<PAGE> 1
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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-5550
TCI COMMUNICATIONS, INC.
----------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-0588868
------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
All of the Registrant's common stock is owned by Tele-Communications,
Inc. The number of shares outstanding of the Registrant's common stock as of
July 31, 1998, was:
Class A common stock - 811,655 shares; and
Class B common stock - 94,447 shares.
<PAGE> 2
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash and cash equivalents $ 51 1
Restricted cash (note 3) 304 35
Trade and other receivables, net 382 319
Investment in Cablevision Systems Corporation
("CSC"), accounted for under the equity method
(note 4) 618 --
Investments in other affiliates, accounted for
under the equity method, and related receivables
(note 5) 263 231
Property and equipment, at cost:
Land 57 70
Distribution systems 9,253 9,547
Support equipment and buildings 1,344 1,351
------- ------
10,654 10,968
Less accumulated depreciation 4,468 4,444
------- ------
6,186 6,524
------- ------
Franchise costs 15,776 17,154
Less accumulated amortization 2,599 2,711
------- ------
13,177 14,443
------- ------
Other assets, net of amortization 309 305
------- ------
$21,290 21,858
======= ======
</TABLE>
(continued)
I-1
<PAGE> 3
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
Liabilities and Common Stockholder's Deficit amounts in millions
- --------------------------------------------
<S> <C> <C>
Accounts payable $ 83 131
Accrued interest 246 248
Accrued programming expense 263 242
Other accrued expenses 637 651
Debt (note 7) 12,643 13,528
Deferred income taxes 5,188 5,215
Other liabilities 291 125
-------- -------
Total liabilities 19,351 20,140
-------- -------
Minority interests in equity of consolidated
subsidiaries 668 787
Redeemable preferred stock 232 232
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Trust
Preferred Securities") holding solely
subordinated debt securities of the Company
(note 8) 1,500 1,500
Common stockholder's deficit:
Class A common stock, $1 par value. Authorized
910,553 shares; issued and outstanding
811,655 shares 1 1
Class B common stock, $1 par value.
Authorized, issued and outstanding 94,447
shares -- --
Additional paid-in capital 1,802 1,857
Accumulated other comprehensive earnings, net
of taxes (note 1) 2 4
Accumulated deficit (1,030) (957)
-------- -------
775 905
Investment in Tele-Communications, Inc. ("TCI"),
at cost (1,144) (1,143)
Due from related parties (note 9) (92) (563)
-------- -------
Total common stockholder's deficit (461) (801)
-------- -------
Commitments and contingencies (notes 2, 6 and 10)
$ 21,290 21,858
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 4
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
1998 1997 1998 1997
------- ------ ------ ------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue (note 9) $ 1,476 1,545 2,987 3,050
Operating costs and expenses:
Operating:
Related party (note 9) 58 25 118 48
Other 458 537 962 1,058
Selling, general and administrative (note 9) 331 304 634 586
Stock compensation (note 10) 77 8 136 8
Depreciation and amortization 365 363 724 694
------- ------ ------ ------
1,289 1,237 2,574 2,394
------- ------ ------ ------
Operating income 187 308 413 656
Other income (expense):
Interest expense (227) (274) (492) (546)
Interest income 1 1 2 7
Intercompany interest, net (note 9) 2 6 4 9
Share of losses of CSC (note 4) (28) -- (46) --
Share of earnings (losses) of other affiliates, net (note 5) (3) (10) 29 (22)
Loss on early extinguishment of debt (note 7) (22) (11) (38) (11)
Minority interests in earnings of consolidated
subsidiaries, net (note 8) (46) (55) (89) (81)
Gain on disposition of assets, net (note 6) 36 22 193 40
Other, net (9) 5 (8) 1
------- ------ ------ ------
(296) (316) (445) (603)
------- ------ ------ ------
Earnings (loss) before income taxes (109) (8) (32) 53
Income tax expense (2) (5) (41) (27)
------- ------ ------ ------
Net earnings (loss) (111) (13) (73) 26
Dividend requirements on preferred stocks (3) (3) (5) (5)
------- ------ ------ ------
