<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-26264
TELE-COMMUNICATIONS INTERNATIONAL, INC.
--------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1289408
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of Tele-Communications International,
Inc.'s common stock (net of shares held in treasury) as of October 31, 1998,
was:
Series A common stock - 103,640,680 shares; and
Series B common stock - 11,700,000 shares.
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ------------
Assets amounts in thousands
- ------
<S> <C> <C>
Cash and cash equivalents (note 3) $ 13,341 --
Trade and other receivables, net (note 11) 17,587 5,065
Investment in Telewest Communications plc ("Telewest"),
accounted for under the equity method (note 6) 432,465 324,417
Investment in Cablevision S.A. ("Cablevision"), accounted
for under the equity method (note 5) 224,555 239,379
Investment in other affiliates, accounted for
under the equity method, and related
receivables (note 7) 599,362 602,325
Other investments (note 8) 60,314 33,012
Property and equipment, at cost:
Land 415 415
Distribution systems 71,879 78,185
Support equipment and buildings 14,876 11,269
---------- ----------
87,170 89,869
Less accumulated depreciation 36,517 32,348
---------- ----------
50,653 57,521
---------- ----------
Franchise costs and other intangible assets 178,936 76,890
Less accumulated amortization 14,197 11,494
---------- ----------
164,739 65,396
---------- ----------
Deferred income tax asset 78,968 54,547
Deferred financing costs and other assets,
net of amortization 15,579 12,338
---------- ----------
$1,657,563 1,394,000
========== ==========
</TABLE>
(continued)
I-1
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
Liabilities and Stockholders' Equity amounts in thousands,
- ------------------------------------ except share amounts
<S> <C> <C>
Cash overdraft $ -- 1,003
Accounts payable 15,485 672
Accrued liabilities 15,345 19,490
Debt (note 9) 646,032 390,042
Other liabilities 24,030 18,482
----------- -----------
Total liabilities 700,892 429,689
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized 10,000,000 shares; none issued -- --
Series A Common Stock, $1 par value
Authorized 300,000,000 shares, issued
107,046,074 in 1998 and 106,997,880 in 1997 107,046 106,998
Series B Common Stock, $1 par value
Authorized 12,000,000 shares, issued
11,700,000 shares 11,700 11,700
Additional paid-in capital 1,309,276 1,285,904
Accumulated deficit (418,730) (325,805)
Accumulated other comprehensive earnings, net of
taxes (note 1) 12,443 5,640
----------- -----------
1,021,735 1,084,437
Treasury stock, at cost, 3,382,200 shares and 3,370,000
shares of Series A Common Stock in 1998 and 1997,
respectively (42,216) (42,014)
Due to related parties (note 10) (22,848) (78,112)
----------- -----------
Total stockholders' equity 956,671 964,311
----------- -----------
Commitments and contingencies
(notes 5, 6, 7, 8, 10, 11 and 12) $ 1,657,563 1,394,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communicaitons, Inc.)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ---------------------
1998 1997 1998 1997
--------- -------- -------- --------
amounts in thousands
<S> <C> <C> <C> <C>
Revenue $ 17,884 72,465 43,556 206,621
Operating costs and expenses:
Operating:
Charges from related parties (note 10) 1,032 7,117 3,800 18,992
Other 9,511 37,838 21,072 104,382
Corporate general and administrative:
Allocated from related parties (note 10) 686 5,270 7,121 7,883
Other 3,732 3,390 13,779 8,557
Year 2000 costs (note 12) 209 -- 209 --
Depreciation and amortization 3,876 16,730 8,666 49,583
-------- -------- -------- --------
19,046 70,345 54,647 189,397
-------- -------- -------- --------
Operating income (loss) (1,162) 2,120 (11,091) 17,224
Other income (expense):
Share of losses of Telewest (note 6) (26,366) (37,880) (90,083) (111,338)
Share of losses of Cablevision (note 5) (6,817) -- (14,408) --
Share of losses of other affiliates (note 7) (33,917) (25,717) (79,323) (74,505)
Interest expense:
Related parties (note 10) (746) (560) (1,121) (1,724)
Other (6,762) (9,788) (17,650) (26,981)
Interest income:
Related parties (note 10) 55 588 1,692 4,340
Other -- 789 1,099 2,196
Gain on disposition of assets, net -- 58,355 9,165 58,355
Gain on issuance of stock by equity
investee (note 6) 57,965 -- 57,965 --
Minority interests' share of earnings -- (4,283) -- (8,616)
Other, net (44) (341) 925 4,057
-------- -------- -------- --------
(16,632) (18,837) (131,739) (154,216)
-------- -------- -------- --------
Loss before income taxes (17,794) (16,717) (142,830) (136,992)
Income tax benefit 6,259 600 49,905 55,378
-------- -------- -------- --------
Net loss $(11,535) (16,117) (92,925) (81,614)
======== ======== ======== ========
Basic and diluted net loss per common share (note 2) $ (.10) (.14) (.81) (.70)
======== ======== ======== ========
Comprehensive loss (note 1) $ (1,361) (30,347) (86,122) (106,465)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Additional comprehensive Treasury
Preferred Common Stock paid-in Accumulated earnings, stock,
----------------------
stock Series A Series B capital deficit net of taxes at cost
--------- --------- --------- --------- ----------- ------------ ---------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ -- 106,998 11,700 1,285,904 (325,805) 5,640 (42,014)
Net loss -- -- -- -- (92,925) -- --
Repurchase of common shares -- -- -- -- -- -- (202)
Issuance of common shares
in connection with exercise
of stock options -- 25 -- 444 -- -- --
Issuance of common shares
to executive officer -- 23 -- 477 -- -- --
Recognition of stock
compensation related
to restricted stock awards -- -- -- 768 -- -- --
Excess of consideration
received over basis of
net assets sold to
related party (note 10) -- -- -- 21,683 -- -- --
Foreign currency
translation adjustment -- -- -- -- -- 6,803 --
Change in due from
related parties (note 10) -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 $ -- 107,046 11,700 1,309,276 (418,730) 12,443 (42,216)
========= ========= ========= ========= ========= ========= =========
<CAPTION>
Due from Total
related stockholders'
parties equity
--------- ------------
<S> <C> <C>
Balance at January 1, 1998 (78,112) 964,311
Net loss -- (92,925)
Repurchase of common shares -- (202)
Issuance of common shares
in connection with exercise
of stock options -- 469
Issuance of common shares
to executive officer -- 500
Recognition of stock
compensation related to
restricted stock awards -- 768
Excess of consideration
received over basis of
net assets sold to
related party (note 10) -- 21,683
Foreign currency
translation adjustment -- 6,803
Change in due from
related parties (note 10) 55,264 55,264
--------- ---------
Balance at September 30, 1998 (22,848) 956,671
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1998 1997
----------- ----------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(92,925) (81,614)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,666 49,583
Stock compensation 12,513 7,367
Payments of stock compensation (14,705) --
Share of losses of Telewest 90,083 111,338
Share of losses of Cablevision 14,408 --
Share of losses of other affiliates 79,323 74,505
Gain on issuance of stock by equity investee (57,965) --
Gain on disposition of assets (9,165) (58,355)
Minority interests' share of earnings -- 8,616
Other non-cash charges 1,999 3,410
Deferred income tax benefit (36,742) (71,266)
Intercompany tax allocation (13,374) 6,064
Changes in operating assets and liabilities, net of the
effect of the deconsolidation of Flextech p.l.c.:
Change in receivables 4,999 (572)
Change in payables, accruals, other liabilities and the cash
intercompany account included in due from related parties (10,546) (17,118)
-------- --------
Net cash provided by (used in) operating activities $(23,431) 31,958
-------- --------
</TABLE>
(continued)
I-5
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1998 1997
------------ ----------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from investing activities:
Investments in and loans to affiliates and others $(250,723) (107,571)
Proceeds from disposition of assets 31,683 52,959
Capital expended for property and equipment (6,543) (47,882)
Cash paid for acquisitions, net (30,855) (23,559)
Deposit received on sale of interest in Cablevision S.A -- 21,000
Repayments received on loans to affiliates 18,399 19,415
Effect of the deconsolidation of Flextech p.l.c. on cash and cash
equivalents -- (38,142)
Other, net (1,531) (507)
--------- ---------
Net cash used in investing activities (239,570) (124,287)
--------- ---------
Cash flows from financing activities:
Collections on note receivable from related party 88,707 149,245
Borrowings from related party 154,401 --
Repayments of borrowings from related party (10,434) --
Borrowings of debt 45,000 206,360
Repayments of debt (495) (215,081)
Repurchases of common stock (202) (42,014)
Proceeds from issuance of common stock 366 --
Payment of deferred financing costs -- (950)
Change in cash overdraft (1,001) --
--------- ---------
Net cash provided by financing activities 276,342 97,560
--------- ---------
Net increase in cash and cash equivalents 13,341 5,231
Cash and cash equivalents:
Beginning of period -- 44,192
--------- ---------
End of period $ 13,341 49,423
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-6
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1998
(unaudited)
(1) Basis of Presentation
---------------------
Tele-Communications International, Inc. ("TINTA" or the "Company"), a
majority-owned subsidiary of Tele-Communications, Inc. ("TCI"), operates
multi-channel video and telecommunications distribution networks in, and
provides diversified programming services to, selected markets outside the
United States.
TINTA's common stock, par value $1.00 per share is comprised of
Tele-Communications International Inc. Series A Common Stock ("Series A
Stock") and Tele-Communications International Inc. Series B Common Stock
("Series B Stock" and together with Series A Stock, the "Common Stock"). At
September 30, 1998, TCI owned approximately 85% of the aggregate issued and
outstanding TINTA Common Stock and 92% of the aggregate voting interest
represented by the TINTA Common Stock.
TCI's common stock, par value $1.00 per share, is comprised of six series:
Tele-Communications, Inc. Series A TCI Group Common Stock,
Tele-Communications, Inc. Series B TCI Group Common Stock, (collectively,
the "TCI Group Stock"), Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, Tele-Communications, Inc. Series B Liberty Media Group
Common Stock, (collectively, the "Liberty Group Stock"),
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock and
Tele-Communications, Inc. Series B TCI Ventures Group Common Stock,
(collectively, the "TCI Ventures Group Stock").
The TCI Group Stock is intended to reflect the separate performance of the
"TCI Group," which is comprised of TCI's domestic cable and communications
business. The Liberty Group 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. The TCI Ventures Group Stock is intended to reflect the
separate performance of the "TCI Ventures Group," which is comprised of
TCI's principal international assets and businesses and substantially all
of TCI's non-cable and non-programming domestic assets and businesses.
TINTA is attributed to TCI Ventures Group.
