lease arrangements.
Rental costs under such arrangements amounted to $4.4 million, $22.4
million and $17.5 million for the years ended December 31, 1997, 1996
and 1995, respectively, of which $412,000, $442,000 and $518,000
related to the Puerto Rico Subsidiary.
A summary of future minimum lease payments under noncancellable
operating leases as of December 31, 1997 follows (amounts in
thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1998 $ 533
1999 383
2000 225
2001 174
2002 183
Thereafter 736
</TABLE>
It is expected that in the normal course of business, leases related
to the Puerto Rico Subsidiary and TINTA's corporate operations that
expire generally will be renewed or replaced by leases on other
properties.
(continued)
II-71
<PAGE> 130
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
During 1997, TCI began an enterprise-wide comprehensive review of its
computer systems and related software to ensure systems properly
recognize the year 2000 and continue to process business information.
The systems being evaluated include all internal use software and
devices and those systems and devices that manage the distribution of
TINTA's products. Additionally, TINTA has initiated a program of
communications with all of its significant suppliers and affiliated
companies to determine the readiness of third parties and the impact
on TINTA if those third parties fail to remediate their own year 2000
issues.
Over the past three years, TCI began an effort to convert a
substantial portion of its financial applications to widely available
year 2000 ready commercial products, or to outsource portions of
financial applications to year 2000 ready vendors. Notwithstanding
such effort, TINTA is in the process of finalizing its assessment of
the impact of year 2000. TINTA is utilizing both internal and external
resources to identify, correct or reprogram, and test systems for year
2000 readiness. Confirmations have been received from select primary
suppliers indicating that they are either year 2000 ready or have
plans in place to ensure readiness. As part of TINTA's assessment of
its year 2000 issue, it is evaluating the level of validation it will
require of third parties to ensure their year 2000 readiness. TINTA's
manual assessment of the impact of the year 2000 date change should be
complete by mid-1998.
Management of TINTA has not yet determined the cost associated with
its year 2000 readiness efforts and the related potential impact on
TINTA's results of operations. Amounts expended to date have not been
material, although there can be no assurance that costs ultimately
required to be paid to ensure TINTA's year 2000 readiness will not
have an adverse effect on TINTA's financial position. Additionally,
there can be no assurance that the systems of other companies on which
TINTA relies will be converted in time or that any such failure to
convert by another company will not have an adverse effect on TINTA's
financial condition or position.
(continued)
II-72
<PAGE> 131
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(16) Segment Data
The Company is engaged in the cable and programming businesses in
various foreign countries. Selected information regarding the
Company's activities in the cable and programming businesses and its
activities in various geographic regions are set forth in the
following tables. In all cases, the identifiable assets of the
industry or geographic segment include the carrying value of the
Company's equity method investees.
<TABLE>
<CAPTION>
Industry Segments
------------------------------
Cable Programming Corporate Total
------------- ------------ ----------- -----------
amounts in thousands
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
----------------------------
Revenue $ 219,834 -- -- 219,834
============= ============ =========== ===========
Operating income (loss) $ 35,559 -- (30,683) 4,876
============= ============ =========== ===========
Depreciation and amortization $ 53,481 -- 53,481
============= ============ =========== ===========
Capital expenditures, including
acquisitions $ 74,303 -- -- 74,303
============= ============ =========== ===========
Identifiable assets $ 835,398 483,036 75,566 1,394,000
============= ============ =========== ===========
Year ended December 31, 1996:
----------------------------
Revenue $ 220,163 94,397 -- 314,560
============= ============ =========== ===========
Operating income (loss) $ 36,831 (49,559) (10,629) (23,357)
============= ============ =========== ===========
Depreciation and amortization $ 49,459 9,288 -- 58,747
============= ============ =========== ===========
Capital expenditures, including
acquisitions $ 91,487 25,975 -- 117,462
============= ============ =========== ===========
Identifiable assets $ 1,458,119 515,913 15,269 1,989,301
============= ============ =========== ===========
Year ended December 31, 1995:
----------------------------
Revenue $ 142,494 48,039 -- 190,533
============= ============ =========== ===========
Operating loss $ 20,744 (18,968) (12,991) (11,215)
============= ============ =========== ===========
Depreciation and amortization $ 31,390 4,970 -- 36,360
============= ============ =========== ===========
Capital expenditures, including
acquisitions $ 222,514 5,709 -- 228,223
============= ============ =========== ===========
Identifiable assets $ 1,276,756 540,590 46,065 1,863,411
============= ============ =========== ===========
</TABLE>
(continued)
II-73
<PAGE> 132
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
Geographic Segments
---------------------------------------
Latin
America Asia,
and Australia
The and New
Caribbean Europe Zealand Corporate Total
--------- ------------ ----------- --------- ------------
amounts in thousands
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
----------------------------
Revenue $ 219,834 -- -- -- 219,834
========= ============ =========== =========== ============
Operating income (loss) $ 35,559 -- -- (30,683) 4,876
========= ============ =========== =========== ============
Depreciation and amortization $ 53,481 -- -- -- 53,481
========= ============ =========== =========== ============
Capital expenditures, including
acquisitions $ 74,303 -- -- -- 74,303
========= ============ =========== =========== ============
Identifiable assets $ 535,531 706,833 76,070 75,566 1,394,000
========= ============ =========== =========== ============
Year ended December 31, 1996:
Revenue $ 215,543 99,017 -- -- 314,560
========= ============ =========== =========== ============
Operating income (loss) $ 32,963 (45,691) -- (10,629) (23,357)
========= ============= =========== =========== ============
Depreciation and amortization $ 48,336 10,411 -- -- 58,747
========= ============ =========== =========== ============
Capital expenditures, including
acquisitions $ 91,487 25,975 -- -- 117,462
========= ============ =========== =========== ============
Identifiable assets $ 915,776 994,834 63,422 15,269 1,989,301
========= ============ =========== =========== ============
Year ended December 31, 1995:
Revenue $ 141,129 49,404 -- -- 190,533
========= ============ =========== =========== ============
Operating loss $ 23,678 (21,902) -- (12,991) (11,215)
========= ============ =========== =========== ============
Depreciation and amortization $ 31,390 4,970 -- -- 36,360
========= ============ =========== =========== ============
Capital expenditures, including
acquisitions $ 199,492 28,731 -- -- 228,223
========= ============ =========== =========== ============
Identifiable assets $ 720,695 1,058,061 35,417 49,238 1,863,411
========= ============ =========== =========== ============
</TABLE>
During the years ended December 31, 1996 and 1995 the Company derived 30% and
36%, respectively of its programming revenue from one customer.
(continued)
II-74
<PAGE> 133
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Notes to Financial Statements
(17) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------- ------------- --------------- ------------
1997: amounts in thousands
----
<S> <C> <C> <C> <C>
Revenue $ 65,611 68,545 72,465 13,213
============= ============= =============== ============
Operating income (loss) $ 9,419 5,685 1,045 (11,273)
============= ============= =============== ============
Net loss $ (33,455) (32,042) (16,117) (38,735)
============= ============= =============== ============
Basic and diluted net loss per common
share $ (.28) (.28) (.14) (.34)
============= =========== =============== ============
1996:
----
Revenue $ 62,624 74,010 83,239 94,687
============= ============= =============== ============
Operating income (loss) $ 4,696 (10,408) (3,734) (13,911)
============= ============= =============== ============
Net loss $ (26,411) (44,177) (31,269) (28,563)
============= ============= =============== ============
Basic and diluted net loss per common
share $ (.22) (.37) (.26) (.25)
============= ============ =============== ============
</TABLE>
II-75
<PAGE> 134
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements
<TABLE>
<CAPTION>
Included in Part II of this Report: Page No.
<S> <C>
Independent Auditors' Report II-19
Balance Sheets,
December 31, 1997 and 1996 II-20
Statements of Operations,
Years ended December 31, 1997, 1996 and 1995 II-22
Statements of Equity,
Years ended December 31, 1997, 1996 and 1995 II-23
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 II-25
Notes to Financial Statements,
December 31, 1997, 1996 and 1995 II-27
</TABLE>
(a) (2) Financial Statement Schedules
Included in Part IV of this Report:
(i) Financial Statement Schedules required to be filed:
All schedules have been omitted because they are not
applicable, or the required information is set forth in the
applicable financial statements or notes thereto.
(ii) Separate financial statements for Telewest Communications plc:
<TABLE>
<CAPTION>
Consolidated Financial Statements Page No.
<S> <C>
Independent Auditors' Report IV-11
Consolidated Statements of Operations IV-12
Consolidated Balance Sheets IV-14
Consolidated Statements of Cash Flows IV-15
Consolidated Statement of Shareholders' Equity IV-16
Notes to the Consolidated Financial Statements IV-17 to IV-48
</TABLE>
(continued)
IV-1
<PAGE> 135
(a) (3) Exhibits
The following exhibits are filed herewith or incorporated by reference herein
(according to the number assigned to them in Item 601 of Regulation S-K), as
noted:
3 - Articles of Incorporation and Bylaws:
Restated Certificate of Incorporation. (b)
Bylaws of Registrant. (b)
4 - Instruments Defining the Rights of Security Holders:
Indenture dated as of February 7, 1996, between
Tele-Communications International, Inc. and the Bank of New
York relating to Subordinated Debt Securities.(r)
10 - Material Contracts
10.1 Registration Rights Agreement between TINTA and TCI dated July
12, 1995.(b)
10.2 Indemnification Agreement between TINTA and TCI dated July 12,
1995.(b)
10.3 Services Agreement between TINTA and TCI dated July 18,
1995.(b)
10.4 Tax Sharing Agreement between TINTA and TCI dated July 18,
1995.(b)
10.5 First Amendment to Tax Sharing Agreement between TINTA and TCI
dated October 1995.(r)
10.6 Trade Name and Service Mark License Agreement between TINTA
and TCI dated July 18, 1995.(b)
10.7 Subordinated Revolving Credit Agreement between TINTA and TCI
dated July 12, 1995.(b)
10.8 Loan Agreement, dated October 4, 1993, as amended by
Supplemental Agreement on October 3, 1994, among London South
Cable Partnership, Avon Cable Limited Partnership, United
Artists Communications (London South) plc, United Artists
Communications (Avon) Limited, The Toronto-Dominion Bank and
certain banks and financial institutions parties thereto.(d)
10.9 Second Supplemental Agreement, dated November 1, 1994,
relating to the Loan Agreement referred to in Exhibit
10.7(a).(d)
10.10 Loan Agreement, dated June 13, 1994, among Telewest Scotland
Holdings Limited, Canadian Imperial Bank of Commerce and
certain banks and financial institutions parties thereto.(d)
10.11 Supplemental Agreement, dated November 19, 1994, relating to
the Loan Agreement referred to in Exhibit 10.8(a).(d)
10.12 Relationship Agreement, entered into as of November 22, 1994,
by and among Telewest, TINTA and US WEST.(e)
IV-2
<PAGE> 136
10 - Material Contracts (continued)
10.13 Amendment to Relationship Agreement by and among Telewest,
Inter-national and U S WEST referred to in Exhibit 10.9(a).(b)
10.14 Shareholders' Agreement, entered into as of November 22, 1994,
between certain subsidiaries of TCI and certain subsidiaries
of U S WEST.(e)
10.15 Amendment to Shareholders Agreement referred to in Exhibit
10.10(a).(a)
10.16 Registration Rights Agreement, dated as of November 22, 1994,
between Telewest and certain subsidiaries of TCI (Identical
agreement was entered into between Telewest and certain
subsidiaries of US WEST.)(e)
10.17 Operating Agreement of T W Holdings, L.L.C.(a)
10.18 TCI International Holdings, Inc./Gerry Lenfest Guarantee
Agreements dated November 19, 1994.(a)
10.19 Guarantee Agreement, dated November 19, 1994 by Australis
Holdings Pty Limited in favor of TINTA.(e)
10.20 Guarantee Agreement, dated November 19, 1994 by TINTA in favor
of Australis Holdings Pty Limited.(e)
10.21 Amended and Restated Stock Purchase Agreement dated April 25,
1995 among Eduardo Eurnekian and the Stockholders of
Cablevision S.A., Construred S.A., Univent's S.A., Televisora
Belgrano S.A. and TINTA.(a)
10.22 Amended and Restated Stockholders Agreement dated April 25,
1995 among Eduardo Eurnekian, Basilia Jaliquias, Alberto
Antranik Eurnekian, Natalio Wende, Enrique Kevorkyan,
Sebastian Arias Duval, Lorenzo Luis Marchese, Tomas Daniel
Kolakovic and TINTA.(a)
10.23 Promissory Note dated April 25, 1995 in the amount of
$21,688,748 payable by TINTA to Eduardo Eurnekian.(a)
10.24 Promissory Note dated April 25, 1995 in the amount of
$21,688,748, payable by TINTA to Eduardo Eurnekian.(a)
10.25 Promissory Note dated April 25, 1995 in the amount of
$21,688,748, payable by TINTA to Eduardo Eurnekian.(a)
10.26 Promissory Note dated April 25, 1995 in the amount of
$21,688,748, payable by TINTA to Eduardo Eurnekian.(a)
10.27 Promissory Note dated February 9, 1996 payable by
Tele-Communications, Inc. to TINTA.(r)
10.28 United Communications International Partnership Agreement
dated as of August 30, 1990, between United International
Holdings and US WEST Cable Europe, Inc., as assigned to United
International Holdings, Inc. pursuant to the Assignment and
Assumption Agreement dated as of January 1, 1993, between
United International Holdings and United Inter-national
Holdings, Inc.(g)
IV-3
<PAGE> 137
10 - Material Contracts (continued)
10.29 Amendment of Partnership Agreement dated November 9, 1992,
between Telewest Europe Group and United International
Holdings.(g)
10.30 Shareholders Agreement in relation to Flextech plc dated May
10, 1993, between HC Crown Corp. and TINTA.(a)
10.31 Shareholders Agreement in relation to Flextech plc dated May
10, 1995 between US WEST Marketing Resources (UK) Limited and
TINTA.(a)
10.32 Shareholders Agreement among Sumitomo Corporation, TCI Japan,
Inc., TCI International Holdings, Inc. and Jupiter
Telecommunications Co., Ltd. dated December 6, 1994.(a)
10.33 Employment Agreement between TINTA and Fred A. Vierra. +(b)
10.34 Restated and Amended Employment Agreement, dated as November
1, 1992, between the Company and John C. Malone.+(j)
10.35 Assignment and Assumption Agreement, dated as of August 4,
1994, among TCI/Liberty Holding Company, Tele-Communications,
Inc. and John C. Malone. +(l)
10.36 Form of Indemnification Agreement by and between TINTA and
each director.+(a)
10.37 Tele-Communications, Inc. 1994 Stock Incentive Plan.(i)
10.38 The Tele-Communications International, Inc. 1995 Stock
Incentive Plan.(a)
10.39 Tele-Communications, Inc. 1996 Stock Incentive Plan.(c)
10.40 Form of 1992 Non-Qualified Stock Option and Stock Appreciation
Rights Agreement. +(k)
10.41 Form of Assumption and Amended and Restated Stock Option
Agreement between the Company, TCI/Liberty Holding Company and
grantee relating to assumption of options and related stock
appreciation rights under Tele-Communications, Inc.'s 1992
Stock Incentive Plan pursuant to Tele-Communications, Inc.'s
1992 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement.+(m)
10.42 Form of 1993 Non-Qualified Stock Option and Stock Appreciation
Rights Agreement. +(k)
10.43 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement, dated as of November 12, 1993, by and between
Tele-Communications, Inc. and Jerome H. Kern. +(k)
IV-4
<PAGE> 138
10 - Material Contracts (continued)
10.44 Assumption and Amended and Restated Stock Option Agreement
between Tele-Communications, Inc., TCI/Liberty Holding Company
and a director of Tele-Communications, Inc. relating to
assumption of options and related stock appreciation rights
granted outside of an employee benefit plan pursuant to
Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option
and Stock Appreciation Rights Agreement. +(m)
10.45 Form of Assumption and Amended and Restated Stock Option
Agreement between Tele-Communications, Inc., TCI/Liberty
Holding Company and grantee relating to assumption of options
and related stock appreciation rights granted under
Tele-Communications, Inc.'s 1992 Stock Incentive Plan pursuant
to Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option
and Stock Appreciation Agreement. +(m)
10.46 Form of 1994 Non-Qualified Stock Option and Stock Appreciation
Rights Agreement. +(l)
10.47 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A TCI Group common
stock pursuant to the Tele-Communications, Inc. 1994 Stock
Incentive Plan. +(c)
10.48 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A Liberty Media Group
common stock pursuant to the Tele-Communications, Inc. 1994
Stock Incentive Plan. +(c)
10.49 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A TCI Group common