Net earnings (loss) attributable to common stockholder $ (114) (16) (78) 21
======= ====== ====== ======
Comprehensive earnings (loss) (note 1) $ (114) (12) (75) 32
======= ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 5
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statement of Common Stockholder's Deficit
Six months ended June 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Common stock Additional comprehensive Investment
------------------ paid-in earnings, Accumulated in
Class A Class B capital net of taxes deficit TCI
------- ------- ---------- ------------- ----------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 1 -- 1,857 4 (957) (1,143)
Net earnings -- -- -- -- (73) --
Accreted dividends on redeemable
preferred stock -- -- (5) -- -- --
Change in unrealized holding gains for
available-for-sale securities, net of
taxes -- -- -- (2) -- --
Transfer of net liabilities from related
party (note 9) -- -- (50) -- -- --
Transfer of net assets from TCI (note 9) -- -- -- -- -- --
TCI Group Stock received in connection
with settlement of litigation -- -- -- -- -- (1)
Change in due from related parties -- -- -- -- -- --
---- ------ ------ ------ ------ ------
Balance at June 30, 1998 $ 1 -- 1,802 2 (1,030) (1,144)
==== ====== ====== ====== ====== ======
<CAPTION>
Total
Due common
from related stockholder's
parties deficit
------------ -------------
<S> <C> <C>
Balance at January 1, 1998 (563) (801)
Net earnings -- (73)
Accreted dividends on redeemable
preferred stock -- (5)
Change in unrealized holding gains for
available-for-sale securities, net of
taxes -- (2)
Transfer of net liabilities from related
party (note 9) -- (50)
Transfer of net assets from TCI (note 9) 137 137
TCI Group Stock received in connection
with settlement of litigation -- (1)
Change in due from related parties 334 334
---- ----
Balance at June 30, 1998 (92) (461)
==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 6
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1998 1997
------- ------
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (73) 26
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 724 694
Stock compensation 136 8
Payments of obligation relating to stock compensation (37) (2)
Share of losses of CSC 46 --
Share of losses (earnings) of other affiliates, net (29) 22
Loss on early extinguishment of debt 38 11
Deferred income tax benefit (15) (92)
Minority interests in earnings of consolidated
subsidiaries, net 89 81
Gain on disposition and exchange of assets, net (193) (40)
Intercompany tax allocation -- 115
Payments of restructuring charges (4) (19)
Other noncash charges 2 4
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables (53) (82)
Change in other accruals and payables (90) 120
------- ------
Net cash provided by operating activities 541 846
------- ------
Cash flows from investing activities:
Capital expended for property and equipment (475) (170)
Cash paid for acquisitions (47) (76)
Cash received in exchanges -- 15
Proceeds from disposition of assets 312 193
Increase in restricted cash (269) (13)
Investments in and loans to affiliates (153) (10)
Collections of loans to affiliates and others 806 1
Other investing activities (18) (9)
------- ------
Net cash provided by (used in) investing
activities 156 (69)
------- ------
Cash flows from financing activities:
Borrowings of debt 1,883 995
Repayments of debt (2,625) (1,677)
Prepayment penalties on debt (34) (7)
Payment of redeemable preferred stock dividends (5) (5)
Payment of dividends on subsidiary preferred stock and
Trust Preferred Securities (90) (80)
Net change in due from related parties 224 (493)
Proceeds from issuance of Trust Preferred Securities -- 490
------- ------
Net cash used in financing activities (647) (777)
------- ------
Net change in cash and cash equivalents 50 --
Cash and cash equivalents at beginning of
period 1 --
------- ------
Cash and cash equivalents at end of period $ 51 --
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 7
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of TCI Communications, Inc. ("TCIC" or the "Company") and those of all
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. TCI owns 100% of
the common stock of TCIC.