(continued)
I-7
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
On August 28, 1997, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue the TCI Ventures Group 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
of Tele-Communications, Inc. Series A TCI Ventures Group Common Stock and
32,532,800 shares 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.
During the nine months ended September 30, 1998 and 1997, the most
significant entities that were reflected in the Company's consolidated
financial statements on a consolidated basis were engaged in (i) the
multi-channel video distribution business (the "cable" business) in Puerto
Rico (the "Puerto Rico Subsidiary") and in Buenos Aires, Argentina (through
the October 1, 1997 deconsolidation of Cablevision, see note 5) and (ii)
the distribution and production of programming for multi-channel video
distribution systems (the "programming business") in Argentina (since the
August 21, 1998 acquisition of Pramer, SCA, see note 4).
As further described in note 10, the accompanying consolidated statements
of operations separately present certain allocated corporate expenses of
TCI. Although such allocated corporate expenses are not necessarily
indicative of the costs that would have been incurred by the Company on a
stand-alone basis, management believes the allocated amounts are
reasonable.
The accompanying interim consolidated financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the results
of such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These unaudited
interim consolidated financial statements should be read in conjunction
with the Company's December 31, 1997 audited financial statements and notes
thereto.
(continued)
I-8
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
("SFAS 130"). The Company has reclassified its prior period consolidated
balance sheet and consolidated statement of operations to conform to the
requirements of SFAS 130. SFAS 130 requires that all items which are
components of comprehensive earnings or losses be reported in a financial
statement in the period in which they are recognized. The Company has
included cumulative foreign currency translation adjustments in other
comprehensive earnings that are recorded directly in stockholders' equity.
Pursuant to SFAS 130, this item is reflected, net of related tax effects,
as a component of comprehensive losses in the Company's consolidated
statements of operations, and is included in accumulated other
comprehensive earnings in the Company's consolidated balance sheets and
statement of stockholders' equity.
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 consolidated statements of operations. At
September 30, 1998, 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.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133"), which is effective for
all fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities by requiring that all derivative instruments be reported as
assets or liabilities and measured at their fair values. Under SFAS 133,
changes in the fair values of derivative instruments are recognized
immediately in earnings unless those instruments qualify as hedges of the
(1) fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign
currency exposures of net investments in foreign operations. Although
management of the Company has not completed its assessment of the impact of
SFAS 133 on its consolidated results of operations and financial position,
management estimates that the impact of SFAS 133 will not be material.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
(continued)
I-9
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Unless otherwise indicated, convenience translations of foreign currencies
into U.S. dollars are calculated using the applicable spot rate at
September 30, 1998, as published in the Wall Street Journal.
(2) Loss Per Common Share
---------------------
Basic earnings (loss) per share ("EPS") is measured as the income or loss
attributable to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to basic
EPS but presents the dilutive effect on a per share basis of potential
common shares as if they had been converted at the beginning of the periods
presented. Potential common shares that have an anti-dilutive effect are
excluded from diluted EPS.
The basic and diluted loss attributable to TINTA stockholders per common
share was computed by dividing the net loss attributable to TINTA
stockholders by a weighted average number of common shares outstanding of
(i) 115.3 million for each of the three month periods ended September 30,
1998 and 1997, and (ii) 115.3 million and 116.6 million for the nine months
ended September 30, 1998 and 1997, respectively. Potential common shares
were not included in the computation of weighted average shares outstanding
because their inclusion would be anti-dilutive.
At September 30, 1998, there were 15.4 million potential common shares
consisting of performance awards and convertible securities that could
potentially dilute future earnings per share calculations in periods of net
income. Such potential common share amount does not take into account the
assumed number of shares that would be repurchased by TINTA upon the
exercise of the performance awards and the conversion of TINTA's
convertible securities. No material changes in the weighted average
outstanding shares or potential common shares occurred after September 30,
1998.
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
Cash paid for interest was $21.3 million and $25.5 million during the nine
months ended September 30, 1998 and 1997, respectively. Cash paid for
income taxes was not significant during the nine months ended September 30,
1998 and was $11.7 million during the nine months ended September 30, 1997.
(continued)
I-10
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Cash paid for acquisitions is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1998 1997
------ ------
amounts in thousands
<S> <C> <C>
Recorded value of assets acquired $ 117,089 63,556
Issuance of notes payable (65,000) --
Liabilities assumed (including debt of $65.0 million and $32.3
million in 1998 and 1997, respectively) (21,234) (38,482)
Increase in minority interests in equity of subsidiaries -- (1,515)
--------- ---------
Cash paid for acquisitions $ 30,855 23,559
========= =========
</TABLE>
The effects of changing the method of accounting for the Company's
ownership interest in Flextech p.l.c. ("Flextech"), effective January 1,
1997, from the consolidation method to the equity method (see note 7) are
summarized below (amounts in thousands):
<TABLE>
<S> <C>
Assets reclassified to equity investments $ 177,003
Liabilities reclassified to equity investments
(72,512)
Minority interests in equity of subsidiary reclassified to
equity investments (142,633)
---------
Decrease in cash and cash equivalents $ (38,142)
=========
</TABLE>
(4) Acquisitions
------------
On August 21, 1998, TINTA purchased 100% of the issued and outstanding
common stock of Pramer SCA ("Pramer"), an Argentine programming company,
for $32 million in cash and the issuance of notes payable in the amount of
$65 million (the "Pramer Notes"). See note 9. In accordance with the
purchase method of accounting, the purchase price was allocated using the
estimated fair values of the net assets acquired and Pramer has been
included in the Company's consolidated financial statements since the
August 21, 1998 acquisition date. The $101 million excess of the purchase
price over the fair value of the tangible net assets acquired is being
amortized over ten years.
(continued)
I-11
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
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 9.
(5) Cablevision
-----------
On October 9, 1997, TINTA sold a portion of its 51% interest in Cablevision
to unaffiliated third parties (the "Buyers") for cash proceeds of $120.0
million. In addition, on October 9, 1997, Cablevision issued 3,541,829
shares of stock in the aggregate to the Buyers for $320.0 million. The 1997
transactions (collectively, the "Cablevision Sale") reduced TINTA's
interest in Cablevision to 26.2%. TINTA recognized a gain of $48.8 million
(excluding related tax expense of $17.1 million) on the Cablevision Sale.
TINTA continues to manage Cablevision (pursuant to a renewable five-year
management contract that was entered into in connection with the
Cablevision Sale), and certain material corporate transactions of
Cablevision will require TINTA's approval, so long as TINTA maintains at
least a 16% interest in Cablevision. As a result of the Cablevision Sale,
effective October 1, 1997, TINTA ceased to consolidate Cablevision and
began to account for Cablevision using the equity method of accounting.
On November 9, 1998, Cablevision and the lenders under its $1.1 billion
loan facility agreed to an extension of $950 million of outstanding
borrowings under the facility until December 15, 1998. At that time,
outstanding borrowings are to be refinanced through (i) $550 million of
indebtedness, which is expected to be issued under Cablevision's medium
term note program, and (ii) $400 million of support from Cablevision's
shareholder's, including TINTA. TINTA's portion of such support aggregates
approximately $84.8 million and will be made through (i) a $42.4 million
capital contribution to Cablevision and (ii) the guarantee of senior
indebtedness of Cablevision and/or subordinated loans from TINTA to
Cablevision in the aggregate amount of $42.4 million.
During the fourth quarter of 1998, one of the Cablevision shareholders
exercised a put right that, under certain circumstances, could require
TINTA to purchase a portion of such shareholder's ownership interest for
cash consideration of up to $36 million, one-third of which would be paid
on December 15, 1998 and the remaining amount would be paid in four semi-
annual installments. Additionally, the Cablevision shareholders' agreement
contains a buy-sell provision that, under certain circumstances, could
require TINTA to purchase other shareholders' ownership interests.
Summarized unaudited results of operations of Cablevision for the nine
months ended September 30, 1998 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Revenue $ 337,323
Operating, selling, general and administrative expenses (241,977)
Depreciation and amortization (54,559)
---------
Operating income 40,787
Interest expense, net (66,794)
Other, net (6,731)
---------
Net loss $ (32,738)
=========
</TABLE>
(continued)
I-12
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(6) Investment in Telewest
----------------------
At September 30, 1998, the Company indirectly owned, through its 50%
ownership interest in TW Holdings, L.L.C. 463,438,960 or 21.7% of the
issued and outstanding Telewest ordinary shares. The reported closing price
on the London Stock Exchange of Telewest's ordinary shares was (Pound)1.35
($2.30) per share at September 30, 1998.
Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which holders
of General Cable received 1.243 new Telewest shares and (Pound)0.65 ($1.11)
in cash for each share of General Cable. In addition, holders of American
Depository Shares of General Cable ("General Cable ADSs") (each
representing five General Cable shares) received 6.215 new Telewest shares
and (Pound)3.25 ($5.53) in cash for each share of General Cable ADSs. The
General Cable Merger was valued at approximately (Pound)649 million ($1.1
billion).
The cash portion of the General Cable Merger was financed through an offer
to qualifying Telewest shareholders for the purchase of approximately 261
million new Telewest shares at a price of (Pound)0.925 ($1.57) per share
(the "Telewest Offer"). TINTA subscribed to 84,688,960 Telewest ordinary
shares at an aggregate cost of (Pound)78.3 million ($133.1 million) in the
Telewest Offer. Immediately following the Telewest Offer, TINTA owned 27.8%
of the issued and outstanding Telewest ordinary shares.
In connection with the General Cable Merger, TINTA also converted its
entire holdings of Telewest convertible preference shares (132,638,250
shares) into Telewest ordinary shares. As a result of the General Cable
Merger, TINTA's ownership interest in Telewest decreased to 21.7%. In
connection with such dilution, TINTA recognized a non-cash gain of $58.0
million (excluding related tax expense of $20.3 million) during the third
quarter of 1998.
As a result of Telewest's issuance of U.S. dollar denominated debentures
(the "Telewest Debentures"), changes in the exchange rate used to translate
the U.S. dollar into the UK pound sterling will cause Telewest to
experience realized and unrealized foreign currency transaction gains and
losses throughout the term of the Telewest Debentures, which mature in 2006
and 2007, if not redeemed earlier. During the nine months ended September
30, 1998 and 1997, Telewest experienced foreign currency transaction gains
(losses) of (Pound)11.1 million ($18.5 million using the applicable
exchange rate) and (Pound)(32.8 million) ($54.5 million using the
applicable exchange rate), respectively, resulting from the translation of
the Telewest Debentures into UK pounds sterling and the adjustment of a
related foreign currency option contract to market value.