stock pursuant to the Tele-Communications, Inc. 1996 Stock
Incentive Plan. +(c)
10.50 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A Liberty Media Group
common stock pursuant to the Tele-Communications, Inc. 1996
Stock Incentive Plan. +(c)
10.51 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A Tele-Communications
International, Inc. common stock pursuant to the
Tele-Communications International, Inc. 1995 Stock Incentive
Plan. +(c)
10.52 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A Tele-Communications
International, Inc. common stock. +(c)
10.53 Qualified Employee Stock Purchase Plan of Tele-Communications,
Inc., as amended. +(n)
IV-5
<PAGE> 139
10 - Material Contracts (continued)
10.54 Form of Restricted Stock Award Agreement for 1995 Award of
Series A TCI Group Restricted Stock pursuant to the
Tele-Communications, Inc. 1994 Stock Incentive Plan. +(c)
10.55 Form of Restricted Stock Award Agreement for 1995 Award of
Series A Liberty Media Group Restricted Stock pursuant to the
Tele-Communications, Inc. 1994 Stock Incentive Plan.+(c)
10.56 Form of Restricted Stock Award Agreement for 1995 Award of
Series A Tele-Communications International, Inc. Restricted
Stock pursuant to the Tele-Communications International 1995
Stock Incentive Plan.(c)
10.57 Agreement regarding International Sports Joint Venture by and
among Liberty Media Corporation, The News Corporation Limited,
TINTA and TCI dated October 30, 1995.(b)
10.58 Agreement regarding U.S. Sports Joint Venture by and among
Liberty Media Corporation, Fox, Inc., TCI and The News
Corporation Limited dated October 30, 1995.(b)
10.59 Share Exchange Agreement among certain affiliates of SBC
CableComms (UK), an affiliate of Cox Communications, Inc.,
("Cox"), Telewest, Telewest Communications plc, SBC
International, Inc., SBCC and Cox dated August 14, 1995.(h)
10.60 The Scheme of Arrangement under Section 425 of the Companies
Act of 1985 dated August 14, 1995.(h)
10.61 Indenture among Telewest and The Bank of New York dated
October 3, 1995 relating to the Senior Debentures.(b)
10.62 Subscription and Option Agreement among Flextech, Flextech
1992 plc and Scottish Television plc dated August 31, 1995.(b)
10.63 Agreement for the sale and purchase of all of the issued share
capital of various companies owned by IVS Cable Holdings
Limited among IVS Cable Holdings Limited, Flextech and
Koninkigke PTT Nederland NV dated October 17, 1995.(b)
10.64 Stock Exchange Agreement dated July 28, 1995 among certain
stockholders of Torneos y Compentencias S.A., Torneos y
Compentencias S.A. and TINTA.(b)
10.65 Subscription Agreement date November 21, 1995 among Canal +
S.A., Generale d'Images S.A., TINTA and MultiThematiques
S.A.(b)
10.66 Cooperation Agreement dated November 21, 1995 among Canal +
S.A., Generale d'Images S.A., TINTA.(b)
10.67 Side Letter among Canal + S.A., MultiThematiques S.A., TINTA
dated November 21, 1995.(b)
10.68 Side Letter from Canal + S.A. to TINTA relating to a future
50/50 holding company.(b)
IV-6
<PAGE> 140
10 - Material Contracts (continued)
10.69 Agreement of Amendment of Partnership Agreement dated as of
May 19, 1995 between Telewest Europe Group, UIH, Joint
Venture, Inc. (formerly known as United International
Management, Inc.) and UPC.(b)
10.70 Agreement of Amendment of Third Amended and Restated
Partnership Agreement of United International Investments
dated July 13, 1995 among UA-UII, Inc., Joint Venture, Inc.,
UIH and UPC.(b)
10.71 Subscription Agreement relating to Jupiter Programming Co.,
Ltd. dated February 21, 1996 between Sumitomo Corporation and
TCI Japan, Inc.(r)
10.72 Shareholders Agreement relating to Jupiter Programming Co.,
Ltd. dated February 21, 1996 between Sumitomo Corporation, TCI
Japan, Inc., Tele-Communications International, Inc. and
Jupiter Programming Co., Ltd.(r)
10.73 Sale Contract dated February 7, 1996 between Cordillera
Comunicac-iones Limitada and Compana de Telecomunicaciones de
Chile S.A.(r)
10.74 Signal Transmission and Connection Maintenance Agreement dated
February 7, 1996 between Metroplos-Intercom S.A. and Compana
de Telecomunicaciones de Chile S.A.(r)
10.75 Shareholders Agreement in relation to Flextech p.l.c. dated
March 20, 1996 between International Family Entertainment,
Inc. and Tele-Communications International, Inc.(o)
10.76 English translation of Shareholders Agreement dated February
7, 1996 between Cordillera Communicaciones Limitada and
others, and Invercom S.A. and others. (o)
10.77 North America DTH Platform Memorandum of Understanding. (p)
10.78 Multi-Country DTH Platform Memorandum of Understanding. (p)
10.79 Stock Purchase Agreement by and among Eduardo Eurnekian and
Natalio Wende owners of Oeste Cable Color S.A. and
Cablevision.(q)
10.80 Deed of Guarantee and Indemnity and Subordination by
Independent Newspapers, plc, Tele-Communications
International, Inc., and United and Philips Communications,
B.V. as Guarantors in favour of the Governor and Company of
the Bank of Ireland.(q)
10.81 Partnership Interest Purchase Agreement by and between TCID of
Puerto Rico, Inc. and Joslin Communications Corp. (s)
10.82 Step-In Deed Relating to UK Channel Management Limited. (s)
10.83 Credit Agreement dated as of April 30, 1997, among TCI
Cablevision of Puerto Rico, Inc. as the Borrower, Certain
Commerical Lending Institutions, as the Lenders, and the Bank
of Nova Scotia, as the Administrative Agent for the Lenders.
(s)
IV-7
<PAGE> 141
10 - Material Contracts (continued)
10.84 Tax Sharing Agreement, effective for periods on and after
October 1, 1997, among TCI and certain entities attributed to
each of the TCI Group, the Liberty Media Group and the TCI
Ventures Group, as amended by the First Amendment to the Tax
Sharing Agreement, dated as of October 1, 1997, among TCI and
certain entities attributed to each of the TCI Group, the
Liberty Media Group and the TCI Ventures Group. Incorporated
herein by reference to Exhibit 9(c)2 to TCI's Schedule 13E-4/A
(Amendment No. 2), Issuer Tender Offer Statement, dated
September 5, 1997.
10.85 Stock Purchase and Capital Contribution Agreement entered into
as of September 22, 1997 by and among (i) Tele-Communications
International, Inc., (ii) Eduardo Eurnekian et.al., (iii) CEI
Citicorp Holdings S.A. and (iv) T.I. Telefonica Internacional
de Espana S.A. (t)
10.86 Shareholders Agreement dated October 9, 1997 between (i) Tele-
Communications International, Inc., (ii) CEI Citicorp Holdings
Sociedad Anonima, (iii) Southtel Equity Corporation, (iv) T.I.
Telefonica Internacional de Espana S.A. and (v) Martin
Eurnekian. (t)
10.87 Management Agreement dated October 9, 1997 by and between
Cablevision S.A. and TINTA Cable Management, Inc., a wholly
owned subsidiary of Tele-Communications International, Inc.
(t)
10.88 Consulting Agreement dated as of January 1, 1998 between
Tele-Communications International, Inc. and Fred A. Vierra.
21 - Subsidiaries of the Registrant.
23 - Consent of Experts and Counsel.
23.1 - Consent of KPMG Peat Marwick LLP
23.2 - Consent of KPMG
27 - Financial Data Schedule.
- ----------
(a) Incorporated by reference to TINTA's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 11,
1995 (Registration No. 33-91876).
(b) Incorporated by reference to TINTA's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on December
15, 1995 (Registration No. 33-80491).
(c) Incorporated by reference to Tele-Communications, Inc.'s Annual
Report on Form 10-K dated December 31, 1995.
(d) Incorporated by reference to Telewest Communications plc's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on April 29, 1994 (Registration No. 33-79398).
(e) Incorporated by reference to Telewest Communications plc's Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1994 on Form
10-K filed with the Securities and Exchange Commission (Commission
File Number 1-24150).
IV-8
<PAGE> 142
(f) Incorporated by reference to Australis Media Limited's Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission on May 16, 1995 (Registration No. 33-87210).
(g) Incorporated by reference to United International Holding, Inc.'s
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on July 22, 1993 (Registration No. 33-61376).
(h) Incorporated by reference to Telewest Communications plc's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on August 14, 1995 (Commission File Number 1-24250).
(i) Incorporated herein by reference to Tele-Communications, Inc.'s
Form S-4 Registration Statement (Commission File No. 33-54263).
(j) Incorporated herein by reference to Tele-Communications, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1992, as
amended by Form 10-K/A for the year ended December 31, 1992
(Commission File No. 0-5550).
(k) Incorporated herein by reference to Tele-Communications, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1993, as
amended by Form 10-K/A for the year ended December 31, 1993
(Commission File No. 0-5550).
(l) Incorporated herein by reference to Tele-Communications, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1994, as
amended by Form 10-K/A for the year ended December 31, 1994
(Commission File No. 0-2041).
(m) Incorporated herein by reference to Tele-Communications, Inc.'s
Post Effective Amendment No. 1 to Form S-4 Registration Statement
on Form S-8 Registration Statement (Commission File No. 33-54263).
(n) Incorporated herein by reference to the Tele-Communications, Inc.
Registration Statement on Form S-8 (Commission File No. 33-57635).
(o) Incorporated herein by reference to Tele-Communications
International, Inc.'s Quarterly Report on Form 10-Q dated March 31,
1996.
(p) Incorporated herein by reference to Tele-Communications
International, Inc.'s Quarterly Report on Form 10-Q dated June 30,
1996.
(q) Incorporated herein by reference to Tele-Communications
International, Inc.'s Quarterly Report on Form 10-Q dated September
30, 1996.
(r) Incorporated herein by reference to Tele-Communications
International, Inc.'s Annual Report on Form 10-K dated December 31,
1995.
(s) Incorporated herein by reference to Tele-Communications
International, Inc.'s Quarterly Report on Form 10-Q dated March 31,
1997.
(t) Incorporated herein by reference to Tele-Communications,
International, Inc.'s Current Report on Form 8-K dated October 24,
1997.
+ Constitutes management contract or compensatory arrangement.
IV-9
<PAGE> 143
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997:
Date of Report Items Reported Financial Statements Filed
-------------- -------------- --------------------------
October 24, 1997 Item 5 None
IV-10
<PAGE> 144
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Telewest Communications plc
We have audited the accompanying consolidated balance sheet of Telewest
Communications plc and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations and cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telewest
Communications plc and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles in the United States of America.
KPMG Audit Plc
Chartered Accountants
Registered Auditors
London, England
March 19, 1998
IV-11
<PAGE> 145
Telewest Communications - US GAAP
Consolidated statements of operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1997 1996 1995
$'000 L. '000 L. '000 L. '000
(NOTE 2)
<S> <C> <C> <C> <C>
REVENUE
Cable television 262,698 159,918 121,224 64,740
Telephony - residential 273,748 166,645 125,013 57,597
Telephony - business 72,085 43,882 34,562 17,449
Other (L. 3,573, L. 1,600 and L. 1,451 in 1997, 1996 and 1995,
respectively, from related parties) 26,370 16,053 9,467 4,998
-------- -------- -------- --------
634,901 386,498 290,266 144,784
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Programming (153,496) (93,441) (69,906) (32,194)
Telephony (82,373) (50,145) (52,572) (29,526)
Selling, general, and administrative (including L. 1,170, L. 2,560
and L. 3,257 in 1997, 1996 and 1995, respectively, to related
parties) (317,591) (193,335) (167,323) (105,388)
Depreciation (291,318) (177,341) (129,716) (60,019)
Amortization of goodwill (43,359) (26,395) (26,149) (7,854)
-------- -------- -------- --------
(888,137) (540,657) (445,666) (234,981)
-------- -------- -------- --------
OPERATING LOSS (253,236) (154,159) (155,400) (90,197)
OTHER INCOME/(EXPENSE):
Interest income (including L. 3,178, L. 1,723 and L. 1,583 in 1997,
1996 and 1995, respectively, from related parties) 13,074 7,959 16,651 15,645
Interest expense (232,805) (141,721) (105,172) (26,649)
Loss on disposal of interest rate swaps -- -- -- (8,609)
Foreign exchange losses, net (38,676) (23,544) (2,838) (14,575)
Share of net losses of affiliates (35,640) (21,696) (15,973) (12,777)
Gain/(loss) on disposal of assets 1,871 1,139 571 (419)
Minority interests in profits of consolidated subsidiaries, net (482) (293) (180) (16)
Other, net -- -- -- 82
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (545,894) (332,315) (262,341) (137,515)
Income tax expense (note 14) (225) (137) (50) (16)
-------- -------- -------- --------
NET LOSS (546,119) (332,452) (262,391) (137,531)
-------- -------- -------- --------
</TABLE>
IV-12
<PAGE> 146
Telewest Communications - US GAAP
Consolidated statements of operations (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1997 1996 1995
$* L. * L. * L. *
(EXCEPT NUMBER (except number
OF SHARES) of shares)
<S> <C> <C> <C> <C>
BASIC AND DILUTED LOSS PER ORDINARY SHARE
Weighted average number of ordinary shares
outstanding 927,567,600 927,567,600 925,425,473 861,424,848
BASIC AND DILUTED LOSS PER ORDINARY SHARE (0.59) (0.36) (0.28) (0.16)
</TABLE>
See accompanying notes to the consolidated financial statements
* EXCEPT NUMBER OF SHARES
IV-13
<PAGE> 147
Telewest Communications - US GAAP
Consolidated balance sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1997 1996
$'000 L. '000 L. '000
ASSETS (note 2)
<S> <C> <C> <C>
Cash and cash equivalents 48,595 29,582 79,116
Trade receivables (net of allowance for doubtful accounts of
L. 6,507 and L. 5,405) 60,167 36,627 29,305
Other receivables (note 7) 43,050 26,207 32,394
Prepaid expenses 12,526 7,625 5,168
Investment in affiliates, accounted for under the equity method,
and related receivables (note 8) 98,081 59,707 69,420
Other investments, at cost 42,162 25,666 25,666
Property and equipment (less accumulated depreciation of
L. 481,451 and L. 308,240) (note 9) 2,801,658 1,705,520 1,447,194
Goodwill (less accumulated amortization of L. 64,301 and L. 37,907 ) 765,342 465,905 491,290
Other assets (less accumulated amortization of L. 10,140 and L. 4,162)
(note 11) 92,833 56,513 62,387
---------- ---------- ----------
TOTAL ASSETS 3,964,414 2,413,352 2,241,940
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 43,877 26,710 46,855
Other liabilities (note 12) 326,345 198,664 190,200
Debt (note 13) 2,255,516 1,373,054 879,351
Capital lease obligations (note 17) 124,080 75,534 54,390
---------- ---------- ----------
TOTAL LIABILITIES 2,749,818 1,673,962 1,170,796
---------- ---------- ----------
MINORITY INTERESTS 1,051 640 347
---------- ---------- ----------
SHAREHOLDERS' EQUITY (note 15)
Convertible preference shares, 10p par value; 661,000,000 shares
authorized and 496,066,708 shares issued and outstanding 81,489 49,607 49,607
Ordinary shares, 10p par value; 2,010,000,000 shares authorized;
927,567,600 issued and outstanding in 1997 and 1996 152,372 92,757 92,757
Additional paid-in capital 2,189,533 1,332,887 1,332,887
Accumulated deficit (1,206,661) (734,560) (402,108)
---------- ---------- ----------
1,216,733 740,691 1,073,143
Ordinary shares held in trust for the Telewest Restricted Share
Scheme (note 16) (3,188) (1,941) (2,346)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,213,545 738,750 1,070,797
---------- ---------- ----------
Commitments and contingencies (note 17)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 3,964,414 2,413,352 2,241,940
---------- ---------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements
IV-14
<PAGE> 148
Telewest Communications - US GAAP
Consolidated statements of cash flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1997 1996 1995
$'000 L. '000 L. '000 L. '000
(NOTE 2)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (546,119) (332,452) (262,391) (137,531)
Adjustments to reconcile Net loss to net
cash provided by / (used in) operating
activities:
Depreciation 291,318 177,341 129,716 60,019
Amortization of goodwill 43,359 26,395 26,149 7,854
Amortization of deferred financing costs and issue discount
on senior discount debentures 127,280 77,482 74,104 16,605
Accrued interest on senior debentures -- -- -- 5,451
Unrealized loss on foreign currency translation 38,676 23,544 2,838 14,575
Loss on disposal of interest rate swaps -- -- -- 8,609
Share of net losses of affiliates 35,640 21,696 15,973 12,777
(Gain)/loss on disposals of assets (1,871) (1,139) (571) 419
Minority interests in profits of consolidated subsidiaries 482 293 180 16
Changes in operating assets and liabilities, net of effect of
acquisition of subsidiaries:
Change in receivables (7,011) (4,268) (15,908) (5,282)
Change in prepaid expenses (4,036) (2,457) 953 (3,367)
Change in accounts payable (11,648) (7,091) (4,575) (5,603)
Change in other liabilities 38,825 23,635 51,668 19,206
Other -- -- -- (356)
-------- -------- -------- --------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 4,895 2,979 18,136 (6,608)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (714,635) (435,037) (464,367) (254,453)
Cash paid for acquisition of subsidiaries (999) (608) (14,167) (3,232)
Additional investments in and loans to affiliates (14,825) (9,025) (2,728) (9,143)
Additions to other investments -- -- (5,000) --
Proceeds from disposals of assets 9,962 6,066 3,059 688
Other investing activities -- -- -- 335
-------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (720,497) (438,604) (483,203) (265,805)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for credit facility arrangement costs -- -- (18,400) --