TCIC, through its subsidiaries and affiliates, is principally engaged
in the construction, acquisition, ownership and operation of cable
television systems. TCIC operates its cable television systems
throughout the United States.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of results for
the full year. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto contained in TCIC's Annual Report on Form 10-K for the year
ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
TCI common stock, par value $1.00 per share, is comprised of six
series: Tele-Communications, Inc. Series A TCI Group Common Stock ("TCI
Group Series A Stock"), Tele-Communications, Inc. Series B TCI Group
Common Stock ("TCI Group Series B Stock" and, together with the TCI
Group Series A Stock, "TCI Group Stock"), Tele-Communications, Inc.
Series A Liberty Media Group Common Stock ("Liberty Group Series A
Stock"), Tele-Communications, Inc. Series B Liberty Media Group Common
Stock ("Liberty Group Series B Stock" and, together with the Liberty
Group Series A Stock, the "Liberty Group Stock"), Tele-Communications,
Inc. Series A TCI Ventures Group Common Stock ("TCI Ventures Group
Series A Stock") and Tele-Communications, Inc. Series B TCI Ventures
Group Common Stock ("TCI Ventures Group Series B Stock" and, together
with the TCI Ventures Group Series A Stock, the "TCI Ventures Group
Stock").
(continued)
I-6
<PAGE> 8
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
The Liberty Group Stock is intended to reflect the separate performance
of the "Liberty Media Group," which is comprised of TCI's assets which
produce and distribute programming services. The TCI Ventures Group
Stock is intended to reflect the separate performance of the "TCI
Ventures Group," which is comprised of TCI's principal international
assets and businesses and substantially all of TCI's non-cable and
non-programming assets. The TCI Group Stock is intended to reflect the
separate performance of TCI and its subsidiaries and assets not
attributed to Liberty Media Group or TCI Ventures Group. Such
subsidiaries and assets are referred to as "TCI Group" and are
comprised primarily of TCI's domestic cable and communications
business. TCIC is attributed to TCI Group.
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). The Company has reclassified its
prior period consolidated balance sheet and consolidated statements of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
or losses be reported in a financial statement in the period in which
they are recognized. The Company has included unrealized holding gains
and losses on available-for-sale securities in other comprehensive
earnings that are recorded directly in stockholder's deficit. Pursuant
to SFAS 130, this item is reflected, net of related tax effects, as a
component of comprehensive earnings 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 common stockholder's deficit.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133"), which is effective
for all fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their
fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those
instruments qualify as hedges of the (1) fair values of existing
assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures of net
investments in foreign operations. Although management of the Company
has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management
estimates that the impact of SFAS 133 will not be material.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
(continued)
I-7
<PAGE> 9
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(2) Proposed Merger
TCI and AT&T Corp. ("AT&T") have agreed to a merger (the "Merger")
pursuant to, and subject to the terms and conditions set forth in, the
Agreement and Plan of Restructuring and Merger, dated as of June 23,
1998 (the "Merger Agreement"), among TCI, AT&T and Italy Merger Corp.,
an indirect wholly-owned subsidiary of AT&T. In the Merger, TCI will
become a wholly-owned subsidiary of AT&T and (i) each share of TCI
Group Series A Stock will be converted into .7757 of a share of common
stock, par value $1.00 per share, of AT&T ("AT&T Common Stock"), (ii)
each share of TCI Group Series B Stock will be converted into .8533 of
a share of AT&T Common Stock, (iii) each share of Liberty Group Series
A Stock will be converted into one share of a newly authorized class of
AT&T common stock to be designated as the Class A Liberty Group Common
Stock, par value $1.00 per share (the "AT&T Liberty Class A Tracking
Stock") and (iv) each share of Liberty Group Series B Stock will be
converted into one share of a newly authorized class of AT&T common
stock to be designated as the Class B Liberty Group Common Stock, par
value $1.00 per share (the "AT&T Liberty Class B Tracking Stock" and
together with the AT&T Liberty Class A Tracking Stock, the "AT&T
Liberty Tracking Stock"). In addition, TCI has announced its intention,
subject to stockholder approval, to combine the assets and businesses
of Liberty Media Group and TCI Ventures Group and reclassify each share
of TCI Ventures Group Series A Stock as .52 of a share of Liberty Group
Series A Stock and each share of TCI Ventures Group Series B Stock as
.52 of a share of Liberty Group Series B Stock. If such combination and
reclassification does not occur prior to the Merger, then in the
Merger, each share of TCI Ventures Group Series A Stock and TCI
Ventures Group Series B Stock will be converted into .52 of a share of
the corresponding series of AT&T Liberty Tracking Stock. In general,
the holders of shares of AT&T Liberty Class A Tracking Stock and the
holders of shares of AT&T Liberty Class B Tracking Stock will vote
together as a single class with the holders of shares of AT&T Common
Stock on all matters presented to such stockholders, with the holders
being entitled to one-tenth (1/10th) of a vote for each share of AT&T
Liberty Class A Tracking Stock held, 1 vote per share of AT&T Liberty
Class B Tracking Stock held, and 1 vote per share of AT&T Common Stock
held.