The functional currency of Telewest is the UK pound sterling. The average
exchange rate used to translate the Company's share of Telewest's operating
results from UK pounds to U.S. dollars was 1.6584 to 1 and 1.6393 to 1
during the nine months ended September 30, 1998 and 1997, respectively. The
spot rate used to translate the Company's share of Telewest's net assets
from UK pounds to U.S. dollars was 1.7000 to 1 and 1.6508 to 1 at September
30, 1998 and December 31, 1997, respectively.
(continued)
I-13
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Summarized unaudited results of operations of Telewest are as follows:
Nine months ended
September 30,
--------------------------
1998 1997
---------- ----------
amounts in thousands
Revenue $ 604,537 460,646
Operating, selling, general and
administrative expenses (456,421) (408,038)
Depreciation and amortization (281,106) (239,987)
--------- ---------
Operating loss (132,990) (187,379)
Share of losses of affiliates (25,951) (26,078)
Interest expense, net (209,585) (154,510)
Foreign currency transaction gain (loss) 18,511 (54,487)
Other, net 2,051 339
--------- ---------
Net loss $(347,964) (422,115)
========= =========
(7) Investments in Other Affiliates
-------------------------------
The Company's affiliates other than Cablevision and Telewest that are
accounted for using the equity method (the "Other Affiliates") generally
are engaged in the cable and/or programming businesses in various foreign
countries. Most of the Other Affiliates have incurred net losses since
their respective inception dates. As such, substantially all of the Other
Affiliates are dependent upon external sources of financing and capital
contributions in order to meet their respective liquidity requirements.
The Company has guaranteed notes payable and other obligations of certain
of the Other Affiliates (the "Guaranteed Obligations"). At September 30,
1998, the U.S. dollar equivalent of the amounts borrowed pursuant to the
Guaranteed Obligations aggregated approximately $123 million.
Certain of the Other Affiliates are general partnerships and any subsidiary
of the 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 has guaranteed the
performance of the Company's subsidiary that directly holds the related
investment.
(continued)
I-14
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
The following table reflects the Company's carrying value (including
receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
amounts in thousands
<S> <C> <C>
Flextech (a) $255,606 261,453
Liberty/TINTA LLC ("Liberty/TINTA")(b) 124,383 115,720
MultiThematiques S.A
("MultiThematiques") 74,670 68,335
Jupiter Telecommunications Co., Ltd. ("Jupiter") 45,170 49,197
Bresnan International Partners (Poland), L.P.
("BIP Poland") 23,726 26,110
United International Investments ("UII") (c) 23,682 26,966
Bresnan International Partners (Chile), L.P. 18,720 22,863
Jupiter Programming Co., Ltd. ("JPC") 17,688 15,582
Other 15,717 16,099
-------- -------
$599,362 602,325
======== =======
</TABLE>
(a) Flextech
--------
At September 30, 1998, the Company owned 57,889,032 Flextech ordinary
shares ("Flextech Ordinary Shares") representing 36.8% of the issued and
outstanding Flextech share capital and, when combined with a special voting
share owned by TINTA, 50% of the aggregate voting interests attributable to
such Flextech share capital. Based upon the (Pound)5.73 ($9.74) per share
closing price at September 30, 1998 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)332 million ($564 million) at
September 30, 1998.
(continued)
I-15
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
In April 1997, Flextech and BBC Worldwide Limited ("BBC Worldwide") formed
two separate joint ventures (the "Principal Joint Venture" and the "Second
Joint Venture", collectively, the "BBC Joint Ventures"). Flextech has
undertaken to finance the working capital requirements of the Principal
Joint Venture, and is obligated to provide the Principal Joint Venture with
a primary credit facility of (Pound)88 million ($150 million) and, subject
to certain restrictions, a standby credit facility of (Pound)30 million
($51 million). As of September 30, 1998, the Principal Joint Venture had
borrowed (Pound)13.6 million ($23.1 million) under the primary credit
facility. Flextech has also agreed to make available to the Second Joint
Venture, if required, funding of up to (Pound)10 million ($17 million). As
of September 30, 1998, Flextech had funded (Pound)7.5 million ($12.8
million) to the Second Joint Venture under such obligation. If Flextech
defaults in its funding obligation to the Principal Joint Venture and fails
to cure within 42 days after receipt of notice from BBC Worldwide, BBC
Worldwide is entitled, within the following 90 days, to require that the
Company assume all of Flextech's funding obligations to the Principal Joint
Venture (the "Standby Commitment").
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.
(continued)
I-16
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(b) Liberty/TINTA
Subsidiaries of TINTA and Liberty Media Corporation ("Liberty") own equal
parts of Liberty/TINTA. During 1996, Liberty/TINTA and News Corporation
Limited ("News Corp.") formed a joint venture including a number of
partnerships or other entities under common ownership, ("Fox Sports
International"), to operate currently existing sports services in Latin
America and Australia and a variety of new sports services throughout the
world, excluding the United States, Canada and certain other defined
geographic areas.
During the third quarter of 1997, Fox Sports International distributed (i)
its 35% interest in Torneos y Competencias S.A. ("Torneos") to
Liberty/TINTA and (ii) certain Australian sports rights to News Corp. On
October 2, 1997 TINTA purchased a 5% direct interest in Torneos from an
unaffiliated third party for $12 million. As of September 30, 1998, TINTA
had made cash contributions to Torneos on the behalf of Liberty/TINTA of
$56.5 million.
(c) UII
At September 30, 1998, UII owned approximately 50.0%, 46.6% and 45.0% of
Melita Cable TV Limited ("Melita"), Tevel Israel International
Communications Ltd. ("Tevel") and Princes Holding Limited ("PHL"),
respectively. Through UII, TINTA owned 50.0%, 50.0% and 55.6% of the
foregoing Melita, Tevel and PHL ownership interests. Melita and Tevel
operate cable television systems in Malta and Israel, respectively. PHL is
an Irish cable and microwave-multichannel distribution operator.
On November 6, 1998, UII distributed to TINTA a 45% interest in PHL.
Immediately following the distribution, TINTA sold its interests in UII to
United International Holdings, Inc. ("UIH") for $68 million plus an
additional 5% interest in PHL. TINTA now owns a 50% interest in PHL and no
longer holds an interest in Tevel and Melita.
The following table reflects the Company's share of losses of the Other
Affiliates:
Nine months ended
September 30,
---------------------------
1998 1997
-------- --------
amounts in thousands
Jupiter $17,270 17,173
Liberty/TINTA 15,917 11,364
MultiThematiques 14,690 9,337
JPC 10,941 12,614
BIP Poland 7,109 1,507
Other 13,396 22,510
------- -------
$79,323 74,505
======= =======
(continued)
I-17
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, Inc.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Summarized unaudited results of operations of the Other Affiliates by geographic
region for the periods in which the Company used the equity method to account
for its investments in the Other Affiliates are as follows:
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
-------------------------------------------------
Latin
America and
Asia and the
Europe Australia Caribbean Total
------ --------- ----------- -----
amounts in thousands
<S> <C> <C> <C> <C>
Combined Operations
- -------------------
Revenue $ 228,188 155,684 59,405 443,277
Operating, selling, general and
administrative expenses (259,033) (199,427) (50,882) (509,342)
Depreciation and amortization (16,098) (17,257) (6,520) (39,875)
--------- --------- --------- ---------
Operating income (loss) (46,943) (61,000) 2,003 (105,940)
Interest expense, net (4,866) (2,248) (7,314) (14,428)
Other, net (34,092) 4,319 (41,190) (70,963)
--------- --------- --------- ---------
Net loss $ (85,901) (58,929) (46,501) (191,331)
========= ========= ========= =========
<CAPTION>
Nine months ended September 30, 1997
-------------------------------------------------
America and
Asia and the
Europe Australia Caribbean Total
------ --------- ----------- -----
amounts in thousands
<S> <C> <C> <C> <C>
Combined Operations
Revenue $ 208,824 216,128 6,559 431,511
Operating, selling, general and
administrative expenses (256,946) (231,808) (5,375) (494,129)
Depreciation and amortization (17,779) (13,851) (4,723) (36,353)
--------- --------- --------- ---------
Operating loss (65,901) (29,531) (3,539) (98,971)
Interest income (expense), net 2,551 (13,128) (4,410) (14,987)
Other, net (4,415) (29,118) (20,569) (54,102)
--------- --------- --------- ---------
Net loss $ (67,765) (71,777) (28,518) (168,060)
========= ========= ========= =========
</TABLE>
(continued)
I-18
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, Inc.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(8) Other Investments
The components of other investments are set forth below:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
amounts in thousands
<S> <C> <C>
DTH Ventures (a) $52,944 24,933
Other (b) 7,370 8,079
------- -------
$60,314 33,012
======= =======
</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 September 30, 1998,
TINTA had contributed $52.9 million to the DTH Ventures. It is anticipated
that TINTA could be required to make additional cash contributions to the
DTH Ventures. In addition, as of September 30, 1998, TINTA had guaranteed
approximately $174 million of the DTH Ventures' financial obligations.
(b) Other
On January 16, 1998, the Company sold its interest in TeleCable Nacional,
CXA for cash proceeds of $10.0 million. The Company recognized a gain on
such sale of $9.2 million.
(9) Debt
The components of debt are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ----------
amounts in thousands
<S> <C> <C>
Convertible Subordinated
Debentures (a) $345,000 345,000
TVG LLC Credit Facility,
including accrued interest (b) 145,006 --
Puerto Rico Subsidiary (c) 90,295 45,042
Pramer Notes (d) 65,731 --
-------- --------
$646,032 390,042
======== ========
</TABLE>
(continued)
I-19
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(a) On February 8, 1996, TINTA received net cash proceeds of approximately $336
million from the issuance of 4-1/2% Convertible Subordinated Debentures due
2006 having an aggregate principal amount of $345 million (the
"Debentures"). The Debentures are convertible into shares of Series A
Common Stock at a price of $27.30 per share of Series A Common Stock,
subject to anti-dilution adjustments. Interest on the Debentures is payable
on February 15 and August 15 of each year. The Debentures are redeemable by
TINTA in whole or in part, at any time on or after February 15, 1999.
(b) 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 initially 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 the
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 the TVG LLC Credit Facility from 13% to 10%. If at any time TVG LLC
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. Borrowings of $144.2 million were
outstanding pursuant to the TVG LLC Credit Facility at September 30, 1998.
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 were not material during each of the
nine month periods ended September 30, 1998 and 1997. During the nine
months ended September 30, 1998 and 1997, interest expense related to the
TVG LLC Credit Facility was not significant.