Proceeds from debenture issue -- -- -- 754,812
Cash paid for foreign currency option -- -- -- (88,070)
Repayment of borrowings (3,901) (2,375) (937) (157,930)
Cash paid for debenture issue costs -- -- (829) (20,574)
Cash paid for share issue costs -- -- -- (6,141)
Proceeds from borrowings 644,760 392,500 100,400 --
Capital element of finance lease repayments (6,523) (3,971) (1,231) (1,291)
-------- -------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 634,336 386,154 79,003 480,806
-------- -------- -------- --------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (81,266) (49,471) (386,064) 208,393
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (103) (63) 362 8,423
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 129,964 79,116 464,818 248,002
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR 48,595 29,582 79,116 464,818
-------- -------- -------- --------
</TABLE>
See accompanying notes to the consolidated financial statements
IV-15
<PAGE> 149
Telewest Communications - US GAAP
Consolidated statement of shareholders' equity
<TABLE>
<CAPTION>
Convertible Shares Additional Accumulated
preference Ordinary held Paid-in deficit
shares shares in trust Capital Total
L. '000 L. '000 L. '000 L. '000 L. '000 L. 'OOO
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 15,300 84,824 (7,280) 686,276 (2,186) 776,934
Conversion of ordinary shares into
convertible preference shares (see note 15) 11,227 (11,227) -- -- -- --
Shares issued in connection with the
acquisition of TCMN (see notes 5 and 15) 23,080 18,399 -- 636,695 -- 678,174
Accrued employee compensation
relating to the Telewest Restricted Share Scheme -- -- 5,171 -- -- 5,171
Net Loss -- -- -- -- (137,531) (137,531)
BALANCE AT DECEMBER 31, 1995 49,607 91,996 (2,109) 1,322,971 (139,717) 1,322,748
Ordinary shares issued -- 761 -- 9,916 -- 10,677
Accrued employee compensation
relating to the Telewest Restricted Share Scheme -- -- (237) -- -- (237)
Net loss -- -- -- -- (262,391) (262,391)
BALANCE AT DECEMBER 31, 1996 49,607 92,757 (2,346) 1,332,887 (402,108) 1,070,797
Accrued employee compensation
relating to the Telewest Restricted Share Scheme -- -- 405 -- -- 405
Net loss -- -- -- -- (332,452) (332,452)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 49,607 92,757 (1,941) 1,332,887 (734,560) 738,750
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
IV-16
<PAGE> 150
Telewest Communications - US GAAP
Notes to the consolidated financial statements
Years ended December 31, 1997 and 1996
1) ORGANIZATION AND HISTORY
Telewest Communications plc ("the Company") is a cable television and
telephony operator which offers these services to business and
residential customers in the United Kingdom ("UK"). The Company derives
its cable television revenues from installation fees, monthly basic and
premium service fees and advertising charges. The Company derives its
telephony revenues from connection charges, monthly line rentals, call
charges, special residential service charges and interconnection fees
payable by other operators. The cable television and telephony services
account for approximately 41% and 54%, respectively, of the Company's
revenue. This revenue is predominantly derived from residential, rather
than business, customers.
The Company was incorporated on October 20, 1994 under the laws of
England and Wales in preparation for the October 2,1995 internal
reorganization of Telewest Communications Cable Limited ("TCCL"), then
called Telewest Communications plc, and its subsidiaries whereby the
entire issued share capital of TCCL was transferred to the Company in
exchange for fully paid up shares of the Company. TCCL had traded since
November 22, 1994 when affiliates of Tele-Communications, Inc. (the "TCI
Affiliates") and affiliates of US WEST (the "US WEST Affiliates")
contributed their UK cable interests to TCCL (the "Contribution"). These
interests were previously held by the TCI Affiliates and US WEST
Affiliates through TCI/US Cable Communications Group, a general
partnership. TCI/US WEST Cable Communications Group and its subsidiaries
collectively are referred to herein as the "Joint Venture" and the TCI
Affiliates and US WEST Affiliates collectively are referred to herein as
the "Joint Venturers".
2) BASIS OF PREPARATION
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America ("US GAAP"). The preparation of financial statements in
conformity with US GAAP 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
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The economic environment and currency in which the Company operates is
the UK and hence its reporting currency is Pounds Sterling (L.).
Certain financial information for the year ended December 31, 1997 has
also been translated into US Dollars, with such US Dollar amounts being
unaudited and presented solely for the convenience of the reader, at the
rate of $1.6427 = L. 1.00, the Noon Buying Rate of the Federal
Reserve Bank of New York on December 31, 1997. The presentation of the
US Dollar amounts should not be construed as a representation that the
Pounds Sterling amounts could be so converted into US Dollars at the
rate indicated or at any other rate.
IV-17
<PAGE> 151
Telewest Communications - US GAAP
Notes to consolidated financial statements (continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and those of all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated upon
consolidation.
All acquisitions have been accounted for under the purchase method of
accounting. Under this method, the results of subsidiaries and
affiliates acquired in the year are included in the consolidated
statement of operations from the date of acquisition.
Impairment of Long-Lived Assets. Effective January 1, 1996, the company
adopted Statement of Financial Accounting Standards No. 121 (FAS 121),
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of." FAS 121 requires that long-lived assets and certain
identifiable intangibles, including goodwill, to be held and used by an
entity, to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Upon adoption of this standard, the company evaluated its
long-lived assets using projected undiscounted future cash flows and
operating income for each subsidiary and determined that no material
impairment of these assets existed at January 1, 1996, and, accordingly,
no loss was recognized. The company believes that no material impairment
existed at December 31, 1997.
Goodwill arising on consolidation (representing the excess of the fair
value of the consideration given over the fair value of the identifiable
net assets acquired) is amortized over the acquisition's useful life or
over a maximum period of 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted future operating cash flows of
the acquired operations. The assessment of the recoverability of
goodwill will be impacted if projected future operating cashflows are
not achieved. The amount of goodwill impairment, if any, is measured
based on the projected discounted future operating cashflows using a
discount rate reflecting the Company's cost of funds.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly-liquid investments with
original maturities of three months or less that are readily convertible
into cash.
IV-18
<PAGE> 152
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FINANCIAL INSTRUMENTS
The Company uses foreign currency option contracts which permit, but do
not require, the Company to exchange foreign currencies at a future date
with another party at a contracted exchange rate. The Company also
enters into combined foreign currency and interest rate swap contracts
("Foreign Currency Swaps"). Such contracts are used to hedge against
adverse changes in foreign currency exchange rates associated with
obligations denominated in foreign currency. The foreign currency option
and Foreign Currency Swaps are recorded on the balance sheet in other
assets or other liabilities at their fair value at the reporting period
with changes in their fair value during the reporting period being
reported as part of the foreign exchange gain or loss in the
consolidated statement of operations. Such gains and losses are offset
against foreign exchange gains and losses on the obligations denominated
in foreign currencies which have been hedged.
Interest swap agreements which are used to manage interest rate risk on
the Company's borrowings are accounted for using the accruals method,
Net income or expense resulting from the differential between floating
and fixed rate interest payments is recorded on an accruals basis. To
the extent that the interest rate swap agreements are delaying starting,
net income or expense is not recognized until the effective date of the
agreement.
Other interest rate swaps which are held as trading assets are recorded
on the consolidated balance sheet at their fair value at the end of each
reporting period with changes in their fair value being recorded as
gains and losses in the consolidated statement of operations.
INVESTMENTS
Investments in partnerships, joint ventures and subsidiaries in which
the Company's voting interest is 20% to 50%, and others where the
Company has significant influence, are accounted for using the equity
method. Investments which do not have a readily determinable fair value,
in which the Company's voting interest is less than 20%, and in which
the Company does not have significant influence, are carried at cost and
written down to the extent that there has been an other-than-temporary
diminution in value.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The amount of advertising
costs expensed was L. 25,920,000, L. 24,846,000, and L. 10,246,000 for
the years ended 31 December 1997, 1996, and 1995, respectively.
IV-19
<PAGE> 153
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including the historical
carryover basis cost from the Contribution. Except during the
pre-maturity period as described below, depreciation is provided to
write off the cost, less estimated residual value, of property and
equipment by equal installments over their estimated useful economic
lives as follows:
<TABLE>
<S> <C>
Freehold and long leasehold buildings 50 years
Cable and ducting 20 years
Electronic equipment
- Systems electronics 8 years
- Switching equipment 8 years
- Subscriber electronics 5 years
- Headend, studio, and playback facilities 5 years
Other equipment
- Office furniture and fittings 5 years
- Motor vehicles 4 years
</TABLE>
During the pre-maturity period, depreciation of cable and ducting and
system electronics is charged monthly to write off the estimated cost at
the end of the pre-maturity phase over a useful life of 20 and 8 years,
respectively. In accordance with Statement of Financial Accounting
Standard ("SFAS") No 51, "Financial Reporting by Cable Television
Companies", the monthly charge is scaled down by a ratio of average
customers in the current period to the estimated customer base at the
end of the pre-maturity period. The pre-maturity period covers the
period between connecting the first customer and substantial completion
of the network.
Pre-construction costs which are included within cable and ducting are
amortized over the life of the franchise from the date of the first
customer.
The Company accounts for costs, expenses and revenues applicable to the
construction and operation of its cable systems under SFAS No 51.
The estimated useful lives of cable and ducting and systems electronics
were reassessed with effect from January 1, 1996, and were changed from
25-30 years and 10 years to 20 years and 8 years,
IV-20
<PAGE> 154
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
respectively. The net book value of these assets are being written off
over their revised estimated remaining lives.
In 1997, the treatment of activation costs was reviewed. With effect
from 1 January 1997, activation labour was reclassified from cable and
ducting to electronics to be consistent with the classification of
activation materials. The assets are now depreciated over 8 years rather
than 20 years.
FRANCHISE COSTS
Expenditure incurred on successful applications for franchise licences
is included in property and equipment and is amortized over the
remaining life of the original franchise term. Costs relating to
unsuccessful applications are charged to the consolidated statement of
operations.
DEFERRED FINANCING COSTS
Costs incurred in raising debt are deferred and recorded on the
consolidated balance sheet in other assets. The costs are amortized to
the consolidated statement of operations at a constant rate to the
carrying value of the debt over the life of the obligation.
MINORITY INTERESTS
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests'
allocable portion of the equity of those consolidated subsidiaries.
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded using the rate of
exchange in effect at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated using the
rate of exchange ruling at the balance sheet date and the gains or
losses on translation are included in the consolidated statement of
operations.
REVENUE RECOGNITION
Revenue is recognized as services are delivered. Other revenues include
connection fees which are recognized in the period of connection to the
extent that the fee is offset by direct selling costs. The remainder is
recognized over the estimated average period that customers are expected
to remain connected to the system.
PENSION COSTS
The Company operates a defined contribution scheme or contributes up to
specified limits to third-party schemes on behalf of the employees. The
amount included in losses in 1997, 1996 and 1995 of L. 2,801,000, L.
2,580,000, and L. 1,538,000, respectively, represents the contributions
payable to the selected schemes in respect of the relevant accounting
periods.
IV-21
<PAGE> 155
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
Under the asset and liability method of SFAS No 109, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered.
SHARE-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for share-based
employee compensation plans at fair value. The Company has chosen to
continue to account for share-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for share options is measured as the
excess, if any, of the quoted market price of the Company's share at the
date of the grant over an employee must pay to acquire the shares.
Share purchased by the trustees in connection with the Telewest
Restricted Share Scheme, are valued at the market price on the date on
which they are purchased and are reflected as a reduction of
shareholders' equity in the consolidated balance sheet. This equity
account is reduced when the shares are awarded to employees based on the
original cost of the shares to the trustees. The value of awards of
ordinary shares to be made to employees in future years is charged to
the consolidated statement of operations to the extent that the awards
have been awarded to and earned by employees in the current accounting
period. The value of shares which have been awarded to, but have not
been earned by employees is included as deferred compensation expense
within other assets.
NEW ACCOUNTING STANDARDS APPLICABLE TO THE COMPANY
EARNINGS PER SHARE AND CAPITAL STRUCTURE
The Company adopted the provisions of SFAS No. 128, "Earnings per
Share." This Statement required that all prior-period earnings per
share calculations be restated to conform with the provisions of this
statement. Basic earnings per share has been computed by dividing net
income available to ordinary shareholders by the weighted average number
of ordinary shares outstanding during the period. Diluted earnings per
share is computed by adjusting the weighted average number of ordinary
shares outstanding during the period for all dilutive potential ordinary
shares outstanding during the period and adjusting the net loss for any
changes in income or loss that would result from the conversion of such
potential ordinary shares. There is no difference in net income and
number of shares used for basic and diluted net income per ordinary
share, as potential ordinary share equivalents are not included in the
computation as their effect would be to decrease the loss per share.
IV-22
<PAGE> 156
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods
for comparative purposes is required. It requires that all items that
are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It
requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of the statement of financial position. The Company is currently
reviewing the likely impact on the classification of items included in
the shareholders' equity.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of
an Enterprise and Related Information," which is effective for fiscal
years beginning after December 15, 1997. In the initial year of
application comparative information for earlier years is to be restated.
It requires that companies disclose segment data based on how management
makes decisions about allocating resources to segments and measuring
their performance. It also requires entity-wide disclosures about the
products and services an entity provides, the material countries in
which it holds assets and reports revenues, and its major customers. The
Company is currently reviewing the likely impact on the level of
disclosure currently provided in its financial statements.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 "Employers'
Disclosure about Pensions and other Post-retirement Benefits" (SFAS No.
132" ). SFAS No. 132 revises disclosure requirements about employers'
pension and other post-retirement benefit plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The
company has not determined the impact that SFAS No. 132 will have on its
pension and other post-retirement benefit disclosures.