Under the terms of the Company's Cumulative Exchangeable Preferred
Stock, Series A (the "Series A Preferred Stock"), from and after
January 15, 2001 (the "Initial Exchange Date") each share of the Series
A Preferred Stock will be exchangeable for 2.119 shares of TCI Group
Series A Stock, subject to certain anti-dilution adjustments. If the
Merger is consummated, under the terms of the Series A Preferred Stock,
each share of that stock will become exchangeable, from and after the
Initial Exchange Date, for 1.644 shares of AT&T Common Stock, subject
to certain anti-dilution adjustments. In addition, after the Merger,
the Company may elect to make any dividend, redemption or liquidation
payment on the Series A Preferred Stock in cash, by delivery of shares
of AT&T Common Stock or by a combination of the foregoing forms of
consideration.
(continued)
I-8
<PAGE> 10
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
The shares of AT&T Liberty Tracking Stock to be issued in the Merger
will be a newly authorized class of common stock of AT&T which will be
intended to reflect the separate performance of the businesses and
assets attributed to the "Liberty/Ventures Group." The Liberty/Ventures
Group following the Merger will be made up of the corporations,
partnerships and other entities and interests which comprise Liberty
Media Group and TCI Ventures Group at the time of the Merger. Pursuant
to the Merger Agreement, immediately prior to the Merger, certain
assets currently held by TCI Ventures Group (including, among others,
the shares of AT&T Common Stock received in the merger of AT&T and
Teleport Communications Group, Inc., the stock of At Home Corporation
held by TCI Ventures Group and the assets and business of the National
Digital Television Center, Inc. ("NDTC") will be transferred to TCI
Group in exchange for approximately $5.5 billion in cash. Also, upon
consummation of the Merger, Liberty/Ventures Group will become entitled
to the benefit of all of the net operating loss carryforwards available
to the entities included in TCI's consolidated income tax return as of
the date of the Merger. Additionally, certain warrants currently
attributed to TCI Group will be transferred to Liberty/Ventures Group
in exchange for up to $176 million in cash. Certain agreements to be
entered into at the time of the Merger as contemplated by the Merger
Agreement will, among other things, provide preferred vendor status to
Liberty/Ventures Group for digital basic distribution on AT&T's systems
of new programming services created by Liberty/Ventures Group and its
affiliates, provide for a renewal of existing affiliation agreements
and provide for the business of the Liberty/Ventures Group to continue
to be managed following the Merger by certain members of TCI's
management who currently manage the businesses of Liberty Media Group
and TCI Ventures Group.