(continued)
I-20
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
I-21
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(c) At September 30, 1998, the Puerto Rico Subsidiary had amounts outstanding
under the Puerto Rico Bank Facility of $90.0 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. In addition, the Puerto Rico Subsidiary is required to pay a
commitment fee equal to 0.375% on the average daily unused portion of the
maximum borrowing commitments, payable quarterly in arrears and at
maturity. The Puerto Rico Bank Facility contains restrictive covenants
which require, among other things, the maintenance of certain financial
ratios (primarily the ratios of cash flow to total debt and cash flow to
debt service, as defined), and includes certain limitations on
indebtedness, investments, guarantees, acquisitions, dispositions,
dividends, liens and encumbrances, and transactions with affiliates. If
TCI's ownership interest in TINTA were to fall below 50.1%, borrowings
under the Puerto Rico Bank Facility would be secured by the assets of the
Puerto Rico Subsidiary and the variable interest rates on such borrowings
would be increased.
As described more fully in note 11, on September 21, 1998, Hurricane
Georges struck Puerto Rico and caused considerable property damage to the
area in general, including the Puerto Rico Subsidiary's cable television
systems. The Puerto Rico Subsidiary has submitted a claim to its insurance
carrier for its damaged property and loss of revenue. The Puerto Rico
Subsidiary anticipates that its estimated loss of revenue will exceed its
business interruption insurance. Such uncovered losses could cause the
Puerto Rico Subsidiary to be in violation of certain financial covenants
with respect to the Puerto Rico Bank Facility in the fourth quarter of 1998
and the first quarter of 1999. Violations of certain financial covenants
will prevent the Puerto Rico Subsidiary from borrowing any unused borrowing
commitments and could result in the acceleration of amounts due under the
Puerto Rico Bank Facility. The Puerto Rico Subsidiary is in discussions
with the lenders of the Puerto Rico Bank Facility regarding possible
remedies of any potential violations of financial covenants.
(d) In connection with TINTA's acquisition of Pramer, TINTA issued $65 million
principal amount of secured promissory notes. Interest of $731,000 on the
Pramer Notes has been included in the principal amount at September 30,
1998. TINTA made an $11 million payment on the Pramer Notes on October 1,
1998 and the remainder of the Pramer Notes are due in 20 equal monthly
installments beginning October 15, 1998 and accrue interest at 9.25%.
With the exception of the Debentures, which had a fair value of $336 million,
the Company believes the carrying value of the Company's debt approximates its
fair value at September 30, 1998.
I-22
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, Inc.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(continued)
I-23
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
I-24
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, Inc.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(10) Related Party Transactions
--------------------------
Due from related parties
The components of "Due to (from) related parties" are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
amounts in thousands
<S> <C> <C>
TVG LLC Note Receivable (a) $ -- (88,707)
Non-Cash Intercompany Account (b) (28,059) 4,823
Cash Intercompany Account (c) 5,211 5,772
-------- --------
$(22,848) (78,112)
======== ========
</TABLE>
(a) In December 1997, amounts outstanding under TINTA's note receivable from
TCI were assigned to TVG LLC (the "TVG LLC Note Receivable"). The TVG LLC
Note Receivable was repaid in its entirety during the third quarter of
1998. During the nine months ended September 30, 1998 and 1997, interest
income related to the TVG LLC Note Receivable aggregated $1.7 million and
$4.3 million, respectively.
I-25
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, Inc.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(b) At September 30, 1998, the non-cash intercompany account (the "Non-Cash
Intercompany Account") with TVG LLC was comprised of $3.5 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 $31.6 million due from TVG LLC with respect to
the allocation of current intercompany income tax benefits pursuant to a
tax sharing agreement as described below. The TCI Compensation Liability,
which represents TINTA's share of TCI's stock compensation liability, 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 consolidated statements of operations. Amounts included in the
Non-Cash Intercompany Account are non-interest bearing.
(c) 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.
(continued)
I-26
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, Inc.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Other Related Party Transactions
During the third quarter of 1998, TINTA exercised its right to require
Liberty Media Group to purchase from TINTA 2,710,406 shares of TCI Music,
Inc. Series A common stock for $8.00 per share. Due to the related party
nature of the transaction, TINTA has reflected its $21.7 million gain on
such sale as an increase to stockholders' equity in the accompanying
consolidated financial statements.
Certain key employees of TINTA hold stock options with tandem stock
appreciation rights ("SARs") with respect to certain common stock of TCI.
Estimates of the compensation expense relating to SARs have been included
in the accompanying consolidated statements of operations, but are subject
to future adjustment based upon the vesting and market value of the
underlying TCI common stock and ultimately on the final determination of
market value when the rights are exercised. The estimated compensation
adjustment with respect to SARs resulted in increases to TINTA's share of
TCI's stock compensation liability of $5.6 million and $6.6 million for the
nine months ended September 30, 1998 and 1997, respectively. Such
compensation adjustments are included in corporate general and
administrative costs and expenses in the accompanying consolidated
statements of operations. For the nine months ended September 30, 1998,
TINTA made cash payments relating to its share of TCI's stock compensation
obligations of $14.3 million.
I-27
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, Inc.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
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 services agreement between
TINTA and TCI. In connection with the September 10, 1997 consummation of
the Exchange Offer, TCI attributed its rights and obligations under such
services agreement to TVG LLC. The amounts allocated to the Company for the
nine months ended September 30, 1998 and 1997 aggregated $1.5 million and
$1.3 million, respectively.
Pursuant to an employment agreement, TINTA issued 23,194 shares of Series A
Common Stock to one of its executive officers during the third quarter of
1998. The $500,000 fair value of such shares is included in selling,
general and administrative expenses in the accompanying consolidated
statements of operations.
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 $3.8 million and $4.9 million during the nine months
ended September 30, 1998 and 1997, respectively. Such programming charges
are included in operating costs and expenses in the accompanying
consolidated statements of operations.
(continued)
I-28
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
As further described in note 5, 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, such charges
aggregated $11.8 million. Additionally, certain of Cablevision's general
and administrative functions are provided by affiliates. The related
charges, which generally are based upon the respective affiliate's cost of
providing such functions, aggregated $2.3 million during the nine months
ended September 30, 1997. The above-described programming and general and
administrative charges are included in operating costs and expenses in the
accompanying consolidated statements of operations.
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
($1.7 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 nine months ended September
30, 1997, (i) the U.S. dollar equivalent of interest expense incurred with
respect to the TVG LLC Promissory Note was $1.2 million, (ii) the U.S.
dollar equivalent of the lease revenue under the above-described lease
agreement aggregated $3.2 million, and (iii) the Company experienced
foreign currency transaction losses of $1.2 million with respect to the TVG
LLC Promissory Note.
(continued)
I-29
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
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)
I-30
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated 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 were 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)
I-31
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(continued)
I-32
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated 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 were consummated
after the Effective Date pursuant to a letter of intent or agreement that
was entered into prior to the Effective Date will be shared and allocated
pursuant to the terms of the Old Tax Sharing Agreement as amended.
The intercompany tax account existing between TCI and TINTA for the period
beginning July 1, 1995 and ending September 30, 1997 will be required to be
settled between the TCI Ventures Group and TINTA if and when TINTA ceases
to be a member of TCI's consolidated group for federal income tax purposes.
For periods subsequent to September 30, 1997, TINTA and TCI Ventures Group
have followed a tax sharing arrangement with terms similar to those
contained in the New Tax Sharing Agreement.
(continued)
I-33
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(11) 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 $32 million. In
connection with this guarantee, the Company has agreed to maintain a
defined net worth (cash equivalents plus the fair value of securities
listed on an exchange less liabilities) of at least $150 million. If the
Company's net worth (as defined) were to fall below $150 million, TCI has
agreed to subordinate any intercompany amounts owed by the Company to TCI
to the Company's obligation pursuant to this guarantee. Although the
Company has not had to perform under such guarantee to date, the Company
cannot be certain that it will not be required to perform under such
guarantee in the future.
For information concerning the Company's commitments and contingent
liabilities with respect to certain affiliates and other matters, see notes
5, 7, 8, 10 and 12.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). The Federal
Communications Commission ("FCC") adopted certain rate regulations required
by the 1992 Cable Act, and as a result, the Puerto Rico Subsidiary's basic
and tier service rates and its equipment and installation charges (the
"Regulated Services") could be subject to the jurisdiction of local
franchising authorities and the FCC. The regulations established
permissible rates that could be charged by cable operators for Regulated
Services. The regulations further provide for the methodology for
increasing rates generally allowing for recovery of costs beyond the
control of the cable operator (e.g. inflation and programming costs).
On March 15, 1998, the Puerto Rico Telecommunications Regulatory Board (the
"Regulatory Board"), the local franchising authority, notified the Puerto
Rico Subsidiary that it was certified to regulate rates for Regulated
Services. The Puerto Rico Subsidiary submitted the required rate filings to
the Regulatory Board for review. On June 30, 1998 the Regulatory Board
adopted a Resolution and Order approving the basic service, equipment and
installation rates as filed for the franchises under review. The Order
requires that the Puerto Rico Subsidiary restructure its current pricing to
be consistent with the filed rates. The impact of the restructuring will
not have a material effect on the Puerto Rico Subsidiary's results of
operations.
(continued)
I-34
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL,INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including the Puerto
Rico Subsidiary's cable television systems. The Puerto Rico Subsidiary's
cable television systems represent $35.9 million of the Company's revenue
for the nine months ended September 30, 1998. The Puerto Rico Subsidiary
has property and business interruption insurance aggregating $15 million
that is subject to a deductible of $1 million. The Puerto Rico Subsidiary
has submitted a property damage claim to its insurance carrier for
approximately $12 million which represents the estimated replacement cost
of its damaged property. As a result of the damage caused by Hurricane
Georges, the Puerto Rico Subsidiary, at September 30, 1998, recorded an
impairment to reduce the net book value of the damaged property and
equipment by $8.3 million and recorded a receivable in the same amount for
a portion of the estimated proceeds under its property insurance coverage.
Subsequent to September 30, 1998, the Puerto Rico Subsidiary received a $2
million advance on its insurance coverage from the insurance carrier. TINTA
has applied $1 million of such advance to property losses and $1 million to
business interruption losses. The balance of the receivable is deemed
probable of collection.