IV-23
<PAGE> 157
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(4) FINANCIAL INSTRUMENTS
FOREIGN CURRENCY OPTION CONTRACT
At December 31, 1997, the Company held a Pounds Sterling put option to
purchase US$1,537,000,000 to hedge its exposure to adverse fluctuations
in exchange rates on the principal amount at maturity of its US
Dollar-denominated Senior Discount Debentures due 2007 ("Senior Discount
Debentures"). The expiration date of this option contract is September
28, 2000. The put option has a strike price at expiration of L. 1.00 =
US$1.4520. The foreign currency option has been included in other assets
at its fair value on December 31, 1997.
FOREIGN CURRENCY SWAP
The Company has entered into a Foreign Currency Swap to hedge its
exposure to adverse fluctuations in exchange rates on the principal
amount of its US Dollar-denominated Senior Debentures due 2006 ("Senior
Debentures"). The terms of the contract provided for the Company to make
an initial exchange of principal of US$300,000,000 in exchange for
L. 196,078,000. On expiration on October 1, 2000, the initial principal
amounts will be re-exchanged. The interest element of the Foreign
Currency Swap requires the Company to make Pounds Sterling fixed-rate
interest payments and to receive US Dollar fixed-rate interest payments
on the initial exchange amounts on a semi annual basis. The foreign
currency swap contract has been included in other liabilities at its
fair value on December 31, 1997.
INTEREST RATE SWAPS
The Company has also entered into certain delayed-starting interest rate
swap agreements in order to manage interest rate risk on its senior
secured credit facility ("Senior Secured Facility"). The effective dates
of the swap agreements are January 2, 1997 and March 3, 1997, and the
agreements mature on December 31, 2001 and March 28, 2002. The aggregate
notional principal amount of the swaps adjusts upwards on a semi-annual
basis to a maximum of L. 750 million. In accordance with the swap
agreements, the Company receives interest at the six month LIBOR rate
and pays a fixed interest rate in the range of 7.835-7.975%.
IV-24
<PAGE> 158
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(4) FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 119 "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" requires disclosure of an estimate of
the fair values of certain financial instruments. SFAS No. 119 defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties other than in a forced sale. Fair value estimates are made at a
specific point in time, based upon relevant market information and
information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgement, and therefore cannot be determined precisely.
Changes in assumptions could significantly affect the estimates.
At 31 December 1997, the Company's significant financial instruments
include cash and cash equivalents, trade receivables, a foreign currency
option contract, a Foreign Currency Swap, interest rate swap agreements,
trade payables and long-term borrowings. The following table summarizes
the fair value of the foreign currency option contract, the Foreign
Currency Swap, the interest rate swap agreement, the Senior Discount
Debentures and the Senior Debentures. The fair value of the other
financial instruments held by the Company approximates their recorded
carrying amount due to the short maturity of these instruments and these
instruments are not presented in the following table.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 At December 31, 1996
Carrying Fair Value Carrying Fair value
amount amount
L. '000 L. '000 L. '000 L. '000
<S> <C> <C> <C> <C>
Assets:
Foreign currency option
contract 26,145 26,145 25,828 25,828
Liabilities:
Interest rate swap agreements -- 25,543 -- 4,776
Foreign Currency Swap 18,039 18,039 26,481 26,481
Senior Discount Debentures 696,954 729,532 600,799 621,367
Senior Debentures 182,626 189,931 175,203 179,582
</TABLE>
IV-25
<PAGE> 159
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(4) FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of the foreign currency option contract, the
interest rate swap agreements and the Foreign Currency Swap are based on
quotations received from independent, third party financial institutions
and represent the net amount receivable or payable to terminate the
position, taking into consideration market rates and counter-party
credit risk. The estimated fair values of the Senior Discount Debentures
and the Senior Debentures are also based on quotations from independent
third party financial institutions and are based on discounting the
future cash flows to net present values using appropriate market
interest rates prevailing at the year end.
MARKET RISK AND CONCENTRATIONS OF CREDIT RISK
Market risk is the sensitivity of the value of the financial instruments
to changes in related currency and interest rates. Generally, the
Company is not exposed to such market risk because gains and losses on
the financial instruments are offset by gains and losses on the
underlying assets and liabilities.
The Company may be exposed to potential losses due to the credit risk of
non-performance by the counter-parties to its foreign currency option,
interest rate swap agreements and Foreign Currency Swap contract,
however such losses are not anticipated as these counter-parties are
major international financial institutions.
Temporary cash investments also potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105 "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risks." The Company
places its temporary cash investments with major international financial
institutions and limits the amount of credit exposure to any one
financial institution. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers
comprising the Company's customer base.
At December 31, 1997, the Company had no significant concentration of
credit risk.
IV-26
<PAGE> 160
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(5) BUSINESS COMBINATIONS
On January 10, 1996, the Company acquired the entire issued share
capital of Telewest Communications (Worcester) Limited, then called Bell
Cablemedia (Worcester) Limited and owner of the Worcester cable
franchise for cash consideration of L. 9,849,000. Telewest
Communications (Worcester) Limited was otherwise a dormant company with
net assets of L. 2 representing its called up share capital. This
acquisition had been accounted for under the purchase method of
accounting. The goodwill arising o
n acquisition was L. 9,849,000 and
is being amortised on a straight-line basis over 20 years.
During 1996, the Company made various other minor acquisitions, largely
for share consideration. The goodwill arising on these acquisitions was
L. 11,708,000 and is being amortised on a straight-line basis over
20 years.
On October 3, 1995, the Company acquired the entire share capital of
Telewest Communications Midlands & North West) Limited ("TCMN"), then
called SBC CableComms (UK), a company which holds cable television and
telephony interests in the UK, from an affiliate of Cox Communications,
Inc. and affiliates of SBC Communications, Inc. in exchange for an
aggregate of 183,994,960 ordinary shares of 10 pence each and
230,790,208 convertible preference shares of 10 pence each. The value
attributable to the shares issued was L. 1.635 per share, being the
market price of the shares on June 8, 1995, the day the terms of the
acquisition were agreed to and announced. The fair value of the share
consideration using this share price was L. 678,174,000. The
aggregate cost of acquisition was L. 689,878,000 including the costs
of acquisition. This acquisition has been accounted for under the
purchase method of accounting. The goodwill arising on acquisition is
L. 464,872,000 and is being amortized on a straight-line basis over
20 years.
IV-27
<PAGE> 161
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(6) SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was L. 63,479,000, L. 25,795,000 and L. 6,041,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Significant non-cash investing activities of the Company are described
below. The amounts stated for 1996 represent the purchase of former
minority shareholders' interests in certain UK cable interests held by
the Company. The amounts stated for 1995 represent the purchase of TCMN
for largely share consideration as described in Note 5 to the
consolidated financial statements.
<TABLE>
<CAPTION>
1997 1996 1995
L. '000 L. '000 L. '000
<S> <C> <C> <C>
Purchase/contribution of cable interests:
Assets -- -- 428,080
Liabilities assumed -- -- (45,144)
Debt assumed -- -- (157,930)
-------- -------- --------
Net assets acquired/contributed -- -- 225,006
Goodwill on acquisition -- 9,874 464,872
-------- -------- --------
-- 9,874 689,878
-------- -------- --------
Share consideration/capital contribution -- 9,869 678,174
Costs of acquisition -- 5 11,704
-------- -------- --------
-- 9,874 689,878
-------- -------- --------
</TABLE>
IV-28
<PAGE> 162
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(7) OTHER RECEIVABLES
<TABLE>
<CAPTION>
At December 31
1997 1996
L. '000 L. '000
<S> <C> <C>
Value Added Tax refund 4,567 10,633
Interconnection receivables 1,505 3,865
Interest receivable 807 63
Accrued income 8,290 4,356
Prepaid expenses 3,161 5,714
Other 7,877 7,763
------ ------
26,207 32,394
------ ------
</TABLE>
(8) INVESTMENTS
The Company has investments in affiliates accounted for under the equity
method at December 31, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
Percentage ownership
At December 31,
1997 1996
<S> <C> <C>
Cable London plc 50.00% 50.00%
Birmingham Cable Corporation Limited 27.47% 27.47%
London Interconnect Limited 16.67% 16.67%
Central Cable Sales Limited 50.00% 50.00%
Front Row Television Limited 40.00% --
</TABLE>
The Company has accounted for its investment in London Interconnect
Limited under the equity method because it is in a position to exercise
a significant influence over London Interconnect Limited.
IV-29
<PAGE> 163
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
Summarized combined financial information for such affiliates which
operate principally in the cable television and telephony industries is
as follows:
COMBINED FINANCIAL POSITION
<TABLE>
<CAPTION>
AT DECEMBER 31
1997 1996
L. '000 L. '000
<S> <C> <C>
Property and equipment, net 429,161 391,183
Intangible assets, net 4,859 3,845
Other assets, net 30,249 105,475
------- -------
TOTAL ASSETS 464,269 500,503
------- -------
Debt 293,492 281,500
Other liabilities 98,758 91,947
Owners' equity 72,019 127,056
------- -------
TOTAL LIABILITIES AND EQUITY 464,269 500,503
------- -------
</TABLE>
COMBINED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
L. '000 L. '000
<S> <C> <C>
Revenue 120,468 98,329
Operating expenses (150,768) (124,358)
-------- --------
Operating loss (30,300) (26,029)
Interest expense (26,311) (15,945)
-------- --------
NET LOSS (56,611) (41,974)
-------- --------
</TABLE>
The Company's investments in affiliates are comprised as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
L. '000 L. '000
<S> <C> <C>
Loans 39,863 29,089
Share of net assets 19,844 40,331
------ ------
59,707 69,420
------ ------
</TABLE>
IV-30
<PAGE> 164
Telewest Communications - US GAAP
Any excess of the purchase cost over the value of the net assets
acquired is treated as goodwill and amortized over 20 years on a
straight-line basis.
Notes to the consolidated financial statements (continued)
(9) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
CABLE AND ELECTRONIC OTHER
LAND BUILDINGS DUCTING EQUIPMENT EQUIPMENT TOTAL
L. '000 L. '000 L. '000 L. '000 L. '000 L. '000
<S> <C> <C> <C> <C> <C> <C>
ACQUISITION COSTS
Balance at January 1, 1997 4,223 45,956 1,101,961 489,835 113,459 1,755,434
Reclassification -- (62) (118,331) 117,954 439 --
Additions 11 8,683 280,814 101,204 49,882 440,594
Disposals -- -- (182) (556) (8,319) (9,057)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 4,234 54,577 1,264,262 708,437 155,461 2,186,971
---------- ---------- ---------- ---------- ---------- ----------
ACCUMULATED DEPRECIATION
Balance at January 1, 1997 -- 7,378 121,181 130,483 49,198 308,240
Reclassification -- -- (12,792) 12,792 -- --
Charge for year -- 3,824 59,324 88,502 25,691 177,341
Disposals -- -- (182) (229) (3,719) (4,130)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 -- 11,202 167,531 231,548 71,170 481,451
---------- ---------- ---------- ---------- ---------- ----------
1997 NET BOOK VALUE 4,234 43,375 1,096,731 476,889 84,291 1,705,520
---------- ---------- ---------- ---------- ---------- ----------
ACQUISITION COSTS
Balance at January 1, 1996 4,223 36,005 766,866 359,617 79,239 1,245,950
Additions -- 9,951 335,844 130,783 39,012 515,590
Disposals -- -- (749) (565) (4,792) (6,106)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 4,223 45,956 1,101,961 489,835 113,459 1,755,434
---------- ---------- ---------- ---------- ---------- ----------
ACCUMULATED DEPRECIATION
Balance at January 1, 1996 -- 4,920 74,532 70,810 31,880 182,142
Charge for year -- 2,458 47,374 60,220 19,664 129,716
Disposals -- -- (725) (547) (2,346) (3,618)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 -- 7,378 121,181 130,483 49,198 308,240
---------- ---------- ---------- ---------- ---------- ----------
1996 NET BOOK VALUE 4,223 38,578 980,780 359,352 64,261 1,447,194
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
IV-31
<PAGE> 165
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
Cable and ducting consists principally of civil engineering and fibre optic
costs. In addition, cable and ducting includes net book value of
pre-construction and franchise costs of L. 9,807,000 and L. 13,220,000
as of December 31, 1997 and 1996, respectively. Electronic equipment includes
the Company's switching, headend and converter equipment. Other equipment
consists principally of motor vehicles, office furniture and fixtures, leasehold
improvements.
(10) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION> ADDITIONS
CHARGED TO
BALANCE AT ACQUISITION OF COSTS AND BALANCE AT
JANUARY 1 TCMN EXPENSES DEDUCTIONS DECEMBER 31
L. '000 L. '000 L. '000 L. '000 L. '000
<S> <C> <C> <C> <C> <C>
1997
Allowance for
doubtful accounts 5,405 -- 8,815 (7,713) 6,507
------ ------ ------ ------ ------
1996
Allowance for
doubtful accounts 4,695 -- 9,020 (8,310) 5,405
------ ------ ------ ------ ------
1995
Allowance for
doubtful accounts 1,736 1,063 5,920 (4,024) 4,695
------ ------ ------ ------ ------
</TABLE>
(11) OTHER ASSETS
The components of other assets, net of amortization, are as follows:
<TABLE>
<CAPTION>
At December 31
1997 1996
L. '000 L. '000
<S> <C> <C>
Deferred financing costs of debentures 13,770 17,510
Deferred financing costs of Senior Secured Facility 15,963 18,186
Foreign currency option contract 26,145 25,828
Other 635 863
------ ------
56,513 62,387
------ ------
</TABLE>
(12) OTHER LIABILITIES
Other liabilities are summarised as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
1997 1996
L. '000 L. '000
<S> <C> <C>
Amounts due to affiliated or other related parties 61 1,901
Accrued interest 13,641 8,921
Accrued construction costs 30,235 36,397
Accrued expenses and deferred income 112,198 82,938
Foreign Currency Swap 18,039 26,481
Other liabilities 24,490 33,562
------- -------
198,664 190,200
</TABLE>
Notes to the consolidated financial statements (continued)
IV-32
<PAGE> 166
Telewest Communications - US GAAP
(13) DEBT
Debt is summarized as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Weighted average 1997 1996
interest rate L. '000 L. '000
1997 1996
<S> <C> <C> <C> <C>
Senior Debentures 9.625% 9.625% 182,626 175,203
Senior Discount Debentures 11.000% 11.000% 696,954 600,799
Senior Secured Facility 9.071% 8.281% 492,500 100,000
Other debt 8.719% 7.790% 974 3,349
-------- --------
1,373,054 879,351
-------- --------
</TABLE>
SENIOR DEBENTURES
In October 1995, the Company issued US$300,000,000 principal amount of
Senior Debentures with a yield to maturity of 9.625%. The cash
consideration received at the date of issue was L. 188,703,000. The
Senior Debentures mature on October 1, 2006. Interest on the Senior
Debentures accrues semi annually and is payable in arrears. The Senior
Debentures are redeemable, in whole or in part, at the option of the
Company at any time on or after October 1, 2000 at the redemption price
of 104.813% of the principal amount during the year commencing October
1, 2000, 102.406% of the principal amount during the year commencing
October 1, 2001, and thereafter at 100% of the principal amount plus
accrued and unpaid interest.
The Senior Debentures and the Senior Discount Debentures, which are
described below, were issued to finance working capital, capital
expenditure, foreign currency swap and options to hedge against adverse
fluctuations in exchange rates, and additional investments in affiliated
companies. A portion of the net proceeds of the issue also was used to
repay the L. 157,930,000 indebtedness outstanding under the loan
facility held by TCMN at the date that it was acquired by the Company.
The indenture under which the Senior Debentures were issued contains
various covenants which among other things, restrict the ability of the
Company to incur additional indebtedness, pay dividends, create certain
liens, enter into certain transactions with shareholders or affiliates,
or sell certain assets. The Company was in compliance with the covenants
at December 31, 1997.
IV-33
<PAGE> 167
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(13) DEBT (CONTINUED)
The Company has entered into a Foreign Currency Swap to hedge its
exposure to adverse fluctuations in exchange rates on the principal
amount which will be outstanding on October 1, 2000, the earliest
redemption date, and the associated interest payments of the Senior
Debentures. The terms of the Foreign Currency Swap are described in Note
4 to the consolidated financial statements.