If TCI terminates the Merger Agreement due to (i) the failure of AT&T's
stockholders to approve the Merger prior to March 31, 1999, (ii) the
withdrawal or modification by the AT&T Board of Directors of its
approval of the transaction, or (iii) the failure to obtain necessary
governmental and regulatory approvals by September 30, 1999, which
failure occurs as a result of the announcement by AT&T of a significant
transaction which delays receipt of such governmental approvals, AT&T
will pay to TCI the sum of $1.75 billion in cash. If AT&T terminates
the Merger Agreement due to the failure of TCI stockholders to approve
the transaction prior to March 31, 1999 or the withdrawal or
modification by the TCI Board of Directors of its approval of the
Merger, TCI will pay to AT&T the sum of $1.75 billion in cash.
Consummation of the Merger is subject to the satisfaction or waiver of
customary conditions to closing, including but not limited to, the
separate approvals of the stockholders of AT&T and TCI, receipt of all
necessary governmental consents and approvals, and effectiveness of the
registration statement registering the AT&T Common Stock and AT&T
Liberty Tracking Stock to be issued to TCI stockholders in the Merger.
As a result, there can be no assurance that the Merger will be
consummated or, if the Merger is consummated, as to the date of such
consummation.
(continued)
I-9
<PAGE> 11
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $494 million and $548 million for the six
months ended June 30, 1998 and 1997, respectively. Also during these
periods, cash paid for income taxes was not material.
Summary of cash paid for acquisitions and cash received in exchanges is
as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1998 1997
-------- -------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Aggregate cost basis of assets acquired $(216) (74)
Liabilities assumed, net of current assets 2 2
Deferred tax liability recorded in acquisitions 36 (1)
Acquisition of minority interests in equity of
consolidated subsidiaries 2 (3)
Elimination of notes receivable from affiliates 129 --
----- ----
Cash paid for acquisitions $ (47) (76)
===== ====
Cash received in exchanges:
Aggregate cost basis of assets acquired $ -- 395
Historical cost of assets disposed of -- (399)
Gain recorded on exchange of assets -- (11)
----- ----
Cash received in exchanges $ -- (15)
===== ====
</TABLE>
For a description of certain non-cash transactions, see notes 5, 6 and
9.
The Company's restricted cash includes proceeds received in connection
with certain asset dispositions. Such proceeds, which aggregated $303
million and $34 million at June 30,1998 and December 31, 1997, are
designated to be reinvested in certain identified assets for income tax
purposes.
(continued)
I-10
<PAGE> 12
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(4) Investment in Cablevision Systems Corporation
On March 4, 1998, subsidiaries of TCI (including certain subsidiaries
of TCIC) contributed to CSC certain of its cable television systems
serving approximately 830,000 customers in exchange for approximately
24.5 million newly issued CSC Class A common shares (as adjusted for a
stock dividend) (the "CSC Transaction"). CSC also assumed and repaid
approximately $574 million of debt owed by TCIC to external parties and
$95 million of debt owed to TCI. As a part of such transaction, TCIC
subsidiaries contributed to CSC cable television systems serving
approximately 410,000 customers in exchange for approximately 14.0
million shares (as adjusted for a stock dividend) of CSC's newly issued
Class A common shares, and CSC assumed approximately $78 million of
intercompany debt owed to TCIC. As a result of the CSC Transaction,
TCIC recognized a $148 million gain in the accompanying consolidated
statement of operations for the six months ended June 30, 1998. Such
gain represents the excess of the $663 million fair value of the CSC
Class A common shares received over the historical cost of the net
assets transferred by TCIC to CSC. TCIC has also entered into letters
of intent with CSC which provide for TCIC to acquire a cable system in
Michigan and an additional 3% of CSC's Class A common shares and for
CSC to (i) acquire cable systems serving approximately 250,000
customers in Connecticut and (ii) assume $110 million of TCIC's debt.
The ability of TCIC to sell or increase its investment in CSC is
subject to certain restrictions and limitations set forth in a
stockholders agreement with CSC.