Although there can be no assurance, the Puerto Rico Subsidiary currently
estimates that 85% of its cable distribution systems and related support
equipment will be restored by the end of 1998 and fully restored by the end
of the first quarter of 1999. In addition to property damage caused by
Hurricane Georges, the Puerto Rico Subsidiary will also suffer a loss in
revenue from its pre-hurricane customers. As of September 30, 1998,
approximately 23% of the Puerto Rico Subsidiary's pre-hurricane basic
customers were receiving cable television services. Although there can be
no assurance, the Puerto Rico Subsidiary estimates that it will regain 80%
and 100% of its pre-hurricane customer base by December 31, 1998 and June
30, 1999, respectively. The loss of revenue from September 21, 1998 through
December 31, 1998 has been preliminarily estimated at $7 million, of which
$1 million relates to the period from September 21, 1998 through September
30, 1998. In addition, the estimated loss of revenue for the first quarter
of 1999 is approximately $3 million. The Puerto Rico Subsidiary's business
interruption insurance will cover the first $3 million in lost revenue. The
Puerto Rico Subsidiary currently estimates that lost revenue of
approximately $7 million will not be covered under its business
interruption insurance. However, no assurance can be given that the Puerto
Rico Subsidiary will not incur losses in excess of current estimates. In
addition, all insurance claims are subject to approval by the Puerto Rico
Subsidiary's insurance carrier. Accordingly, no assurance can be given that
amounts claimed under the Puerto Rico Subsidiary's insurance coverage will
be paid in their entirety.
(continued)
I-35
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
On January 1, 1999, eleven of the fifteen European Union countries (the
"Participating Countries") will adopt a new currency, the "euro". The other
members of the European Union countries (Denmark, Greece, the United
Kingdom and Sweden) have elected not to adopt the euro at this time. In
connection with the adoption of the euro, (i) a fixed conversion rate will
be established between the existing currencies of the Participating
Countries (the "legacy currencies") and the euro, (ii) the legacy
currencies will trade on currency exchanges and will remain legal tender in
the Participating Countries through January 1, 2002 and (iii) the
Participating Countries will no longer control their own monetary policies.
Instead, the new European Central Bank will direct monetary policy,
including money supply and official interest rates of the euro. Certain of
TINTA's affiliates (primarily MultiThematiques and UII) have operations in
the Participating Countries. Management of TINTA has had communications
with such affiliates to assess the impact of the euro conversion on TINTA.
Although there can be no assurance, TINTA anticipates that the euro
conversion will not have an adverse material effect on it's financial
position, results of operations or cash flows.
(12) Year 2000
---------
During the three months ended September 30, 1998, TCI continued its
enterprise-wide, comprehensive efforts to assess and remediate its computer
systems and related software and equipment to ensure such systems, software
and equipment recognize, process and store information in the year 2000 and
thereafter. TCI's year 2000 remediation efforts include an assessment of
TINTA's most critical systems, equipment, and facilities. TCI also
continued its efforts to verify the year 2000 readiness of TINTA's
significant suppliers and vendors and continued to communicate with
significant business partners and affiliates to assess such partners and
affiliates' year 2000 status.
TCI formed a year 2000 Program Management Office (the "PMO") to organize
and manage its year 2000 remediation efforts. The PMO is responsible for
overseeing, coordinating and reporting on TINTA's year 2000 remediation
efforts. It is comprised of a 90-member full-time staff and is accountable
to executive management of TCI.
The PMO has defined a four-phase approach to determining the year 2000
readiness of TINTA's systems, software and equipment. Such approach is
intended to provide a detailed method for tracking the evaluation, repair
and testing of TINTA's systems, software and equipment. Phase 1,
Assessment, involves the inventory of all systems, software and equipment
and the identification of any year 2000 issues. Phase 1 also includes the
preparation of the work plans needed for remediation. Phase 2, Remediation,
involves repairing, upgrading and/or replacing any non-compliant equipment
and systems. Phase 3, Testing, involves testing TINTA's systems, software,
and equipment for year 2000 readiness, or in certain cases, relying on test
results provided to TINTA. Phase 4, Implementation, involves placing
compliant systems, software and equipment into production or service.
(continued)
I-36
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
At September 30, 1998, TINTA's overall progress by phase was as follows:
Percentage of all
Equipment/Systems
Phase In Phase*
----- -----------------
Phase 1-Assessment 96%
Phase 2-Remediation 89%
Phase 3-Testing 11%
Phase 4-Implementation 4%
---------------------
*The percentages set forth above do not total 100% because many projects
have elements in more than one phase. For purposes of this table, such
projects have been attributed to each applicable phase. In addition, the
percentages set forth above are based on the number of projects in each
phase compared to the total number of Year 2000 projects.
TINTA is completing an inventory of its important systems with embedded
technologies and is currently determining the correct remediation approach.
During the three months ended September 30, 1998, TINTA continued its
survey of significant third-party vendors and suppliers whose systems,
services or products are important to TINTA's operations (e.g., suppliers
of addressable controllers and set-top boxes, and the provider of billing
services). The year 2000 readiness of such providers is critical to
continued provision of TINTA's cable service. TINTA has received
information that the most critical systems, services or products supplied
to TINTA by third parties are either year 2000 ready or are expected to be
year 2000 ready by mid-1999. TINTA is currently developing contingency
plans for systems provided by vendors who have not responded to TINTA's
surveys.
In addition to the survey process described above, management of TINTA has
identified its most critical supplier/vendor relationships and has
instituted a verification process to determine the vendors' year 2000
readiness. Such verification includes, as deemed necessary, reviewing
vendors' test and other data and engaging in regular conferences with
vendors' year 2000 teams. TINTA is also requiring testing to validate the
year 2000 compliance of certain critical products and services and is
contracting with independent consultants to conduct such testing.
(continued)
I-37
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Significant market value is associated with TINTA's investments in certain
public and private corporations, partnerships and other businesses.
Accordingly, TINTA is monitoring the public disclosure of such publicly-
held business entities to determine their year 2000 readiness. In addition,
TINTA has surveyed and monitored the year 2000 status of certain privately-
held business entities in which TINTA has significant investments.
Year 2000 expenses and capital expenditures incurred in the three months
ended September 30, 1998 were approximately $200,000 and zero,
respectively. Expenses and capital expenditures incurred in the nine months
ended September 30, 1998 were approximately $200,000 and zero,
respectively. Management of TINTA currently estimates the remaining costs
to be not less than $1.2 million, bringing the total estimated cost
associated with TINTA's year 2000 remediation efforts to be not less than
$1.4 million, including TINTA's pro rata share of the $32 million cost for
replacement of noncompliant information technology ("IT") systems. Also
included in this estimate is TINTA's pro rata share of the $9 million in
future payments to be made by the PMO pursuant to unfulfilled executory
contracts or commitments with vendors for year 2000 remediation services.
TCI is a widely distributed enterprise in which allocation of certain
resources, including IT support, is decentralized. Accordingly, neither TCI
nor TINTA consolidates an IT budget. Therefore, total estimated year 2000
costs as a percentage of an IT budget are not available. There are
currently no planned IT projects being deferred due to year 2000 costs.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There can
be no assurance that TINTA's systems or the systems of other companies on
which TINTA relies will be converted in time or that any such failure to
convert by TINTA or other companies will not have a material adverse effect
on its financial position, results of operations or cash flows.
(continued)
I-38
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes To Consolidated Financial Statements
I-39
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(13) Proposed Mergers
----------------
TCI and AT&T Corp. ("AT&T") have agreed to a merger (the "Merger") pursuant
to, and subject to the terms and conditions set forth in, the Agreement and
Plan of Restructuring and Merger, dated as of June 23, 1998. In the Merger,
TCI will become a wholly-owned subsidiary of AT&T.
In addition, TCI has announced its intention, subject to stockholder
approval, to combine the assets and businesses of Liberty Media Group and
TCI Ventures Group (the "Liberty/Ventures Combination"). Assuming the
Liberty/Ventures Combination occurs prior to the Merger, the shares of
"Liberty/Ventures Stock" to be issued in the Merger will be a newly
authorized class of common stock of AT&T which will be intended to reflect
the separate performance of the businesses and assets attributed to the
"Liberty/Ventures Group." Subject to certain asset transfers, the
Liberty/Ventures Group following the Merger will be made up of the
corporations, partnerships and other entities and interests, including
TINTA, which comprise Liberty Media Group and TCI Ventures Group at the
time of the Merger. Certain agreements to be entered into at the time of
the Merger as contemplated by the Merger Agreement will, among other
things, provide preferred vendor status to Liberty/Ventures Group for
digital basic distribution on AT&T's systems of new programming services
created by Liberty/Ventures Group and its affiliates, provide for a renewal
of existing affiliation agreements and provide for the business of the
Liberty/Ventures Group to continue to be managed following the Merger by
certain members of TCI's management who currently manage the businesses of
Liberty Media Group and TCI Ventures Group.
Consummation of the Merger is subject to the satisfaction or waiver of
customary conditions to closing, including but not limited to, the separate
approvals of the stockholders of AT&T and TCI, receipt of all necessary
governmental consents and approvals, and effectiveness of the registration
statement registering the AT&T Common Stock and Liberty/Ventures Stock to
be issued to TCI stockholders in the Merger. As a result, there can be no
assurance that the Merger will be consummated or, if the Merger is
consummated, the date of such consummation.
(continued)
I-40
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(A Majority-Owned Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
On August 24, 1998, the Company announced its Board of Directors had
approved a merger agreement pursuant to which the Company would become a
wholly-owned subsidiary of TCI, through the acquisition by Liberty Media
Group of all of the outstanding shares of common stock of the Company not
beneficially owned by TCI Ventures Group. Under the agreement, each
outstanding share of TINTA Series A Stock not already owned by TCI Ventures
Group will be converted into 0.58 of a share of Tele-Communications, Inc.
Series A Liberty Media Group Common Stock, subject to possible adjustment.
The merger agreement provides that if the 0.58 exchange rate would yield a
value to TINTA stockholders (other than TCI) of less than $22.00 per share
of TINTA Series A Stock, then Liberty Media Group would be required to
either increase the exchange ratio to an amount that would yield a value of
$22.00 per share or terminate the merger agreement. Such value will be
based upon the average of the closing sales price of a share of Tele-
Communications, Inc. Series A Liberty Media Group Common Stock during a
five day trading period ending shortly before the closing date of the
merger. Consummation of the merger, which is expected to occur in the
fourth quarter of 1998, is subject to customary closing conditions.
Accordingly, no assurance can be given that the merger will be consummated.
I-41
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations
---------------------
General
- -------
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements, included elsewhere herein, and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and financial statements included in Part II of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. With respect to
trends, risks and uncertainties affecting the Company's results of operations
and financial condition, the following discussion addresses only changes in such
matters that have occurred during 1998 through the date of this Quarterly Report
on Form 10-Q.