The Senior Debentures are unsecured liabilities of the Company.
SENIOR DISCOUNT DEBENTURES
In October 1995, the Company issued US$1,536,413,000 principal amount at
maturity of Senior Discount Debentures with a yield to maturity of 11%.
The cash consideration received at the date of issue was L. 566,109,000
(US$900,000,000). At December 31, 1997, the unamortized portion of the
discount on issue was L. 238,344,000 (US$391,528,000). The Senior
Discount Debentures mature on October 1, 2007. Interest on the Senior
Discount Debentures accrues semi annually. Cash interest will not accrue
on the Senior Discount Debentures prior to October 1, 2000 and is
thereafter payable in arrears on April 1 and October 1 of each year at a
rate of 11% per annum. The Senior Discount Debentures are redeemable, in
whole or in part, at the option of the Company at any time on or after
October 1, 2000 at the redemption price of 100% of the principal amount
plus accrued and unpaid interest.
The indenture under which the Senior Discount Debentures were issued
contains various covenants as set out for the Senior Debentures above
and the Company was in compliance with such covenants at December 31,
1997.
The Company has purchased a five year Pounds Sterling put option to
purchase US$1,537,000,000 to hedge its exposure to adverse fluctuations
in exchange rates on the principal amount which will be outstanding on
October 1, 2000, the earliest redemption date, of the Senior Discount
Debentures. The terms of the foreign currency option contract are
described in Note 4 to the consolidated financial statements.
The Senior Discount Debentures are unsecured liabilities of the Company.
SENIOR SECURED FACILITY
During 1996 a subsidiary of the Company entered into a senior secured
facility (the "Senior Secured Facility") with a syndicate of banks. The
facility is available to finance the capital expenditure, working
capital requirements and other permitted related activities involving
the construction and operation of all the Company's owned and operated
franchises, to pay cash interest on the Company's unsecured debentures,
to fund the repayment of existing secured borrowings in respect of the
London South and South West Regional Franchise Areas, to fund loans to
or investments in affiliated companies, to bid for or purchase, and
subsequently construct, licenses or franchises which may become
available and to refinance advances and the payment of interest, fees,
and expenses in respect of the Senior Secured Facility.
IV-34
<PAGE> 168
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
The facility is divided into two tranches: the first portion (Tranche A)
is available on a revolving basis for up to L. 300 million, reducing to
L. 100 million by June 30, 1998 with full repayment by December 31,
1998; the second portion (Tranche B) is available on a revolving basis
concurrently with Tranche A for an amount up to 6.5 times the trailing,
rolling six month annualised consolidated net operating cash flow,
gradually reducing throughout the period of the facility to 4 times by
January 1, 2000. Thereafter, the amount outstanding under the facility
converts to a term loan amortising over 5 years. The aggregate drawing
at any time under both tranches cannot exceed L. 1.2 billion. At
December 31, 1997 L. 125 million (1996:$100 million) was outstanding
under Tranche A, and L. 367.5 million under Tranche B (1996:$nil)
Borrowings under the facility are secured by the assets of the Company,
including the partnership interests and shares of subsidiaries, and bear
interest at 2.25% above LIBOR for Tranche A and between 0.5% and 1.875%
above LIBOR (depending on the ratio of borrowings to the trailing,
rolling six month annualized consolidated net operating cash flow) for
Tranche B.
(13) DEBT (CONTINUED)
Since 31 December 1997, this facility has been restructured with revised
financial covenants, a reduction in the amount available under the
facility from $1,200 million to $1,000 million, and a supplementary
L. 100 million revolving credit facility secured with a second fixed and
floating charge, and interest costs on the latter ranging from 3.5% -
5.5% above LIBOR
The Company's ability to borrow under the facility is subject to, among
other things, its compliance with the financial and other covenants and
borrowing conditions contained therein.
The Company was in compliance with the covenants at December 31,1997.
OTHER DEBT
Other debt is represented by property loans which are secured on
freehold land and buildings held by the Company which matures from 1998
onwards. The property loans bear interest at a rate of between 1.00% and
1.50% above LIBOR.
IV-35
<PAGE> 169
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(14) INCOME TAXES
Loss before income taxes is solely attributable to the UK:
The provisions for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
L. '000 L. '000 L. '000
<S> <C> <C> <C>
Currently payable 137 50 16
--- --- ---
</TABLE>
A reconciliation of income taxes determined using the statutory UK rate
of 31.5% (1996:33%) to the effective rate of income tax is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
% % %
<S> <C> <C> <C>
Corporate tax at UK statutory rates (31.5) (33) (33)
Permanent differences 0.5 1 3
Valuation allowance and other temporary differences 29 30 26
Share of losses of affiliates 2 2 4
-------- ------- -------
-- -- --
======== ======= =======
</TABLE>
IV-36
<PAGE> 170
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(14) INCOME TAXES (continued)
Deferred income tax assets and liabilities at December 31, 1997 and 1996
are summarised as follows:
<TABLE>
<CAPTION>
1997 1996
L. '000 L. '000
<S> <C> <C>
Deferred tax assets relating to:
Fixed assets 79,100 --
Net operating loss carried forward 181,800 310,300
Other 2,400 3,400
-------- --------
Deferred tax asset 263,300 313,700
Valuation allowance (247,400) (175,200)
-------- --------
Deferred tax liabilities relating to: 15,900 138,500
-------- --------
Fixed assets -- (110,600)
Other (15,900) (27,900)
-------- --------
Deferred tax liabilities (15,900) (138,500)
-------- --------
DEFERRED TAX ASSET PER BALANCE SHEET -- --
-------- --------
</TABLE>
At December 31 1997 the company estimates that it has subject to Inland
Revenue agreement, net operating losses ("NOLS") of L. 587,000,000
available to relieve against future profits. This excludes capital
allowances on assets which were available to the company, but had not
been claimed.
Due to a history of operating losses the company has established a
valuation allowance with respect to deferred tax assets, except to the
extent of deferred tax liabilities.
The NOLs have an unlimited carry-forward period under UK tax law, but
are limited to their use to the type of business which has generated the
loss.
IV-37
<PAGE> 171
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(15) SHAREHOLDERS' EQUITY
MOVEMENTS IN SHARE CAPITAL
In 1996 the Company issued 7,604,200 ordinary shares at 10 pence each
for the following consideration: an additional 0.25% of the ordinary
shares of Cable London plc, the surrender by Trans-Global (UK) Limited
of is option to acquire 9.9% of equity in the South East Regional
Franchise Area, and the remaining 20% of the ordinary shares of Telewest
Communications (Cotswolds) Limited held by a minority interest.
On October 3, 1995, the Company acquired the entire share capital of
TCMN from its former shareholders in exchange for an aggregate of
183,994,960 ordinary shares of 10 pence each and 230,790,208 convertible
preference shares of 10 pence each. On October 2, 1995, pursuant to a
court-approved scheme of arrangement (the "Scheme of Arrangement"), the
Company exchanged 735,468,440 ordinary shares of 10 pence each and
265,276,500 convertible preference shares of 10 pence each in
consideration for the transfer of shares of TCCL to the Company.
Dealings in ordinary shares and ADSs representing ordinary shares of
TCCL ceased on the London Stock Exchange and NASDAQ National Market
immediately prior to the execution of the Scheme of Arrangement and upon
completion of the Scheme of Arrangement, dealings in the ordinary shares
and ADSs representing ordinary shares of the Company commenced.
Immediately prior to the execution of the Scheme of Arrangement on
October 2, 1995, TCCL restructured its share capital by converting
112,276,500 ordinary shares of 10 pence each into 112,276,500
convertible preference shares of 10 pence each.
CONVERTIBLE PREFERENCE SHARES
The convertible preference shares are convertible into fully paid up
ordinary shares at any time on the basis of one ordinary share for every
convertible preference share provided that, immediately following the
conversion, the percentage of the issued ordinary share capital of the
Company held by members of the public, as defined by the listing rules
of the London Stock Exchange, does not fall below 25%. The ordinary
shares arising on conversion will rank pari passu in all respects with
the ordinary shares then in issue.
The holders of the convertible preference shares are entitled to receive
a dividend of such amount as is declared and paid in relation to each
ordinary share, subject to the dividend to be paid not exceeding 20
pence per share net of any associated tax credit.
In the event of a winding-up of the Company or other return of capital,
the assets of the Company available for distribution will be paid first
to the holders of the convertible preference shares up to the sum of
capital paid-up or credited as paid-up unless the right of election upon
a winding-up of the Company has been exercised in respect of the
convertible preference shares ("the Elected Shares"). If the election
has been exercised, the holders of the ordinary shares and the Elected
Shares will receive any surplus in accordance with the amount paid-up or
credited as paid-up on the shares held.
The holders of the convertible preference shares are not entitled to
vote at any general meeting of the Company unless the meeting includes
the consideration of a resolution for winding up the Company or a
resolution modifying the rights or privileges attaching to the
convertible preference shares.
IV-38
<PAGE> 172
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(16) SHARE-BASED COMPENSATION PLANS
At December 31, 1997, the Company operates five types of share-based
compensation plans: the Telewest Executive Share Option Schemes, the
Telewest Sharesave Schemes, and the Telewest Restricted Share Scheme, as
replaced in 1997 by the Telewest Long Term Incentive Plan ("LTIP") and
an Equity Participation Plan ("EPP").
The Company applies APB Opinion Bulletin No. 25 and related
interpretations in accounting for its share-based compensation plans.
Accordingly, no compensation cost has been charged to the consolidated
statement of operations in respect of performance-based option grants
since the options do not have exercise prices less than the market value
of the Company's ordinary shares. Compensation cost has been recognized
for fixed option grants since the options have exercise prices less than
the market value of the Company's ordinary shares at the date of grant.
Compensation cost has also been recognized for awards over ordinary
shares made in under the Telewest Restricted Share Scheme since the
awards have no exercise price. Compensation cost recognized for fixed
option grants and awards under the Telewest Restricted Share Scheme was
($496,000), $1,380,000, and $1,334,000 for 1997, 1996, and 1995,
respectively. If compensation costs for share option grants and awards
under the Telewest Restricted Share Scheme and LTIP Scheme had been
determined based on their fair value at the date of grant for 1997 and
1996 consistent with the method prescribed by SFAS 123 "Accounting for
Stock-Based Compensation", the Company's net loss and basic and diluted
loss per share would have been adjusted to the pro forma amounts set out
below:
<TABLE>
<CAPTION>
1997 1996 1995
L. '000 L. '000 L. '000
<S> <C> <C> <C>
Net loss - As reported (332,452) (262,391) (137,531)
- Proforma (336,737) (264,579) (138,468)
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
L. L. L.
<S> <C> <C> <C>
Loss per share - As reported (0.36) (0.28) (0.16)
- Proforma (0.36) (0.29) (0.16)
</TABLE>
PERFORMANCE-BASED SHARE OPTION COMPENSATION PLANS
The Company has two performance-based share option plans: the Telewest
1995 (No. 1) Executive Share Option Scheme and the Telewest 1995 (No. 2)
Executive Share Option Scheme. Under both plans, certain officers and
key employees are granted options to purchase ordinary shares of the
Company. The exercise price of each option generally equals the market
price of the Company's ordinary shares on the date of grant. The options
are exercisable between three and ten years after the date of the grant
with exercise conditional on the Company's shares outperforming by
price the FT-SE100 Index over any three year period preceding exercise.
The Company may grant options for up to 92,000,000 ordinary shares.
IV-39
<PAGE> 173
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(16) SHARE COMPENSATION PLANS (continued)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with a weighted-average
risk-free interest rate of 6.8, 8.1 and 8.3 percent used for grants in
1997, 1996 and 1995, respectively, and an expected volatility of between
30 and 45 percent used for grants in these years. The Company does not
expect to pay a dividend on its ordinary shares at any time during the
expected life of the option.
A summary of the status of the Company's performance-based share option
plan as of December 31, 1997, 1996, and 1995, the first year in which
the options were granted, and changes during the years ended on those
dates is presented below:
PERFORMANCE-BASED SHARE OPTION COMPENSATION PLANS (continued)
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED Weighted Weighted
NUMBER AVERAGE Number average Number average
OF EXERCISE of exercise of exercise
SHARES PRICE shares price shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 11,238,852 153.0p 8,645,229 160.4p -- --
Granted 8,994,654 83.7p 4,121,474 140.9p 8,871,398 160.3p
Forfeited (1,205,075) 147.1p (1,527,851) 162.6p (226,169) 158.0p
----------- ----------- -----------
Outstanding at end of year 19,028,431 120.6p 11,238,852 153.0p 8,645,229 160.4p
----------- ----------- -----------
Options exercisable at year-end 3,375,739 152.3p 1,023,042 154.3p -- --
Weighted-average fair value of
options granted during the year 50.4p 75.6p 86.0p
</TABLE>
IV-40
<PAGE> 174
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(16) SHARE COMPENSATION PLANS (continued)
The following table summarizes information about the Company's
performance-based share option plans outstanding at December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Number Weighted- Number
Range of outstanding at average Weighted- exercisable at Weighted-
exercise prices 31 December remaining average 31 December average
1997 contractual life exercise price 1997 exercise price
<S> <C> <C> <C> <C> <C> <C>
71.0-73.0p 2,666,913 7.4 years 72.6p
82.5p-83.0p 5,297,509 7.6 years 82.9p
117.5-118.0p 765,847 9.2 years 117.5p
135.0-141.0p 3,674,467 6.2 years 140.6p 1,293,086 140.8p
154.5-155.5p 4,842,914 4.8 years 154.5p 1,502,527 154.6p
171.5-173.5p 1,780,781 5.9 years 172.4p 580,126 171.9p
71.0-173.5P 19,028,431 6.5 years 120.6P 3,375,739 152.3P
</TABLE>
FIXED SHARE OPTION COMPENSATION PLANS
The Company also operates the Telewest Sharesave Scheme, a fixed share
option compensation scheme. Under this plan, the Company grants options
to employees to purchase ordinary shares at a 20% discount to market
price. These options can be exercised only with funds saved by employees
over time in a qualified savings account. The options are exercisable
between 37 and 66 months after the date of grant.
IV-41
<PAGE> 175
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(16) SHARE COMPENSATION PLANS (continued)
FIXED SHARE OPTION COMPENSATION PLANS (continued)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with a weighted-average
risk-free interest rate of 6.95 percent, 7.4 percent, and 7.2 percent,
used for grants in 1997, 1996 and 1995, respectively and an expected
volatility of between 30 and 45 percent. The Company does not expect to
pay a dividend on its ordinary shares at any time during the expected
life of the option.
A summary of the status of the Company's fixed share option plan as of
December 31, 1997, 1996, and 1995 and the changes during the years ended
on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
NUMBER WEIGHTED Number Weighted Number Weighted
OF AVERAGE of average of average
SHARES EXERCISE shares exercise shares exercise
PRICE price price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 4,076,635 119.8p 3,345,941 139.6p 1,666,534 150.0p
Granted 5,341,783 58.0p 2,165,009 102.5p 2,168,157 134.0p
Forfeited (2,450,243) 120.7p (1,434,315) 139.8p (488,750) 150.0p
---------- ----------- ----------
Outstanding at end of year 6,968,175 72.1p 4,076,635 119.8p 3,345,941 139.6p
---------- ----------- ----------
Options exercisable at year-end -- -- --
Weighted-average fair value of
options granted during the
year 42.7p 49.7p 79.3p
</TABLE>
The following table summarizes information about the Company's fixed
share options outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Options outstanding
Number Weighted-average
outstanding at Remaining
Exercise price 31 December 1997 Contractual life
<S> <C> <C> <C>
58.0p 5,341,783 3.6 years
102.5p 941,444 2.6 years
134.0p 404,256 3.6 years
150.0p 280,692 2.6 years
--------------- ------------- -------------
58.0P - 150.0 p 6,968,175 3.4 YEARS
</TABLE>
IV-42
<PAGE> 176
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
TELEWEST RESTRICTED SHARE SCHEME
The Company operates the Telewest Restricted Share Scheme in conjunction
with an employment trust, the Telewest Employees Share Ownership Plan
Trust (the "Telewest ESOP"), which has been designed to provide
incentives to executives of the Company based on the performance of the
Company. Under the Telewest Restricted Share Scheme, executives may be
granted awards over ordinary shares of the Company based on a percentage
of salary. The awards made for no consideration. The awards generally
vest three years after the date of the award and are exercisable for up
to seven years after the date when they vest. Awards granted under the
Telewest Restricted Share Scheme may be made over a maximum of 4,000,000
ordinary shares of the Company.