At June 30, 1998, subsidiaries of TCI (including certain subsidiaries
of TCIC) owned 24,991,286 shares of CSC Class A common stock, which had
a closing market price of $83.50 per share on such date. Such shares
represented an approximate 33.2% equity interest in CSC's total
outstanding shares and an approximate 9% voting interest in CSC in all
matters except for (i) the election of directors, in which case TCI
effectively has the right to designate two of CSC's directors, and (ii)
any increase in authorized shares, in which case TCI has agreed to vote
its interest in proportion with the public holders of CSC Class A
common shares. At June 30, 1998, TCIC owned 13,975,524 shares of CSC
Class A common stock. Such shares represented an approximate 18.6%
equity interest in CSC's total outstanding shares. In light of TCI's
overall ownership interest in CSC, TCIC will account for its
approximate 18.6% ownership interest in CSC under the equity method.
Summarized unaudited results of operations for CSC, accounted for under
the equity method, are as follows for the period from the date of
acquisition through June 30, 1998 (amounts in millions):
<TABLE>
<S> <C>
Revenue $ 1,041
Operating, selling, general and administrative
expenses (816)
Depreciation and amortization (228)
-------
Operating loss (3)
Interest expense (148)
Other, net (47)
-------
Net loss $ (198)
=======
</TABLE>
I-11
(continued)
<PAGE> 13
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(5) Investments in Other Affiliates
TCIC's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in
the domestic cable business. Summarized unaudited results of operations
for other affiliates for the periods in which the Company used the
equity method to account for such other affiliates are as follows:
<TABLE>
<CAPTION>
Six months ended
Combined Operations June 30,
------------------- --------------------
1998 1997
--------- --------
amounts in millions
<S> <C> <C>
Revenue $ 252 187
Operating, selling, general and administrative expenses (136) (114)
Depreciation and amortization (99) (78)
----- ----
Operating income (loss) 17 (5)
Interest expense (55) (38)
Other, net 4 4
----- ----
Net loss $ (34) (39)
===== ====
</TABLE>
In January 1998, InterMedia Partners, a California limited partnership
("InterMedia Partners") repurchased substantially all of the equity
interests held by partners other than TCIC. As a result of such
repurchases, TCIC began consolidating InterMedia Partners.
Certain of TCIC's affiliates are general partnerships and any
subsidiary of TCIC that is a general partner in a general partnership
is, as such, liable as a matter of partnership law for all debts (other
than non-recourse debts) of that partnership in the event liabilities
of that partnership were to exceed its assets.
(continued)
I-12
<PAGE> 14
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(6) Acquisitions and Dispositions
In addition to the CSC Transaction described in note 4, TCIC completed
during the first six months of 1998, three transactions whereby TCIC
contributed cable television systems serving in the aggregate
approximately 670,000 customers to three separate joint ventures
(collectively, the "1998 Joint Ventures") in exchange for
non-controlling ownership interests in each of the 1998 Joint Ventures,
and the assumption and repayment by the 1998 Joint Ventures of debt
owed by TCIC to external parties aggregating $323 million and
intercompany debt owed to TCIC aggregating $833 million. In connection
with such transactions, TCIC has agreed to take certain steps to
support compliance by the 1998 Joint Ventures with their payment
obligations under certain debt instruments, up to an aggregate
contingent commitment of $784 million. In light of such contingent
commitments, the Company has deferred any gains on the formation of the
1998 Joint Ventures. Such deferred gains, which aggregated $163
million, will not be recognized until such time as the Company's
contingent commitments with respect to the 1998 Joint Ventures are
eliminated. The Company uses the equity method of accounting to account
for its investments in the 1998 Joint Ventures. The CSC Transaction and
the formation of the 1998 Joint Ventures are collectively referred to
herein as the "1998 Contribution Transactions."