Certain statements included in this Quarterly Report on Form 10-Q
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements of the Company (or
entities in which the Company has interests), or industry results, to differ
materially from future results, performance or achievements expressed or implied
by such forward-looking statements. Such risks, uncertainties and other factors
include, among others: the continued strength of multi-channel video and
telecommunication networks and the distribution and production of programming
for multi-channel video distribution; general economic and business conditions
and industry trends; uncertainties inherent in proposed business strategies;
uncertainties inherent in the changeover to the year 2000, including the
Company's projected state of readiness, the projected cost of remediation, the
expected date of completion of each program or phase, the projected worst case
scenarios, and the expected contingency plans associated with such worst case
scenarios; new product launches and development plans; rapid technological
changes; 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 the Company's
products and services, and the overall market acceptance of such products and
services, including acceptance of the pricing of such products and services; and
other factors. These forward-looking statements speak only as of the date of
this Quarterly Report on Form 10-Q. The Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based. Any statement contained
within Management's Discussion and Analysis of Financial Condition and Results
of Operations in this Form 10-Q related to year 2000 are hereby denominated as
"Year 2000 Statements" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
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.
I-42
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Hurricane Georges
- -----------------
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including the Puerto Rico
Subsidiary's cable television systems. The Puerto Rico Subsidiary's cable
television systems represent $35.9 million of the Company's revenue for the nine
months ended September 30, 1998. The Puerto Rico Subsidiary has property and
business interruption insurance aggregating $15 million that is subject to a
deductible of $1 million. The Puerto Rico Subsidiary has submitted a property
damage claim to its insurance carrier for approximately $12 million which
represents the estimated replacement cost of its damaged property. As a result
of the damage caused by Hurricane Georges, the Puerto Rico Subsidiary, at
September 30, 1998, recorded an impairment to reduce the net book value of the
damaged property and equipment by $8.3 million and recorded a receivable in the
same amount for a portion of the estimated proceeds under its property insurance
coverage. Subsequent to September 30, 1998, the Company received a $2 million
advance on its insurance coverage from the insurance carrier. TINTA has applied
$1 million of such advance to property losses and $1 million to business
interruption losses. The balance of the receivable is deemed probable of
collection.
Although there can be no assurance, the Puerto Rico Subsidiary currently
estimates that 85% of its cable distribution systems and related support
equipment will be restored by the end of 1998 and fully restored by the end of
the first quarter of 1999. In addition to property damage caused by Hurricane
Georges, the Puerto Rico Subsidiary will also suffer a loss in revenue from its
pre-hurricane customers. As of September 30, 1998, approximately 23% of the
Puerto Rico Subsidiary's pre-hurricane basic customers were receiving cable
television services. Although there can be no assurance, the Puerto Rico
Subsidiary estimates that it will regain 80% and 100% of its pre-hurricane
customer base by December 31, 1998 and June 30, 1999, respectively. The loss of
revenue from September 21, 1998 through December 31, 1998 has been preliminarily
estimated at $7 million, of which $1 million relates to the period from
September 21, 1998 through September 30, 1998. In addition, the estimated loss
of revenue for the first quarter of 1999 is approximately $3 million. The Puerto
Rico Subsidiary's business interruption insurance will cover the first $3
million in lost revenue. The Puerto Rico Subsidiary currently estimates that
lost revenue of approximately $7 million will not be covered under its business
interruption insurance. However, no assurance can be given that the Puerto Rico
Subsidiary will not incur losses in excess of current estimates. In addition,
all insurance claims are subject to approval by the Puerto Rico Subsidiary's
insurance carrier. Accordingly, no assurance can be given that amounts claimed
under the Puerto Rico Subsidiary's insurance coverage will be paid in their
entirety.
Year 2000
- ---------
During the three months ended September 30, 1998, TCI continued its
enterprise-wide, comprehensive efforts to assess and remediate its computer
systems and related software and equipment to ensure such systems, software and
equipment recognize, process and store information in the year 2000 and
thereafter. TCI's year 2000 remediation efforts include an assessment of TINTA's
most critical systems, equipment, and facilities. TCI also continued its efforts
to verify the year 2000 readiness of TINTA's significant suppliers and vendors
and continued to communicate with significant business partners and affiliates
to assess such partners and affiliates' year 2000 status.
I-43
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
TCI formed a year 2000 Program Management Office to organize and manage its
year 2000 remediation efforts. The PMO is responsible for overseeing,
coordinating and reporting on TINTA's year 2000 remediation efforts. It is
comprised of a 90-member full-time staff and is accountable to executive
management of TCI.
The PMO has defined a four-phase approach to determining the year 2000
readiness of TINTA's systems, software and equipment. Such approach is intended
to provide a detailed method for tracking the evaluation, repair and testing of
TINTA's systems, software and equipment. Phase 1, Assessment, involves the
inventory of all systems, software and equipment and the identification of any
year 2000 issues. Phase 1 also includes the preparation of the work plans needed
for remediation. Phase 2, Remediation, involves repairing, upgrading and/or
replacing any non-compliant equipment and systems. Phase 3, Testing, involves
testing TINTA's systems, software, and equipment for year 2000 readiness, or in
certain cases, relying on test results provided to TINTA. Phase 4,
Implementation, involves placing compliant systems, software and equipment into
production or service.
At September 30, 1998, TINTA's overall progress by phase was as follows:
Percentage of all
Equipment/Systems Expected
Phase In Phase* Completion Date
----- ----------------- ---------------
Phase 1-Assessment 96% December, 1998
Phase 2-Remediation 89% July 1999
Phase 3-Testing 11% July 1999
Phase 4-Implementation 4% September 1999
- ---------------------
*The percentages set forth above do not total 100% because many projects have
elements in more than one phase. For purposes of this table, such projects have
been attributed to each applicable phase. In addition, the percentages set forth
above are based on the number of projects in each phase compared to the total
number of Year 2000 projects.
The completion dates set forth above are based on TINTA's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such projects will be
completed on such dates.
TINTA is completing an inventory of its important systems with embedded
technologies and is currently determining the correct remediation approach. The
embedded technologies assessments are expected to be complete by December of
1998.
I-44
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
During the three months ended September 30, 1998, TINTA continued its
survey of significant third-party vendors and suppliers whose systems, services
or products are important to TINTA's operations (e.g., suppliers of addressable
controllers and set-top boxes, and the provider of billing services). The year
2000 readiness of such providers is critical to continued provision of TINTA's
cable service. TINTA has received information that the most critical systems,
services or products supplied to TINTA by third parties are either year 2000
ready or are expected to be year 2000 ready by mid-1999. TINTA is currently
developing contingency plans for systems provided by vendors who have not
responded to TINTA's surveys.
I-45
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
In addition to the survey process described above, management of TINTA has
identified its most critical supplier/vendor relationships and has instituted a
verification process to determine the vendors' year 2000 readiness. Such
verification includes, as deemed necessary, reviewing vendors' test and other
data and engaging in regular conferences with vendors' year 2000 teams. TINTA is
also requiring testing to validate the year 2000 compliance of certain critical
products and services and is contracting with independent consultants to conduct
such testing.
Significant market value is associated with TINTA's investments in certain
public and private corporations, partnerships and other businesses. Accordingly,
TINTA is monitoring the public disclosure of such publicly-held business
entities to determine their year 2000 readiness. In addition, TINTA has surveyed
and monitored the year 2000 status of certain privately-held business entities
in which TINTA has significant investments.
TINTA is monitoring Telewest's year 2000 program with respect to its
investment in Telewest. Telewest has informed TINTA that a target date of June
1999 has been established for certification of year 2000 compliance of
remediated systems. Please refer to the most recent periodic filings of Telewest
with the Securities and Exchange Commission for updated information related to
Telewest's year 2000 program.
Year 2000 expenses and capital expenditures incurred in the three months
ended September 30, 1998 were approximately $200,000 and zero, respectively.
Expenses and capital expenditures incurred in the nine months ended September
30, 1998 were approximately $200,000 and zero, respectively. Management of TINTA
currently estimates the remaining costs to be not less than $1.2 million,
bringing the total estimated cost associated with TINTA's year 2000 remediation
efforts to be not less than $1.4 million, including TINTA's pro rata share of
the $32 million cost for replacement of noncompliant IT systems. Also included
in this estimate is TINTA's pro rata share of the $9 million in future payments
to be made by the PMO pursuant to unfulfilled executory contracts or commitments
with vendors for year 2000 remediation services. Although no assurances can be
given, management currently expects that (i) cash flow from operations will fund
the costs associated with year 2000 compliance and (ii) the total projected cost
associated with TINTA's year 2000 program will not be material to TINTA's
financial position, results of operations or cash flows.
TCI is a widely distributed enterprise in which allocation of certain
resources, including IT support, is decentralized. Accordingly, neither TCI nor
TINTA consolidates an IT budget. Therefore, total estimated year 2000 costs as a
percentage of an IT budget are not available. There are currently no planned IT
projects being deferred due to year 2000 costs.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. Management
believes that its year 2000 program will significantly reduce TINTA's risks
associated with the changeover to the year 2000 and has implemented certain
contingency plans to minimize the effect of any potential year 2000 related
disruptions. The risks and the uncertainties discussed below and the associated
contingency plans relate to systems, software, equipment, and services that
TINTA has deemed critical in regard to customer service, business operations,
financial impact or safety.
I-46
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
I-47
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
The failure of addressable controllers contained in the cable system
headends could disrupt the delivery of premium services to customers and could
necessitate crediting customers for failure to receive such premium services. In
this unlikely event, management expects that it will identify and transmit the
lowest cost programming tier. Unless other contingency plans are developed with
the programmers, premium and adult content channels would not be transmitted
until the addressable controller had been repaired.
TINTA owns investments in cable and programming operators and other
businesses. The market value of TINTA's investment in these entities could be
adversely impacted by material failures of such entities to address year 2000
remediation issues (including supplier and vendor issues) related to their
programming services and businesses. Further, due to tax and strategic
considerations, TINTA has a limited ability to dispose of these investments if
year 2000 issues develop. Therefore, as a contingency plan, TINTA has undertaken
an extensive effort to verify and in certain cases assist in the year 2000
remediation efforts of companies in which it has significant investments.
Security and fire protection systems failure could leave facilities
vulnerable to intrusion and fire. TINTA expects to return such systems to normal
functioning by turning the power off and then on again ("power off/on"). TINTA
also plans to have additional security staff on site and plans to implement a
backup plan for communicating with local fire and police departments. Also,
certain personal computers interface and control elevators, escalators, wireless
systems, public access systems and certain telephony systems. In the event such
computers cease operating, conducting a power off/on is expected to resume
normal functioning. If a power off/on does not resume normal functioning,
management expects to resolve the problem by resetting the computer to a
pre-designated date which precedes the year 2000.
In the event that the local public utility cannot supply power, TINTA
expects to supply power for a limited time to its cable headends and office
sites through backup generators.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by TINTA due to the numerous uncertainties and
variables associated with such scenarios.
I-48
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
I-49
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
TINTA does not presently anticipate that there will be material losses from
any claims of breach of contract due to year 2000 issues.