The fair value of each award is the share price of the ordinary shares
on the date the award was made.
A summary of the status of the Company's Restricted Share Scheme at
December 31, 1997, 1996, and 1995 and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
NUMBER OF Number of Number of
SHARES shares shares
<S> <C> <C> <C>
Outstanding at beginning of year 2,648,433 2,616,857 --
Granted 377,975 328,297 2,857,191
Exercised (1,123,324) (62,920) --
Forfeited (155,922) (233,801) (240,334)
---------- ---------- ----------
Outstanding at end of year 1,747,162 2,648,433 2,616,857
---------- ---------- ----------
924,008 646,341 49,867
Awards exercisable at year end -- -- --
WEIGHTED-AVERAGE FAIR VALUE OF AWARDS
GRANTED DURING THE YEAR [ ] 1.25 [ ] 1.47 [ ] 1.72
</TABLE>
At December 31, 1997, the 1,747,162 awards outstanding and the 924,008
awards exercisable have weighted average remaining contractual lives of
6.7 years and 6.6 years respectively.
The Telewest Restricted Share Scheme has been replaced with a Long-Term
Incentive Plan ("LTIP") for share awards to executive Directors and
senior executives. Under the LTIP, an executive will be awarded the
provisional right to receive, for no payment, a number of Telewest
shares with a value equating to a percentage of base salary. The shares
will not vest unless certain performance criteria, based on total
shareholder return assessed over a three year period are met. The
percentage of salary will be determined by the Remuneration Committee
and will be up to 100% of base salary for executive Directors.
IV-43
<PAGE> 177
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
TELEWEST LONG TERM INCENTIVE PLAN ("LTIP")
A summary of the status of the Company's Long Term Incentive Plan at
December 31, 1997 and 1996 and changes during the years ended on those
dates is presented below:
<TABLE>
<CAPTION>
1997
NUMBER OF
SHARES
<S> <C>
Outstanding at beginning of year --
Granted 574,309
-------
Outstanding at end of year 574,309
-------
Awards exercisable at year end --
-------
Weighted-average fair value of awards
granted during the year [ ] 0.81
</TABLE>
At December 31, 1997, the 574,309 awards outstanding have weighted
average remaining contractual lives of 9.8 years.
IV-44
<PAGE> 178
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(17) COMMITMENTS AND CONTINGENCIES
CAPITAL AND OPERATING LEASES
The Company leases a number of assets under arrangements accounted for
as capital leases, as follows:
<TABLE>
<CAPTION>
Acquisition Accumulated Net book
costs Depreciation Value
L. '000 L. '000 L. '000
<S> <C> <C> <C>
At December 31, 1997
Electronic equipment 58,465 (16,061) 42,404
Other equipment 40,207 (8,050) 32,157
At December 31, 1996
Electronic equipment 46,634 (8,376) 38,258
Other equipment 8,780 (1,900) 6,880
</TABLE>
Depreciation charged on these assets was L. 10,889,000 and L. 7,106,000
for the years ended 31 December, 1997 and 1996 respectively
The Company leases business offices and uses certain equipment under
lease arrangements accounted for as operating leases. Minimum rental
expense under such arrangements amounted to L. 3,198,000, L. 3,065,000
and L. 2,276,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Future minimum lease payments under capital and operating leases are
summarized as follows as of December 31, 1997:
<TABLE>
<CAPTION>
Capital leases Operating leases
L. '000 L. '000
<S> <C> <C>
1998 15,712 3,059
1999 14,488 2,989
2000 12,740 2,939
2001 11,883 2,885
2002 8,741 2,884
2003 and thereafter 38,413 14,323
--------
101,977
Imputed interest (26,443)
--------
Total 75,534
--------
</TABLE>
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced.
Contingent liabilities
The Company is a party to various legal proceedings in the ordinary
course of business which it does not believe will result, in aggregate,
in a material adverse effect on its financial condition.
IV-45
<PAGE> 179
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
(18) RELATED PARTY TRANSACTIONS
The Company, in the normal course of providing cable television
services, purchases certain of its programming from certain UK
affiliates of TCI. Such programming is purchased on
commercially-available terms. Total purchases in the year amounted to L.
9,681,000.
The Company has management agreements with TCI and US WEST under which
amounts are paid by the Company relating to TCI and US WEST employees
who have been seconded to the Company. For the years ended December 31,
1997, 1996, and 1995, fees paid by the Company under the agreements were
L. 968,000, L. 2,185,000 and L. 3,042,000 respectively. The Company has
similar management agreements with Cox Communications, Inc and SBC
Communications, Inc. For the years ended December 31,1997, and 1996,
fees paid by the Company under these agreements were L. 202,000 and L.
374,000.
The Company has entered into consulting agreements with its affiliates
pursuant to which the Company provides consulting services related to
telephony operations. Under the agreements, the Company receives an
annual fee from each affiliate based upon the affiliate's revenues. Fees
received for the years ended December 31,1997, 1996 and 1995 were L.
786,000, L. 642,000 and L. 566,000, respectively. The Company also
receives a fee for providing switching support services, comprising of a
fixed element based on a number of switches, and a variable element
based on a number of lines. Fees received for the years ended December
31, 1997, 1996 and 1995, were L. 740,000, L. 741,000 and L. 827,000,
respectively.
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997
FOURTH THIRD SECOND First
TOTAL QUARTER QUARTER QUARTER quarter
L. '000 L. '000 L. '000 L. '000 L. '000
<S> <C> <C> <C> <C> <C>
Revenue 386,498 104,972 100,087 91,052 90,390
Operating loss (154,159) (39,578) (41,394) (36,421) (36,766)
Finance expenses, net (156,167) (29,604) (43,613) (30,992) (51,958)
Net loss (332,452) (74,887) (90,780) (72,902) (93,883)
Basic and diluted loss per
ordinary share (36 pence) (8 pence) (10 pence) (8 pence) (10 pence)
</TABLE>
<TABLE>
<CAPTION>
1996
FOURTH THIRD SECOND First
TOTAL QUARTER QUARTER QUARTER quarter
L. '000 L. '000 L. '000 L. '000 L. '000
<S> <C> <C> <C> <C> <C>
Revenue 290,266 83,663 73,123 68,320 65,160
Operating loss (155,400) (46,095) (34,512) (38,536) (36,257)
Finance expenses, net (90,788) 28,222 (30,710) (54,503) (33,797)
Net loss (262,391) (22,361) (69,303) (97,080) (73,647)
Basic and diluted loss per
ordinary share (28 pence) (2 pence) (7 pence) (10 pence) (8 pence)
</TABLE>
IV-46
<PAGE> 180
Telewest Communications - US GAAP
Notes to the consolidated financial statements (continued)
The Company regularly reviews estimated useful lives of its property and
equipment and the estimates in calculating the capitalised overheads
which relate to the construction of the cable network. With effect from
January 1, 1996, the company has revised the estimated lives of certain
assets as set out in Note 3 to the consolidated financial statements and
certain estimates used in calculating capitalizable overheads. The
impact of these revisions was to increase the depreciation charge for
1996 from L. 110,223,000 to L. 129,716,000 and to increase the basic and
diluted loss per ordinary share for the year by 2 pence, and to increase
the capitalization of overheads in 1996 from L. 38,812,000 to L.
54,019,000 and to reduce the basic and diluted loss per share for the
year by 2 pence. The impact was principally accounted for in the fourth
quarter of 1996. In 1997, the treatment of activation costs was
reviewed. With effect from 1 January 1997, activation labour was
reclassified from Cable and Ducting to Electronics to be consistent with
the classification of activation materials. The impact of this change,
was an additional depreciation charge of L. 10,359,000, with activation
labour now depreciated over 8 years rather than 20 years.
Finance expenses include foreign exchange gains and losses on the
retranslation or valuation of non sterling denominated financial
instruments using period end exchange rates and market valuations.
IV-47
<PAGE> 181
Telewest Communications - US GAAP
Supplementary financial information
Five year summary
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
COMPANY JOINT PREDECESSOR
VENTURE (1) BUSINESSES (2)
1997 1996 1995(3) 1994 1993
L. '000 L. '000 L. '000 L. '000 L. '000
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Property and equipment (net) 1,705,520 1,447,194 1,063,808 454,843 269,974
Total assets 2,413,352 2,241,940 2,289,720 878,156 413,865
Investment in affiliates 59,707 69,420 80,703 81,907 68,838
Debt(4) 1,373,044 879,351 792,265 3,886 49,386
Equity 738,750 1,070,797 1,322,748 776,934 311,695
Income statement data:
REVENUE
Cable television 159,918 121,224 64,740 35,875 20,729
Telephony - residential 166,645 125,013 57,597 23,471 11,261
Telephony - business 43,882 34,562 17,449 8,812 4,908
Other 16,053 9,467 4,998 3,869 3,440
---------- ---------- ---------- ---------- ----------
Total revenue 386,498 290,266 144,784 72,027 40,338
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Programming (93,441) (69,906) (32,194) (15,500) (8,403)
Telephony (50,145) (52,572) (29,526) (14,714) (10,203)
Selling, general and administrative (193,335) (167,323) (105,388) (60,414) (32,505)
Depreciation (177,341) (129,716) (60,019) (30,320) (17,635)
Amortization (26,395) (26,149) (7,854) (1,827) (840)
---------- ---------- ---------- ---------- ----------
OPERATING LOSS (154,159) (155,400) (90,197) (50,748) (29,248)
---------- ---------- ---------- ---------- ----------
Share of loss of affiliates (21,696) (15,973) (12,777) (8,466) (7,540)
Financial expenses, net(4) (156,167) (90,788) (34,607) (6,137) (651)
Extraordinary gain -- -- -- 7,287(5) --
Net loss (332,452) (262,391) (137,531) (58,050) (37,439)
Basic and diluted loss per ordinary
share before extraordinary gain
(proforma loss for 1994) (36 PENCE) (28 pence) (16 pence) (10 pence)
Extraordinary gain -- -- -- 1 pence
Loss per ordinary share (pro forma
loss for 1994) (36 PENCE) (28 pence) (16 pence) (9 pence)
</TABLE>
(1) See Note 1 (Organization and history) to the US GAAP Consolidated
Financial Statements.
(2) Predecessor Businesses refers to certain businesses owned by TCI prior
to the formation of the Joint Venture and which are now owned by the
Company.
(3) See Note 5 (Business combinations) to the US GAAP Consolidated Financial
Statements.
(4) See Note 13 (Debt) to the US GAAP Consolidated Financial Statements.
(5) Extraordinary gain, relates to the fair value of interest rate swaps
arising on repayment of debt following the initial public offering of
the company in November 1994, to the US GAAP Consolidated Financial
Statements.
IV-48
<PAGE> 182
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ David J. Evans
--------------------------------------
Name: David J. Evans
Dated March 23, 1998 Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ John C. Malone March 23, 1998
- ---------------------------
John C. Malone Chairman of the Board and
Director
/s/ David J. Evans March 23, 1998
- ---------------------------
David J. Evans President and Chief Executive
Officer
/s/ Fred A. Vierra March 23, 1998
- ---------------------------
Fred A. Vierra Vice Chairman of the Board
and Director
/s/ Paul A. Gould March 23, 1998
- ---------------------------
Paul A. Gould Director
/s/ Jerome H. Kern March 23, 1998
- ---------------------------
Jerome H. Kern Director
/s/ Graham E. Hollis March 23, 1998
- ---------------------------
Graham E. Hollis Executive Vice President
(Chief Financial Officer and
Principal Accounting Officer)
<PAGE> 183
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3 - Articles of Incorporation and Bylaws:
Restated Certificate of Incorporation. (b)
Bylaws of Registrant. (b)
4 - Instruments Defining the Rights of Security Holders:
Indenture dated as of February 7, 1996, between
Tele-Communications International, Inc. and the Bank of New
York relating to Subordinated Debt Securities.(r)
10 - Material Contracts
10.1 Registration Rights Agreement between TINTA and TCI dated July
12, 1995.(b)
10.2 Indemnification Agreement between TINTA and TCI dated July 12,
1995.(b)
10.3 Services Agreement between TINTA and TCI dated July 18,
1995.(b)
10.4 Tax Sharing Agreement between TINTA and TCI dated July 18,
1995.(b)
10.5 First Amendment to Tax Sharing Agreement between TINTA and TCI
dated October 1995.(r)
10.6 Trade Name and Service Mark License Agreement between TINTA
and TCI dated July 18, 1995.(b)
10.7 Subordinated Revolving Credit Agreement between TINTA and TCI
dated July 12, 1995.(b)
10.8 Loan Agreement, dated October 4, 1993, as amended by
Supplemental Agreement on October 3, 1994, among London South
Cable Partnership, Avon Cable Limited Partnership, United
Artists Communications (London South) plc, United Artists
Communications (Avon) Limited, The Toronto-Dominion Bank and
certain banks and financial institutions parties thereto.(d)
10.9 Second Supplemental Agreement, dated November 1, 1994,
relating to the Loan Agreement referred to in Exhibit
10.7(a).(d)
10.10 Loan Agreement, dated June 13, 1994, among Telewest Scotland
Holdings Limited, Canadian Imperial Bank of Commerce and
certain banks and financial institutions parties thereto.(d)
10.11 Supplemental Agreement, dated November 19, 1994, relating to
the Loan Agreement referred to in Exhibit 10.8(a).(d)
10.12 Relationship Agreement, entered into as of November 22, 1994,
by and among Telewest, TINTA and US WEST.(e)
<PAGE> 184
10.13 Amendment to Relationship Agreement by and among Telewest,
Inter-national and U S WEST referred to in Exhibit 10.9(a).(b)
10.14 Shareholders' Agreement, entered into as of November 22, 1994,
between certain subsidiaries of TCI and certain subsidiaries
of U S WEST.(e)
10.15 Amendment to Shareholders Agreement referred to in Exhibit
10.10(a).(a)
10.16 Registration Rights Agreement, dated as of November 22, 1994,
between Telewest and certain subsidiaries of TCI (Identical
agreement was entered into between Telewest and certain
subsidiaries of US WEST.)(e)
10.17 Operating Agreement of T W Holdings, L.L.C.(a)
10.18 TCI International Holdings, Inc./Gerry Lenfest Guarantee
Agreements dated November 19, 1994.(a)
10.19 Guarantee Agreement, dated November 19, 1994 by Australis
Holdings Pty Limited in favor of TINTA.(e)
10.20 Guarantee Agreement, dated November 19, 1994 by TINTA in favor
of Australis Holdings Pty Limited.(e)
10.21 Amended and Restated Stock Purchase Agreement dated April 25,
1995 among Eduardo Eurnekian and the Stockholders of
Cablevision S.A., Construred S.A., Univent's S.A., Televisora
Belgrano S.A. and TINTA.(a)
10.22 Amended and Restated Stockholders Agreement dated April 25,
1995 among Eduardo Eurnekian, Basilia Jaliquias, Alberto
Antranik Eurnekian, Natalio Wende, Enrique Kevorkyan,
Sebastian Arias Duval, Lorenzo Luis Marchese, Tomas Daniel
Kolakovic and TINTA.(a)
10.23 Promissory Note dated April 25, 1995 in the amount of
$21,688,748 payable by TINTA to Eduardo Eurnekian.(a)
10.24 Promissory Note dated April 25, 1995 in the amount of
$21,688,748, payable by TINTA to Eduardo Eurnekian.(a)
10.25 Promissory Note dated April 25, 1995 in the amount of
$21,688,748, payable by TINTA to Eduardo Eurnekian.(a)
10.26 Promissory Note dated April 25, 1995 in the amount of
$21,688,748, payable by TINTA to Eduardo Eurnekian.(a)
10.27 Promissory Note dated February 9, 1996 payable by
Tele-Communications, Inc. to TINTA.(r)
10.28 United Communications International Partnership Agreement
dated as of August 30, 1990, between United International
Holdings and US WEST Cable Europe, Inc., as assigned to United
International Holdings, Inc. pursuant to the Assignment and
Assumption Agreement dated as of January 1, 1993, between
United International Holdings and United Inter-national
Holdings, Inc.(g)
<PAGE> 185
10.29 Amendment of Partnership Agreement dated November 9, 1992,
between Telewest Europe Group and United International
Holdings.(g)
10.30 Shareholders Agreement in relation to Flextech plc dated May
10, 1993, between HC Crown Corp. and TINTA.(a)
10.31 Shareholders Agreement in relation to Flextech plc dated May
10, 1995 between US WEST Marketing Resources (UK) Limited and
TINTA.(a)
10.32 Shareholders Agreement among Sumitomo Corporation, TCI Japan,
Inc., TCI International Holdings, Inc. and Jupiter