Including the 1998 Contribution Transactions, TCIC, as of July 31,
1998, has, since January 1, 1997, contributed, or signed agreements or
letters of intent to contribute within the next twelve months, certain
cable television systems (the "Contributed Cable Systems") serving
approximately 3.5 million basic customers to joint ventures in which
TCIC will retain non-controlling ownership interests (the "Contribution
Transactions"). Following the completion of the Contribution
Transactions, TCIC will no longer consolidate the Contributed Cable
Systems. Accordingly, it is anticipated that the completion of the
Contribution Transactions, as currently contemplated, will result in an
aggregate estimated reduction (based on actual amounts with respect to
the 1998 Contribution Transactions and currently contemplated amounts
with respect to the pending Contribution Transactions) to TCIC's debt
of $4.2 billion and aggregate estimated reductions (based on 1997
amounts) to TCIC's annual revenue and annual operating income before
depreciation, amortization and other non-cash items and stock
compensation of $1.5 billion and $735 million, respectively.
No assurance can be given that any of the pending Contribution
Transactions will be consummated.
(continued)
I-13
<PAGE> 15
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
amounts in millions
<S> <C> <C>
Parent company debt:
Notes payable (a) $ 8,796 7,949
Commercial paper 717 533
------- ------
9,513 8,482
Debt of subsidiaries:
Bank credit facilities (b) 2,311 4,268
Notes payable (a) 586 723
Convertible notes (c) 40 40
Capital lease obligations and
other debt 193 15
------- ------
$12,643 13,528
======= ======
</TABLE>
(a) During the six months ended June 30, 1998, TCIC purchased
certain notes payable which had an aggregate principal balance
of $299 million and fixed interest rates ranging from 8.67% to
10.125% (the "1998 Purchases"). In connection with the 1998
Purchases, TCIC recognized a loss on early extinguishment of
debt of $38 million. Such loss related to prepayment penalties
amounting to $34 million and the retirement of deferred loan
costs.
During the six months ended June 30, 1997, TCIC purchased
certain notes payable which had an aggregate principal balance
of $190 million and fixed interest rates ranging from 8.75% to
10.13% (the "1997 Purchases"). In connection with the 1997
Purchases TCIC recognized a loss on early extinguishment of
debt of $11 million. Such loss related to prepayment penalties
amounting to $7 million and the retirement of deferred loan
costs.
(b) At June 30, 1998, TCIC had approximately $2.6 billion of
availability in unused lines of credit, excluding amounts
related to lines of credit which provide availability to
support commercial paper. TCIC is required to maintain unused
availability under bank credit facilities to the extent of
outstanding commercial paper. Also, TCIC pays fees ranging
from 1/4% to 1/2% per annum on the average unborrowed portion
of the total amount available for borrowings under bank credit
facilities.
(continued)
I-14
<PAGE> 16
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(c) These convertible notes, which are stated net of unamortized
discount of $166 million at June 30, 1998 and December 31,
1997, mature on December 18, 2021. The notes require, so long
as conversion of the notes has not occurred, an annual
interest payment through 2003 equal to 1.85% of the face
amount of the notes. At June 30, 1998, the notes were
convertible, at the option of the holders, into an aggregate
of 24,163,259 shares of TCI Group Series A Stock, 19,416,910
shares of Liberty Group Series A Stock, 20,711,373 shares of
TCI Ventures Group Series A Stock and 3,451,897 shares of
Series A Common Stock, $1.00 par value per share, of TCI
Satellite Entertainment, Inc.
TCIC's bank credit facilities and various other debt instruments
generally contain restrictive covenants which require, among other
things, the maintenance of certain earnings, specified cash flow and
financial ratios (primarily the ratios of cash flow to total debt and
cash flow to debt service, as defined), and include certain limitations
on indebtedness, investments, guarantees, dispositions, stock
repurchases and/or dividend payments.