Material Changes in Results of Operations
- -----------------------------------------
As further described in note 5 to the accompanying consolidated financial
statements, the October 9, 1997 sale of a portion of TINTA's 51% interest in
Cablevision reduced TINTA's interest in Cablevision to 26.2%. As a result of the
Cablevision Sale, the Company, effective October 1, 1997, 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 in 1997 (amounts in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenue $ 59,309 173,517
Operating costs and expenses (37,733) (105,351)
Depreciation and amortization (14,506) (40,882)
-------- --------
Operating income $ 7,070 27,284
======== ========
</TABLE>
Revenue
-------
Revenue decreased $54.6 million or 75% and $163.1 million or 79% during the
three and nine month periods ended September 30, 1998, respectively, as compared
to the corresponding prior year periods. Such decreases are primarily
attributable to the net effects of (i) the deconsolidation of Cablevision (ii)
changes in the Puerto Rico Subsidiary's revenue and (iii) the acquisition of
Pramer. Revenue of the Puerto Rico Subsidiary decreased $900,000 or 9% and
increased $8.4 million or 23% during the three and nine month periods ended
September 30, 1998, respectively, as compared to the corresponding prior year
periods. The increase for the nine months ended September 30, 1998 is due
primarily to the Caguas Acquisition. The decrease for the three months ended
September 30, 1998 is primarily attributable to the effects of Hurricane
Georges, as previously described under "General." As of September 30, 1998,
approximately 23% of the Puerto Rico Subsidiary's pre-hurricane basic customers
were receiving cable television services. Although there can be no assurance,
the Puerto Rico Subsidiary estimates that it will regain 80% and 100% of its
pre-hurricane customer base by December 31, 1998 and June 30, 1999,
respectively.
Operating Costs and Expenses
----------------------------
Operating costs and expenses decreased $34.4 million or 77% and $98.5
million or 80% during the three and nine month periods ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
decreases are primarily attributable to the deconsolidation of Cablevision.
Operating costs and expenses of the Puerto Rico Subsidiary decreased $200,000 or
5% and increased $2.0 million or 24% during the three and nine months ended
September 30, 1998, respectively, as compared to the corresponding prior year
periods. The decrease for the three months ended September 30, 1998 is primarily
attributable for the effects of Hurricane Georges, as previously described under
"General." The increase for the nine months ended September 30, 1998 is due
primarily to the Caguas Acquisition and increased programming costs.
I-50
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
I-51
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
TINTA incurred corporate, general and administrative expenses of $4.4
million and $8.7 million during the three months ended September 30, 1998 and
1997, respectively, of which $686,000 and $5.3 million were allocated from
related parties. TINTA incurred corporate, general and administrative expenses
of $20.9 million and $16.4 million during the nine months ended September 30,
1998 and 1997, respectively, of which $7.1 million and $7.9 million were
allocated from related parties. General and administrative allocations from
related parties 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
aggregated $2.0 million and $5.5 million during the three months ended September
30, 1998 and 1997, respectively, and include increases in the Company's share of
TCI's stock compensation liability of $200,000 and $4.8 million, respectively.
Such estimated increases aggregated $12.5 million and $7.4 million during the
nine months ended September 30, 1998 and 1997, respectively, and include
increases in the Company's share of TCI's stock compensation liability of $5.6
million and $6.6 million, respectively. Such estimated amounts are subject to
future adjustment based upon market value and, ultimately, upon the final
determination of the market value of the stock appreciation rights at the time
they are exercised.
Depreciation and amortization expense decreased $12.9 million and $40.9
million or 77% and 83% during the three and nine month periods ended September
30, 1998, respectively, as compared to the corresponding prior year periods.
Such decreases are primarily the result of the deconsolidation of Cablevision.
Such decreases were partially offset by increased depreciation and amortization
resulting from TINTA's acquisition of Pramer.
Other Income and Expense
------------------------
Telewest has incurred losses since its inception. The Company's share of
Telewest's net losses decreased $11.5 million and $21.3 million or 30% and 19%
during the three and nine month periods ended September 30, 1998, respectively,
as compared to the corresponding prior year periods. Such changes are primarily
attributable to the net effects of (i) changes in foreign currency transaction
gains and losses, (ii) an increase in operating cash flow resulting from revenue
growth and (iii) an increase in interest expense. In connection with a previous
merger transaction, Telewest issued the Telewest Debentures. Changes in the
exchange rate used to translate the Telewest Debentures into 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
(i) (Pound)12.5 million ($20.9 million using the applicable exchange rate) and
(Pound)(8.5 million) ($14.5 million using the applicable exchange rate) during
the three months ended September 30, 1998 and 1997, respectively, and (ii)
(Pound)11.1 million ($18.5 million using the applicable exchange rate) and
(Pound)(32.8 million) ($54.5 million using the applicable exchange rate) during
the nine months ended September 30, 1998 and 1997, respectively. It is
anticipated that Telewest will continue to experience realized and unrealized
foreign currency transaction gains and losses throughout the term of the
Telewest Debentures, which mature in 2006 and 2007, if not redeemed earlier.
I-52
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
I-53
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
As described in note 5 to the accompanying consolidated financial
statements, 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 nine months ended September
30, 1998 was $14.4 million.
The Company's share of losses of the Other Affiliates remained relatively
constant during the three and nine month periods ended September 30, 1998 and
1997, as increased losses for MultiThematiques, Liberty/TINTA and Flextech were
partially offset by a $9.3 million reduction in the Company's share of losses of
Asia Business News (Singapore) PTE Ltd. ("ABN") for the nine months ended
September 30, 1997. As of December 31, 1997, TINTA surrendered all of its shares
of ABN in exchange for a $25 million unsecured note receivable. Accordingly,
effective December 31, 1997, TINTA no longer accounts for ABN under the equity
method of accounting. The Company expects that the Other Affiliates will
continue to incur losses as they continue to expand their operations and/or
launch new services. For additional information concerning the Other Affiliates,
see note 7 to the accompanying consolidated financial statements.
Interest expense decreased $2.8 million and $9.9 million or 27% and 35%
during the three and nine month periods ended September 30, 1998, respectively,
as compared to the corresponding prior year periods. Such decreases are due to a
reduction in interest expense that is attributable to the deconsolidation of
Cablevision and the payment in 1997 of all remaining amounts due to
MultiThematiques. Such decreases were partially offset by an increase in
interest expense attributable to the Puerto Rico Bank Facility.
On January 16, 1998, the Company sold its interest in TeleCable Nacional,
CXA for cash proceeds of $10.0 million. The Company recognized a gain on such
sale of $9.2 million. In addition, on September 26, 1997, the Company sold its
interest in Sky Network Television New Zealand Ltd. for cash proceeds of $53.0
million. The Company recognized a gain on such sale of $58.4 million.
Effective September 1, 1998, Telewest and General Cable consummated the
General Cable Merger. As a result of the General Cable Merger, TINTA's ownership
in Telewest was reduced to 21.6%. In connection with such dilution, TINTA
recorded a non-cash gain of $58.0 million (before deducting deferred income
taxes of $20.3 million). For additional information regarding the General Cable
Merger see note 6 to the accompanying consolidated financial statements.
Income Taxes
------------
The Company's income tax benefit was $49.9 million and $55.4 million during
the nine months ended September 30, 1998 and 1997, respectively. The effective
tax rates associated with such benefits were 35% and 40%, respectively. See note
10 to the accompanying consolidated financial statements.
I-54
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Net Losses
----------
The Company reported net losses of $92.9 million and $81.6 million
during the nine months ended September 30, 1998 and 1997, respectively. 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 customer bases while maintaining pricing structures and
controlling costs. There can be no assurance that any such customer base
increases will occur.
I-55
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Material Changes in Financial Condition
- ---------------------------------------
TINTA expects to have substantial capital requirements for the foreseeable
future because its businesses and investments consist of entities which require
the acquisition, ownership, development and operation of broadband cable
television and telephony distribution networks and new programming services.
Many of TINTA's subsidiaries and affiliates are incurring substantial costs as
they build or rebuild their cable networks or develop and acquire programming.
Until such companies begin generating profits and positive cash flow from
operating activities, they will need additional capital to fund capital
expenditures and working capital requirements. TINTA and its consolidated
subsidiaries have commitments under various partnership and other agreements to
contribute capital or loan money to fund capital expenditures and other capital
requirements of certain affiliates. The Company is not able to more precisely
predict the timing or amount of the future funding requirements of its
affiliates because such future requirements are dependent upon a variety of
factors.
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
may require the availability of substantial additional funds. Although TINTA
had, at September 30, 1998, (i) $55.8 million of borrowing availability pursuant
to the TVG LLC Credit Facility and (ii) 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. (As described below, TINTA will
use $42.4 million of the availability under its credit facility with TCI
Ventures Group in December 1998 to fund a capital contribution to Cablevision.)
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.
On November 9, 1998, Cablevision and the lenders under its $1.1 billion
loan facility agreed to an extension of $950 million of outstanding borrowings
under the facility until December 15, 1998. At that time, outstanding borrowings
are to be refinanced through (i) $550 million of indebtedness, which is expected
to be issued under Cablevision's medium term note program, and (ii) $400 million
of support from Cablevision's shareholders, including TINTA. TINTA's portion of
such support aggregates approximately $84.8 million, and will be made through
(i) a $42.4 million capital contribution to Cablevision and (ii) the guarantee
of senior indebtedness of Cablevision and/or subordinated loans from TINTA to
Cablevision in the aggregate amount of $42.4 million.
During the fourth quarter of 1998, one of the Cablevision shareholders
exercised a put right that, under certain circumstances, could require TINTA to
purchase a portion of such shareholder's ownership interest for cash
consideration of up to $36 million, one-third of which would be paid on December
15, 1998 and the remaining amount would be paid in four semi-annual
installments. Additionally, the Cablevision shareholders' agreement contains a
buy-sell provision that, under certain circumstances, could require TINTA to
purchase other shareholders' ownership interests.
I-56
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Material Changes in Financial Condition (continued)
- ---------------------------------------------------
TINTA held cash and cash equivalents of $13.3 million at September 30,
1998. TINTA does not believe that its present sources of liquidity (including
its cash and cash equivalents, 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, subject to the restrictions noted above), will be sufficient for the
next year to fund the Company's (i) commitments to its affiliates and (ii)
working capital, debt service and capital expenditure requirements. Accordingly,
TINTA will be required to obtain additional sources of liquidity in order to
satisfy such 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's need for additional sources of
liquidity could significantly increase. 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.
I-57
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
The Company's consolidated operating activities provided (used) cash of
$(23.3 million) and $32.0 million during the nine months ended September 30,
1998 and 1997, respectively. As discussed in note 5 to the accompanying
consolidated financial statements, effective October 1, 1997, Cablevision's cash
flows are no longer included in the Company's consolidated statements of cash
flows. During the nine months ended September 30, 1997, Cablevision's operating
activities provided cash of $40.0 million.