Telecommunications Co., Ltd. dated December 6, 1994.(a)
10.33 Employment Agreement between TINTA and Fred A. Vierra. +(b)
10.34 Restated and Amended Employment Agreement, dated as November
1, 1992, between the Company and John C. Malone.+(j)
10.35 Assignment and Assumption Agreement, dated as of August 4,
1994, among TCI/Liberty Holding Company, Tele-Communications,
Inc. and John C. Malone. +(l)
10.36 Form of Indemnification Agreement by and between TINTA and
each director.+(a)
10.37 Tele-Communications, Inc. 1994 Stock Incentive Plan.(i)
10.38 The Tele-Communications International, Inc. 1995 Stock
Incentive Plan.(a)
10.39 Tele-Communications, Inc. 1996 Stock Incentive Plan.(c)
10.40 Form of 1992 Non-Qualified Stock Option and Stock Appreciation
Rights Agreement. +(k)
10.41 Form of Assumption and Amended and Restated Stock Option
Agreement between the Company, TCI/Liberty Holding Company and
grantee relating to assumption of options and related stock
appreciation rights under Tele-Communications, Inc.'s 1992
Stock Incentive Plan pursuant to Tele-Communications, Inc.'s
1992 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement.+(m)
10.42 Form of 1993 Non-Qualified Stock Option and Stock Appreciation
Rights Agreement. +(k)
10.43 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement, dated as of November 12, 1993, by and between
Tele-Communications, Inc. and Jerome H. Kern. +(k)
<PAGE> 186
10.44 Assumption and Amended and Restated Stock Option Agreement
between Tele-Communications, Inc., TCI/Liberty Holding Company
and a director of Tele-Communications, Inc. relating to
assumption of options and related stock appreciation rights
granted outside of an employee benefit plan pursuant to
Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option
and Stock Appreciation Rights Agreement. +(m)
10.45 Form of Assumption and Amended and Restated Stock Option
Agreement between Tele-Communications, Inc., TCI/Liberty
Holding Company and grantee relating to assumption of options
and related stock appreciation rights granted under
Tele-Communications, Inc.'s 1992 Stock Incentive Plan pursuant
to Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option
and Stock Appreciation Agreement. +(m)
10.46 Form of 1994 Non-Qualified Stock Option and Stock Appreciation
Rights Agreement. +(l)
10.47 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A TCI Group common
stock pursuant to the Tele-Communications, Inc. 1994 Stock
Incentive Plan. +(c)
10.48 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A Liberty Media Group
common stock pursuant to the Tele-Communications, Inc. 1994
Stock Incentive Plan. +(c)
10.49 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A TCI Group common
stock pursuant to the Tele-Communications, Inc. 1996 Stock
Incentive Plan. +(c)
10.50 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A Liberty Media Group
common stock pursuant to the Tele-Communications, Inc. 1996
Stock Incentive Plan. +(c)
10.51 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A Tele-Communications
International, Inc. common stock pursuant to the
Tele-Communications International, Inc. 1995 Stock Incentive
Plan. +(c)
10.52 Form of Non-Qualified Stock Option and Stock Appreciation
Rights Agreement for 1995 Grant of Options with tandem stock
appreciation rights to purchase Series A Tele-Communications
International, Inc. common stock. +(c)
10.53 Qualified Employee Stock Purchase Plan of Tele-Communications,
Inc., as amended. +(n)
<PAGE> 187
10.54 Form of Restricted Stock Award Agreement for 1995 Award of
Series A TCI Group Restricted Stock pursuant to the
Tele-Communications, Inc. 1994 Stock Incentive Plan. +(c)
10.55 Form of Restricted Stock Award Agreement for 1995 Award of
Series A Liberty Media Group Restricted Stock pursuant to the
Tele-Communications, Inc. 1994 Stock Incentive Plan.+(c)
10.56 Form of Restricted Stock Award Agreement for 1995 Award of
Series A Tele-Communications International, Inc. Restricted
Stock pursuant to the Tele-Communications International 1995
Stock Incentive Plan.(c)
10.57 Agreement regarding International Sports Joint Venture by and
among Liberty Media Corporation, The News Corporation Limited,
TINTA and TCI dated October 30, 1995.(b)
10.58 Agreement regarding U.S. Sports Joint Venture by and among
Liberty Media Corporation, Fox, Inc., TCI and The News
Corporation Limited dated October 30, 1995.(b)
10.59 Share Exchange Agreement among certain affiliates of SBC
CableComms (UK), an affiliate of Cox Communications, Inc.,
("Cox"), Telewest, Telewest Communications plc, SBC
International, Inc., SBCC and Cox dated August 14, 1995.(h)
10.60 The Scheme of Arrangement under Section 425 of the Companies
Act of 1985 dated August 14, 1995.(h)
10.61 Indenture among Telewest and The Bank of New York dated
October 3, 1995 relating to the Senior Debentures.(b)
10.62 Subscription and Option Agreement among Flextech, Flextech
1992 plc and Scottish Television plc dated August 31, 1995.(b)
10.63 Agreement for the sale and purchase of all of the issued share
capital of various companies owned by IVS Cable Holdings
Limited among IVS Cable Holdings Limited, Flextech and
Koninkigke PTT Nederland NV dated October 17, 1995.(b)
10.64 Stock Exchange Agreement dated July 28, 1995 among certain
stockholders of Torneos y Compentencias S.A., Torneos y
Compentencias S.A. and TINTA.(b)
10.65 Subscription Agreement date November 21, 1995 among Canal +
S.A., Generale d'Images S.A., TINTA and MultiThematiques
S.A.(b)
10.66 Cooperation Agreement dated November 21, 1995 among Canal +
S.A., Generale d'Images S.A., TINTA.(b)
10.67 Side Letter among Canal + S.A., MultiThematiques S.A., TINTA
dated November 21, 1995.(b)
10.68 Side Letter from Canal + S.A. to TINTA relating to a future
50/50 holding company.(b)
<PAGE> 188
10.69 Agreement of Amendment of Partnership Agreement dated as of
May 19, 1995 between Telewest Europe Group, UIH, Joint
Venture, Inc. (formerly known as United International
Management, Inc.) and UPC.(b)
10.70 Agreement of Amendment of Third Amended and Restated
Partnership Agreement of United International Investments
dated July 13, 1995 among UA-UII, Inc., Joint Venture, Inc.,
UIH and UPC.(b)
10.71 Subscription Agreement relating to Jupiter Programming Co.,
Ltd. dated February 21, 1996 between Sumitomo Corporation and
TCI Japan, Inc.(r)
10.72 Shareholders Agreement relating to Jupiter Programming Co.,
Ltd. dated February 21, 1996 between Sumitomo Corporation, TCI
Japan, Inc., Tele-Communications International, Inc. and
Jupiter Programming Co., Ltd.(r)
10.73 Sale Contract dated February 7, 1996 between Cordillera
Comunicac-iones Limitada and Compana de Telecomunicaciones de
Chile S.A.(r)
10.74 Signal Transmission and Connection Maintenance Agreement dated
February 7, 1996 between Metroplos-Intercom S.A. and Compana
de Telecomunicaciones de Chile S.A.(r)
10.75 Shareholders Agreement in relation to Flextech p.l.c. dated
March 20, 1996 between International Family Entertainment,
Inc. and Tele-Communications International, Inc.(o)
10.76 English translation of Shareholders Agreement dated February
7, 1996 between Cordillera Communicaciones Limitada and
others, and Invercom S.A. and others. (o)
10.77 North America DTH Platform Memorandum of Understanding. (p)
10.78 Multi-Country DTH Platform Memorandum of Understanding. (p)
10.79 Stock Purchase Agreement by and among Eduardo Eurnekian and
Natalio Wende owners of Oeste Cable Color S.A. and
Cablevision.(q)
10.80 Deed of Guarantee and Indemnity and Subordination by
Independent Newspapers, plc, Tele-Communications
International, Inc., and United and Philips Communications,
B.V. as Guarantors in favour of the Governor and Company of
the Bank of Ireland.(q)
10.81 Partnership Interest Purchase Agreement by and between TCID of
Puerto Rico, Inc. and Joslin Communications Corp. (s)
10.82 Step-In Deed Relating to UK Channel Management Limited. (s)
10.83 Credit Agreement dated as of April 30, 1997, among TCI
Cablevision of Puerto Rico, Inc. as the Borrower, Certain
Commerical Lending Institutions, as the Lenders, and the Bank
of Nova Scotia, as the Administrative Agent for the Lenders.
(s)
<PAGE> 189
10.84 Tax Sharing Agreement, effective for periods on and after
October 1, 1997, among TCI and certain entities attributed to
each of the TCI Group, the Liberty Media Group and the TCI
Ventures Group, as amended by the First Amendment to the Tax
Sharing Agreement, dated as of October 1, 1997, among TCI and
certain entities attributed to each of the TCI Group, the
Liberty Media Group and the TCI Ventures Group. Incorporated
herein by reference to Exhibit 9(c)2 to TCI's Schedule 13E-4/A
(Amendment No. 2), Issuer Tender Offer Statement, dated
September 5, 1997.
10.85 Stock Purchase and Capital Contribution Agreement entered into
as of September 22, 1997 by and among (i) Tele-Communications
International, Inc., (ii) Eduardo Eurnekian et.al., (iii) CEI
Citicorp Holdings S.A. and (iv) T.I. Telefonica Internacional
de Espana S.A. (t)
10.86 Shareholders Agreement dated October 9, 1997 between (i) Tele-
Communications International, Inc., (ii) CEI Citicorp Holdings
Sociedad Anonima, (iii) Southtel Equity Corporation, (iv) T.I.
Telefonica Internacional de Espana S.A. and (v) Martin
Eurnekian. (t)
10.87 Management Agreement dated October 9, 1997 by and between
Cablevision S.A. and TINTA Cable Management, Inc., a wholly
owned subsidiary of Tele-Communications International, Inc.
(t)
10.88 Consulting Agreement dated as of January 1, 1998 between
Tele-Communications International, Inc. and Fred A. Vierra.
21 Subsidiaries of the Registrant.
23 Consent of Experts and Counsel.
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG
27 Financial Data Schedule.
- ----------
(a) Incorporated by reference to TINTA's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 11,
1995 (Registration No. 33-91876).
(b) Incorporated by reference to TINTA's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on December
15, 1995 (Registration No. 33-80491).
(c) Incorporated by reference to Tele-Communications, Inc.'s Annual
Report on Form 10-K dated December 31, 1995.
(d) Incorporated by reference to Telewest Communications plc's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on April 29, 1994 (Registration No. 33-79398).
(e) Incorporated by reference to Telewest Communications plc's Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1994 on Form
10-K filed with the Securities and Exchange Commission (Commission
File Number 1-24150).
<PAGE> 190
(f) Incorporated by reference to Australis Media Limited's Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission on May 16, 1995 (Registration No. 33-87210).
(g) Incorporated by reference to United International Holding, Inc.'s
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on July 22, 1993 (Registration No. 33-61376).
(h) Incorporated by reference to Telewest Communications plc's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on August 14, 1995 (Commission File Number 1-24250).
(i) Incorporated herein by reference to Tele-Communications, Inc.'s
Form S-4 Registration Statement (Commission File No. 33-54263).
(j) Incorporated herein by reference to Tele-Communications, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1992, as
amended by Form 10-K/A for the year ended December 31, 1992
(Commission File No. 0-5550).
(k) Incorporated herein by reference to Tele-Communications, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1993, as
amended by Form 10-K/A for the year ended December 31, 1993
(Commission File No. 0-5550).
(l) Incorporated herein by reference to Tele-Communications, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1994, as
amended by Form 10-K/A for the year ended December 31, 1994
(Commission File No. 0-2041).
(m) Incorporated herein by reference to Tele-Communications, Inc.'s
Post Effective Amendment No. 1 to Form S-4 Registration Statement
on Form S-8 Registration Statement (Commission File No. 33-54263).
(n) Incorporated herein by reference to the Tele-Communications, Inc.
Registration Statement on Form S-8 (Commission File No. 33-57635).
(o) Incorporated herein by reference to Tele-Communications
International, Inc.'s Quarterly Report on Form 10-Q dated March 31,
1996.
(p) Incorporated herein by reference to Tele-Communications
International, Inc.'s Quarterly Report on Form 10-Q dated June 30,
1996.
(q) Incorporated herein by reference to Tele-Communications
International, Inc.'s Quarterly Report on Form 10-Q dated September
30, 1996.
(r) Incorporated herein by reference to Tele-Communications
International, Inc.'s Annual Report on Form 10-K dated December 31,
1995.
(s) Incorporated herein by reference to Tele-Communications
International, Inc.'s Quarterly Report on Form 10-Q dated March 31,
1997.
(t) Incorporated herein by reference to Tele-Communications,
International, Inc.'s Current Report on Form 8-K dated October 24,
1997.
+ Constitutes management contract or compensatory arrangement.
<PAGE> 1
EXHIBIT 10.88
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated as of January 1, 1998 (this "Agreement"),
between TELE-COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and
FRED A. VIERRA, now residing at 77 Glenmoor Drive, Englewood, Colorado 80110
("Consultant").
On the date hereof, Consultant resigned as an officer, director and
employee of the Company, its subsidiaries and its controlled affiliates, except
that he shall remain a director and Vice Chairman of the Board of Directors of
Tele-Communications International, Inc. ("TINTA") for so long as he is elected
to such Board and such other Boards as requested by the Chief Executive Officer
of TCI for so long as so requested.
This Consulting Agreement replaces the Employment Agreement, dated as of
November 1, 1992 ("Employment Agreement"), between the Company and Consultant
(and all other employment agreements between the Company, any of its
subsidiaries or affiliates and Consultant), and sets forth the terms and
conditions of the consultancy arrangement between the Company and Consultant.
In consideration of the mutual covenants and agreements herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties, intending to be legally bound, do
hereby agree as follows:
1. Term and Termination.
(a) Term. The term of Consultant's consultant arrangement under this
Agreement (the "Term") shall commence on the date hereof and end on December 31,
2002. During the Term, Consultant agrees to serve the Company as a consultant as
provided herein upon and subject to the terms and conditions set forth in this
Agreement.
(b) Termination by the Company. Consultant's consultancy by the Company
may be terminated by the Company only as provided in clauses (i) and (ii) below.
(i) Upon the death of Consultant. The Company shall, as promptly as
practicable following Consultant's death, pay to Consultant's designated
beneficiary or beneficiaries in a lump sum an amount equal to one year's
compensation under Section 4(a) of this Agreement. The phrase "designated
beneficiary or beneficiaries" shall mean the person or persons named by
Consultant from time to time in a signed designation filed with the Company
from time to time.
(ii) Upon giving written notice of such termination to Consultant six
(6) months prior to the effective date thereof and by paying to Consultant
in a lump sum upon such termination all remaining compensation that would
have been payable under
<PAGE> 2
Section 4(a) hereof if this Agreement remained in full force and
effect for the full balance of the Term.
2. Services to Be Rendered by Consultant.
Consultant agrees to serve the Company as a consultant (when and
for what purpose as then requested by the Company's Chief Executive Officer) to
advise the Company's Chief Executive Officer regarding the allocation of the
Company's resources and other matters generally and with respect to the
international operations of the Company in particular. If Consultant continues
to serve as, or is elected, a director of the Company's subsidiaries or
affiliates, Consultant will serve in any such capacities without further
compensation except as may be decided by the Company at the Company's sole
election. Consultant shall discharge his responsibilities and shall in all
other respects serve the Company faithfully and to the best of his ability.