During the nine months ended September 30, 1998 and 1997, cash used by the
Company's investing activities aggregated $239.7 million and $124.3 million,
respectively. Such amounts include $250.7 million and $107.6 million,
respectively, that were used by the Company to fund investments in, and loans
to, affiliates. In addition, the 1997 amount includes a $38.1 million reduction
in the Company's cash and cash equivalents as a result of the deconsolidation of
Flextech. See note 7 to the accompanying consolidated financial statements. See
also the consolidated statements of cash flows included in the accompanying
consolidated financial statements.
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.
Because TINTA generally views its foreign operating subsidiaries and
affiliates as long-term investments, TINTA generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries. Although TINTA
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, TINTA believes that, given
the nature of its business, it is not possible or practical to eliminate TINTA's
exposure to unfavorable fluctuations in foreign currency exchange rates. As of
September 30, 1998, TINTA was not exposed to material near-term losses in future
earnings, fair values or cash flows resulting from derivative financial
instruments.
I-58
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Material Changes in Financial Condition (continued)
- ---------------------------------------------------
Effective September 1, 1998, Telewest and General Cable consummated the
General Cable Merger in which holders of General Cable received 1.243 new
Telewest shares and (Pound)0.65 ($1.11) in cash for each share of General Cable.
In addition, holders of General Cable ADSs (each representing five General Cable
shares) received 6.215 new Telewest shares and (Pound)3.25 ($5.53) in cash for
each share of General Cable ADSs. The General Cable Merger was valued at
approximately (Pound)649 million ($1.1 billion).
The cash portion of the General Merger was financed through an offer to
qualifying Telewest shareholders for the purchase of approximately 261 million
new Telewest shares at a price of (Pound)0.925 ($1.57) per share. TINTA
subscribed to 84,688,960 Telewest ordinary shares at an aggregate cost of
(Pound)78.3 million ($133.1 million) in the Telewest Offer. Immediately
following the Telewest Offer, TINTA owned 27.8% of the issued and outstanding
Telewest ordinary shares.
In connection with the General Cable Merger, TINTA also converted its
entire holdings of Telewest convertible preference shares (132,638,250 shares)
into Telewest ordinary shares. As a result of the General Cable Merger, TINTA's
ownership interest in Telewest decreased to 21.7%. In connection with such
dilution, TINTA recognized a non-cash gain of $58.0 million (excluding related
tax expense of $20.3 million) during the third quarter of 1998.
I-59
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
On August 21, 1998, TINTA purchased 100% of the issued and outstanding
common stock of Pramer, an Argentine programming company, for $32 million in
cash and the issuance of notes payable in the amount of $65 million. TINTA made
an $11 million payment on the Pramer Notes on October 1, 1998 and the remainder
of the Pramer Notes are due in 20 equal monthly installments beginning October
15, 1998 and accrue interest at 9.25%.
At September 30, 1998, the Company had aggregate debt of $646.0 million, of
which $90.3 million (14%) 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 9 to the accompanying consolidated financial statements.
The Company has significant contingent obligations with respect to
guarantees, credit enhancements and other contingent obligations arising from
its ownership interests in affiliates and other matters. The Company also has
consummated certain transactions and entered into certain agreements which have
impacted or may, in the future, impact the Company's liquidity and capital
resources. For additional information, see notes 7, 8, 10, 11 and 12 to the
accompanying consolidated financial statements.
I-60
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Material Changes in Financial Condition (continued)
- ---------------------------------------------------
As described more fully under "General", on September 21, 1998, Hurricane
Georges struck Puerto Rico and caused considerable property damage to the area
in general, including the Puerto Rico Subsidiary's cable television systems. The
Puerto Rico Subsidiary has submitted a claim to its insurance carrier for its
damaged property and loss of revenue. The Puerto Rico Subsidiary anticipates
that its estimated loss of revenue will exceed its business interruption
insurance. Such uncovered losses could cause the Puerto Rico Subsidiary to be in
violation of certain financial covenants with respect to the Puerto Rico Bank
Facility in the fourth quarter of 1998 and the first quarter of 1999. Violations
of certain financial covenants will prevent the Puerto Rico Subsidiary from
borrowing any unused borrowing commitments and could result in the acceleration
of amounts due under the Puerto Rico Bank Facility. The Puerto Rico Subsidiary
is in discussions with the lenders of the Puerto Rico Bank Facility regarding
possible remedies of any potential violations of financial covenants.
On January 16, 1998, the Company sold its interest in TeleCable Nacional,
CXA for cash proceeds of $10.0 million.
During the third quarter of 1998, TINTA exercised its right to require TCI
to purchase from TINTA 2,710,406 shares of TCI Music, Inc. Series A common stock
from TINTA for $8.00 per share. Due to the related party nature of the
transaction, TINTA has reflected its $21.7 million gain on such sale as an
increase to stockholders' equity in the accompanying consolidated financial
statements.
On November 6, 1998 UII distributed to TINTA a 45% interest in PHL.
Immediately following the distribution, TINTA sold its interest in UII to UIH
for $68 million plus an additional 5% interest in PHL. TINTA now owns a 50%
interest in PHL and no longer holds an interest in Tevel and Melita.
TCI and AT&T have agreed to a merger in which TCI will become a
wholly-owned subsidiary of AT&T. In addition, TCI has announced its intention,
subject to stockholder approval, to combine the assets and businesses of Liberty
Media Group and TCI Ventures Group. For additional information concerning these
transactions, see note 13 to the accompanying consolidated financial statements.
I-61
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
On August 24, 1998, the Company announced its Board of Directors had
approved a merger agreement pursuant to which the Company would become a
wholly-owned subsidiary of TCI, through the acquisition by Liberty Media Group
of all of the outstanding shares of common stock of the Company not beneficially
owned by TCI Ventures Group. Under the agreement, each outstanding share of
TINTA Series A Stock not already owned by TCI Ventures Group will be converted
into 0.58 of a share of Tele-Communications, Inc. Series A Liberty Media Group
Common Stock, subject to possible adjustment. The merger agreement provides that
if the 0.58 exchange rate would yield a value to TINTA stockholders (other than
TCI) of less than $22.00 per share of TINTA Series A Stock, then Liberty Media
Group would be required to either increase the exchange ratio to an amount that
would yield a value of $22.00 per share or terminate the merger agreement. Such
value will be based upon the average of the closing sales price of a share of
Tele-Communications, Inc. Series A Liberty Media Group Common Stock during a
five day trading period ending shortly before the closing date of the merger.
Consummation of the merger, which is expected to occur in November 1998, is
subject to customary closing conditions. Accordingly, no assurance can be given
that the merger will be consummated.
I-62
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- ------ -----------------
On July 13, 1998, two putative class action complaints were filed by
certain stockholders of TINTA in the Court of Chancery of the State
of Delaware. The actions, which have identical claims and
allegations, are styled as Berkowitz v. Hindery, et al., C.A. No.
16533, and Chetkov v. Hindery, et al., C.A. No. 16534, respectively.
The complaints were filed following the announcement of a proposed
business combination in which Liberty Media Group would acquire all
outstanding public shares of TINTA not already owned by TCI Ventures
Group. The defendants named in both complaints are TCI, TINTA, and
the Board of Directors of TINTA: Leo J. Hindery, John C. Malone, Gary
S. Howard, David J. Evans, Pierre Lescure, Paul A. Gould, Fred A.
Vierra, and Jerome H. Kern. The gravamen of both complaints is that
the TINTA directors will breach their fiduciary duties by approving
the merger and undervaluing the proposed merger consideration to the
detriment of the TINTA public stockholders. Plaintiffs in both
actions seek to enjoin the consummation or closing of the proposed
merger, or the rescission of the merger in the event it is
consummated, and unspecified compensatory damages, fees and costs.
TINTA and the plaintiffs have reached an agreement in principle to
settle the class action litigation in exchange for TCI's willingness
to include a $22.00 per TINTA share pricing provision in the merger
agreement with Liberty Media Group. The tentative settlement is
subject to numerous conditions, including the execution of definitive
settlement documents, court approval of the settlement and
consummation of the merger. Based on the facts available, management
believes that although no assurance can be given as to the outcome of
this action, the ultimate disposition of this matter should not have
a material adverse effect upon the financial condition of TINTA.
Item 2. Changes in Securities
- ------ ---------------------
On September 16, 1998, TINTA issued 23,194 shares of Series A Common
Stock (valued at $500,000 based upon a price per share of $21.56) to
an executive officer of TINTA. The issuance was made in reliance on
the exemption from registration of a private placement offering as
afforded by Section 4(2) under the Securities Act of 1933.
Item 4. Submission of Matter to a Vote of Security Holders.
- ------ --------------------------------------------------
At the Annual Meeting of Stockholders held on July 1, 1998, the
following matters were voted upon by the stockholders of Tele-
Communications International, Inc.:
1. The election of David J. Evans to the Board of Directors by
99.96% of the votes cast at such meeting (216,417,233 for;
80,577 withheld), the election of Paul A. Gould to the Board of
Directors by 99.98% of the votes cast at such meeting
(216,461,633 for; 36,177 withheld) and the election of John C.
Malone to the Board of Directors by 99.96% of the votes cast at
such meeting (216,417,033 for; 80,777 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. Gary S. Howard, Pierre
Lescure, Jerome H. Kern, Leo J. Hindery, Jr. and Fred A. Vierra
continued to serve as members of the Board of Directors subject
to re-election over staggered three year terms.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K filed during quarter ended September 30,
1998:
Financial
Date of Report Items Reported Statements Filed
-------------- -------------- ----------------
August 3, 1998 Item 5 None
September 8, 1998 Item 5 None
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Date: November 13, 1998 By: /s/ David J. Evans
---------------------------------
David J. Evans
President and Chief Executive
Officer
Date: November 13, 1998 By: /s/ Graham Hollis
---------------------------------
Graham Hollis
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,341
<SECURITIES> 0
<RECEIVABLES> 17,587
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 87,170
<DEPRECIATION> 36,517
<TOTAL-ASSETS> 1,657,563
<CURRENT-LIABILITIES> 0
<BONDS> 646,032
0
0
<COMMON> 118,746
<OTHER-SE> 837,925
<TOTAL-LIABILITY-AND-EQUITY> 1,657,563
<SALES> 0
<TOTAL-REVENUES> 43,556
<CGS> 0
<TOTAL-COSTS> 24,872
<OTHER-EXPENSES> 8,666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,771
<INCOME-PRETAX> (142,830)
<INCOME-TAX> (49,905)
<INCOME-CONTINUING> (92,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (92,925)
<EPS-PRIMARY> (.81)
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