3. Time to Be Devoted by Consultant.
(a) If Consultant is requested to provide consultancy services to the
Company, Consultant will, where practical, be given seven days' notice. In no
event will Consultant be required to provide more than 700 hours per year in
consultancy services to the Company.
(b) Company shall provide to Consultant an office at the Company's
headquarters and secretarial service if such is required by Consultant to
reasonably provide any Company-requested consultancy services.
4. Compensation Payable to Consultant.
(a) The Company shall pay to Consultant a sum equal to the rate of
$700,000 per annum.
(b) Consultant's annual payments shall be paid in accordance with
the Company's regular policy but not less frequently than once a month.
(c) Of each regular payment, approximately 35.714% shall be deferred
(the "monthly deferred amount"), so as to result in the deferral of payment of
Consultant's salary at the annual rate of approximately $250,000 per annum.
Each such monthly deferred amount shall bear interest, compounded annually, at
the rate of 8% per annum, from the first day of the month of deferral to, but
not including, the Determination Date. A statement will be furnished to
Consultant annually, on or about February 1st of each year, stating the sum of
the monthly deferred amounts and the amount of interest accrued thereon as of
the preceding December 31st. As used herein, "Determination Date" shall mean
the first business day of the first full calendar month following the later of
(i) December 31, 2002, and (ii) the date Consultant ceases to be a consultant
pursuant to this Agreement.
<PAGE> 3
(d) The sum of the monthly deferred amounts pursuant to Section 4(c)
above plus all interest accrued thereon to the Determination Date (the "total
deferred amount") shall be calculated as of the Determination Date and shall be
paid to Consultant in substantially equal monthly payments over a 240-month
period commencing on the Determination Date and continuing on the first day of
each calendar month thereafter until paid in full. Each monthly payment of the
total deferred amount shall be accompanied by a payment of interest thereon
computed at the rate of 8% per annum, compounded annually, from and including
the Determination Date to the date of such payment.
(e) If Consultant dies prior to the Determination Date, the amount
payable pursuant to Section 4(d) above shall be calculated as promptly as
practicable but in no event later than the first business day of the first full
calendar month following the date of his death (which date of calculation shall
for this purpose be the Determination Date) and shall be paid forthwith in a
lump sum to his designated beneficiary or beneficiaries. If Consultant dies
after the Determination Date and before the expiration of the period during
which the deferred payments provided for in Section 4(d) above are to be paid to
him, the remaining deferred payments shall be paid forthwith in a lump sum to
Consultant's designated beneficiary or beneficiaries. The phrase "designated
beneficiary or beneficiaries" shall mean the person or persons named from time
to time by Consultant in a signed instrument filed with the Company. If the
designation made in any such signed instrument shall for any reason be
ineffective, the phrase "designated beneficiary or beneficiaries" shall mean
Consultant's estate.
(f) The amount of deferred compensation payable hereunder (together with
the interest applicable thereto) shall not in any way be reserved or held in
trust by the Company. Neither Consultant nor any designated beneficiary or
personal representative shall have any rights against the Company in respect of
such deferred payments other than the rights of an unsecured creditor of the
Company. Deferred payments provided for herein shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, and shall not in any manner be liable or subject to the
debts, contracts, liabilities, engagements or torts of Consultant, nor of any
designated beneficiary or personal representative. The payment to Consultant of
such deferred payments shall be subject to the further condition that
Consultant shall comply with the provisions of Section 9 of this Agreement
during the entire payment period and Consultant shall comply with the
provisions of Sections 8 and 11 of this Agreement, if said provisions are
applicable by their terms, for the first two (2) years of the payment period.
5. Expenses.
The Company shall reimburse Consultant for the reasonable amount of
dining, hotel, traveling, entertainment and other expenses necessarily incurred
by Consultant in the discharge of his consulting obligations hereunder.
<PAGE> 4
6. Executive Benefit Plans
During the Term, Consultant shall be entitled to participate in and
to be accorded all rights and benefits under all group insurance policies
maintained or established by the Company for the benefit of its employees, and
for this purpose Consultant shall be deemed to be a full-time employee of the
Company during such period. Further, during the period that continues after the
Term ("Deferred Compensation Period") that any deferred compensation is payable
to Consultant pursuant to Section 4 of this Agreement, Consultant shall
continue to be entitled to participate in, and to be accorded all rights and
benefits under, all group insurance policies maintained or established by the
Company for the benefit of its employees, and for this purpose Consultant shall
be deemed to be a full-time employee of the Company during such period. In
addition, during the Term and Deferred Compensation Period, Consultant shall be
entitled to free cable television service if Consultant has residences located
within areas serviced by the Company's cable television services.
7. Indemnification.
The Company will indemnify and hold harmless Consultant, to the
fullest extent permitted by applicable law, in respect of any liability,
damage, cost or expense (including reasonable counsel fees) incurred in
connection with the defense of any claim, action, suit or proceeding to which
he is a party, or threat thereof, by reason of his being or having been an
officer or director of, or a consultant to, the Company or any subsidiary of
the Company, or his serving or having served at the request of the Company as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, business organization, enterprise or other
entity, including service with respect to employee benefit plans. Without
limiting the generality of the foregoing, the Company will pay the expenses
(including reasonable counsel fees) of defending any such claim, action, suit
or proceeding in advance of its final disposition, upon receipt of an
undertaking by Consultant to repay all amounts advanced if it should ultimately
be determined that Consultant is not entitled to be indemnified under this
Section.
8. Noncompetition.
Consultant agrees that during the Term he will not, directly or
indirectly, as principal or agent, or in any other capacity, own, manage,
operate, participate in or be employed by or otherwise be interested in, or
connected in any manner with, any person, firm, corporation or other enterprise
which directly competes in a material respect with the business of the Company
or any of its majority-owned subsidiaries as it is then conducted. Nothing
herein contained shall be construed as denying Consultant (i) the right to own
securities of any such corporation which is listed on a national securities
exchange or quoted in the NASDAQ System to the extent of an aggregate of 5% of
the amount of such securities outstanding of (ii) provide consultancy services
to others which may violate the provisions of the first sentence of this
Section if the Company's Chief Executive Officer approves in writing of such
provision of consultancy services.
<PAGE> 5
9. Confidentiality.
Consultant agrees that during the Term (otherwise than in the performance
of his duties hereunder) and thereafter, not to, directly or indirectly, make
use of, or divulge to any person, firm, corporation, entity or business
organization, and he shall use his best efforts to prevent the publication or
disclosure of, any confidential or proprietary information concerning the
business, accounts or finances of, or any of the methods of doing business used
by the Company or of the dealings, transactions or affairs of the Company or
any of its customers which have or which may have come to his knowledge; but
this Section 9 shall not prevent Consultant from responding to any subpoena,
court order or threat of other legal duress, provided Consultant notifies the
Company thereof with reasonable promptness to that the Company may seek a
protective order or other appropriate relief.
10. Delivery of Materials.
Consultant agrees that upon the expiration of the Term he will deliver to
the Company all documents, papers, materials and other property of the Company
relating to its affairs which may then be in his possession or under his
control.
11. Noninterference.
Consultant agrees that he will not during the Term solicit the employment
of any employee of the Company on behalf of any other person, firm,
corporation, entity or business organization or otherwise interfere with the
employment relationship between any employee or officer of the Company and the
Company.
12. Remedies of the Company.
Consultant agrees that, in the event of a material breach by Consultant of
this Agreement, in addition to any other rights that the Company may have
pursuant to this Agreement, the Company shall be entitled, if it so elects, to
institute and prosecute proceedings at law or in equity to obtain damages with
respect to such breach or to enforce the specific performance of this Agreement
by Consultant or to enjoin Consultant from engaging in any activity in
violation hereof. Consultant agrees that because Consultant's services to the
Company are of such a unique and extraordinary character, a suit at law may be
an inadequate remedy with respect to a breach by Consultant of Sections 8, 9,
10, and 11 hereof, and that upon any such breach or threatened breach by him of
such Sections the Company shall be entitled, in addition to any other lawful
remedies that may be available to it, to injunctive relief.
13. Notices.
All notices to be given hereunder shall be deemed duly given when delivered
personally in writing or mailed, certified mail, return receipt requested,
postage prepaid and addressed as follows:
<PAGE> 6
(a) If to be given to the Company:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: Dr. John C. Malone
with a copy similarly addressed
and marked to the attention of
the Legal Department
(b) If to be given to Consultant:
Mr. Fred A. Vierra
77 Glenmoor Drive
Englewood, CO 80110
or to such other address as a party may request by notice given in accordance
with this Section 13.
14. Miscellaneous.
(a) This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and replaces and supersedes as of the
date hereof any and all prior agreements and understandings with respect to
Consultant's employment by the Company, whether oral or written, between the
parties hereto, including, without limitation, the Employment Agreement. This
Agreement may not be changed nor may any provision hereof by waived except by
an instrument in writing duly signed by the party to be charged. This Agreement
shall be interpreted, governed and controlled by the law of the State of
Colorado without reference to principles of conflict of laws.
(b) All options to acquire the Company's TCI Group, Liberty Media Group
or Ventures Group, or TINTA's, Series A Common Stock currently held by
Consultant which by their terms are not currently exercisable are now currently
exercisable. Consultant, as long as Consultant is a consultant hereunder, shall
be deemed to be an employee of the Company for purposes of the option
agreements under which said options were granted.
(c) The TINTA restricted stock granted to Consultant shall vest upon the
expiration of the terms provided by agreements evidencing their respective
grants; and, as long as
<PAGE> 7
Consultant is a consultant hereunder, Consultant shall be deemed to be an
employee of TINTA for purposes of the agreements under which such restricted
stock awards were granted.
IN WITNESS WHEREOF, this Agreement has been executed as of the day
and year first above written.
TELE-COMMUNICATIONS, INC.
By:
---------------------
------------------------
Fred A. Vierra
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
STATE OR JURISDICTION
OR INCORPORATION
SUBSIDIARY OR ORGANIZATION TRADE NAMES
- ---------- --------------- -----------
<S> <C> <C>
A table of the subsidiaries of Tele-Communications International, Inc. as of December 31, 1997, is set forth below, indicating as
to each the state or the jurisdiction of incorporation or organization and the names under which such subsidiaries do business
(Trade Names.)
Subsidiaries not included in the table are inactive or, considered in the aggregate as a single subsidiary, would not constitute a
significant subsidiary.
Tele-Communications International, Inc. DE TINTA
- --------------------------------------- TCI Squared, Inc.
Admi, Inc. DE
Bresnan International Partners (Chile), L.P. DE
Bresnan International Partners (Poland), L.P. DE
Cable Programme Partners - 1 Limited Partnership DE
Cable Programme Partners(1) Ltd. UNITED KINGDOM
Cablevision S.A. ARGENTINA
Carribbean Services Company, Inc. CO
Cathay Television and Communication Company CO
Construred, S.A. ARGENTINA
Discovery (UK, Ltd.) UNITED KINGDOM
Fibertel-TCI2 ARGENTINA
Flextech plc UNITED KINGDOM
International Sports Programming Partners [gp] DE
ISP Distribution LP DE
ISP Transponder LP DE
ISP US Deportive LP DE
Jupiter Programming Co., Ltd. JAPAN
Liberty/TINTA Australia, Inc. DE
Liberty/TINTA Distribution, Inc. DE
Liberty/TINTA LLC DE
Liberty/Tinta Middle East LLC DE
Liberty/TINTA Sport Equity LLC DE
Liberty/TINTA World LLC DE
LNT International Sports Programming (Distribution) Ltd. CAYMAN ISLANDS
LNT International Sports Programming (Australia) Ltd. CAYMAN ISLANDS
LNT International Sports Programming (Latin America) Ltd. CAYMAN ISLANDS
LNT International Sports Programming Partners Australia [gp] DE
Melita Cable Holdings Ltd. (Malta LLC) MALTA
Melita Cable TV Limited (Malta LLC) MALTA
Melita Partnership [gp] CO
Multithematiques FRANCE
</TABLE>
Page 1
<PAGE> 2
<TABLE>
<CAPTION>
STATE OR JURISDICTION
OF INCORPORATION
SUBSIDIARY OR ORGANIZATION TRADE NAMES
- ---------- --------------- -----------
<S> <C> <C>
TCI-Australia, Inc. CO
TCI Argentina, Inc. CO
TCI Cable Holding Company I DE
TCI Cable Programme Partners, Inc. CO
TCI Cablevision of Puerto Rico, Inc. DE
TCI Cathay TV, Inc. CO
TCI Chile, Inc. CO
TCI DTH Mexico, Inc. CO
TCI International DTH Service, Inc. CO
TCI International Investments Ltd. UNITED KINGDOM
TCI International Partnership Holdings, Inc. CO
TCI Japan, Inc. CO
TCI Movies Australia Pty. Limited AUSTRALIA
TCI Multicountry DTH, Inc. CO
TCI Poland, Inc. CO
Televisora Belgrano, S.A. ARGENTINA
TeleWest Communication PLC UNITED KINGDOM
TeleWest Europe Group [gp] CO
Tevel Israel International Communications Ltd. ISRAEL
TINTA Sports Programming, Inc. DE
Tishdoret Achzakot Ltd. ISRAEL
TW Holdings, L.L.C. CO
UA-France, Inc. CO
UA-UII Management, Inc. CO
UA-UII, Inc. CO
UA European Theatres, Inc. CO
UCT-Netherlands, B.V. NETHERLANDS
UII-Ireland Limited Liability Company UT
UII-Ireland, Ltd [gp] CO
UII Management [gp] CO
United Artists (Learning Channel) Ltd. UNITED KINGDOM
United Artists Cable Television International Holdings, Inc. CO
United Artists Cable Television International Ltd. UNITED KINGDOM
United Artists Cable Television UK Holdings, Inc. DE
United Artists European Broadcasting Ltd. UNITED KINGDOM
United Artists European Holdings Limited UNITED KINGDOM
United Artists International, Inc. CO
United Artists Programming Europe, Inc. CO
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
STATE OR JURISDICTION
OF INCORPORATION
SUBSIDIARY OR ORGANIZATION TRADE NAMES
- ---------- --------------- -----------
<S> <C> <C>
United Artists Programming International, Inc. CO
United Artists, B.V. NETHERLANDS
United International Investments [gp] CO
Univent's S.A. ARGENTINA
</TABLE>
Page 3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tele-Communications International, Inc.:
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-16021 and 333-16023) on Form S-8 of Tele-Communications International,
Inc. of our report dated March 20, 1998, relating to the consolidated balance
sheets of Tele-Communications International, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears in the December 31, 1997
annual report on Form 10-K of Tele-Communications International, Inc.
KPMG Peat Marwick LLP
Denver, Colorado
March 23, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Telewest Communications plc
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-16021 and 333-16023) on Form S-8 of Tele-Communications International,
Inc. of our report dated March 19, 1998, relating to the consolidated balance
sheet of Telewest Communications plc and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations and cash flows
for each of the years in the three-year period ended December 31, 1997, which
report appears in the December 31, 1997 annual report on Form 10-K of
Tele-Communications International, Inc.
KPMG Audit Plc
Chartered Accountants
Registered Auditors
London, England
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,065
<ALLOWANCES> 0
<INVENTORY> 1,517
<CURRENT-ASSETS> 0
<PP&E> 89,869
<DEPRECIATION> 32,348
<TOTAL-ASSETS> 1,394,000
<CURRENT-LIABILITIES> 0
<BONDS> 390,042
0
0
<COMMON> 118,668
<OTHER-SE> 845,613
<TOTAL-LIABILITY-AND-EQUITY> 1,394,000
<SALES> 0
<TOTAL-REVENUES> 219,834
<CGS> 0
<TOTAL-COSTS> 130,794
<OTHER-EXPENSES> 53,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,051
<INCOME-PRETAX> (165,303)
<INCOME-TAX> (44,954)
<INCOME-CONTINUING> (120,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (120,349)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