The fair value of TCIC's debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered
to TCIC for debt of the same remaining maturities. At June 30, 1998,
the fair value of TCIC's debt was $13,332 million, as compared to a
carrying value of $12,643 million on such date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into variable and fixed interest
rate exchange agreements ("Interest Rate Swaps") pursuant to which it
(i) pays a fixed interest rate (the "Fixed Rate Agreement") of 6.2% and
receives variable interest rates on a notional amount of $10 million at
June 30, 1998 and (ii) pays variable interest rates (the "Variable Rate
Agreements") and receives fixed interest rates ranging from 4.8% to
9.7% on notional amounts of $2,400 million at June 30, 1998. During the
six months ended June 30, 1998 and 1997, the Company's net payments
pursuant to the Fixed Rate Agreement were less than $1 million and $4
million, respectively; and the Company's net receipts pursuant to the
Variable Rate Agreements were $4 million and $11 million, respectively.
(continued)
I-15
<PAGE> 17
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Information concerning TCIC's Variable Rate Agreements at June 30, 1998
is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to
be paid
Expiration Interest rate Notional (received) upon
date to be received amount termination(a)
---------- -------------- -------- ---------------
<S> <C> <C> <C> <C>
September 1998 4.8%-5.4% $ 450 $ 2
April 1999 7.4% 50 (1)
September 1999 6.4% 350 (3)
February 2000 5.8%-6.6% 300 (3)
March 2000 5.8%-6.0% 675 (1)
September 2000 5.1% 75 1
March 2027 9.7% 300 (30)
December 2036 9.7% 200 (8)
------ ----
$2,400 $(43)
====== ====
</TABLE>
-----------------
(a) The estimated amount that TCIC would pay or receive to
terminate the agreements at June 30, 1998, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
The Fixed Rate Agreement expires in August 1998. At June 30, 1998, the
Company would be required to pay less than $1 million to terminate the
Fixed Rate Agreement.
In addition to the Fixed and Variable Rate Agreements, TCIC entered
into Interest Rate Swaps pursuant to which it pays a variable rate
based on the London Interbank Offered Rate ("LIBOR") (6.1% at June 30,
1998) and receives a variable rate based on the Constant Maturity
Treasury Index ("CMT") (5.9% at June 30, 1998) on a notional amount of
$400 million through September 2000; and pays a variable rate based on
LIBOR (6.0% at June 30, 1998) and receives a variable rate based on CMT
(6.0% at June 30, 1998) on notional amounts of $95 million through
February 2000. During the six months ended June 30, 1998, TCIC's net
payments pursuant to such agreements were less than $1 million. At June
30, 1998, TCIC would be required to pay an estimated $3 million to
terminate such Interest Rate Swaps.
TCIC is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, as of
June 30, 1998, TCIC does not anticipate that it will incur any material
credit losses because it does not anticipate nonperformance by the
counterparties. Further, TCIC does not anticipate material near-term
losses in future earnings, fair values or cash flows resulting from
derivative financial instruments.
(continued)
I-16
<PAGE> 18
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(8) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of the
Company
The Trust Preferred Securities are presented together in a separate
line item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities of the
Company." Dividends accrued on the Trust Preferred Securities
aggregated $71 million and $61 million for the six months ended June
30, 1998 and 1997, respectively, and are included in minority interests
in earnings of consolidated subsidiaries in the accompanying
consolidated financial statements.
(9) Related Party Transactions
At June 30, 1998, amounts due from related parties include (i) $71
million representing the net amount due from TCI and certain
subsidiaries of TCI pursuant to promissory notes, including accrued
interest, and (ii) $21 million representing the net amount due from TCI
pursuant to a non-interest bearing intercompany account. The net
intercompany interest income earned on the promissory notes aggregated
$4 million and $9 million during the six months ended June 30, 1998 and
1997, respectively.
As a part of a legal restructuring that was completed in connection
with the April 30, 1998 formation of one of the 1998 Joint Ventures,
TCI transferred 50% of its 100% ownership interest in TKR Cable
Partners to the Company. At the time of the transfer, TKR Cable
Partners owned a 30% interest in TCI TKR L.P., a 70%-owned subsidiary
of the Company and the parent of TCI TKR Cable II, Inc. ("TCI TKR II").
Upon completion of the restructuring, TCI's 30% minority ownership
interest in TCI TKR L.P. was eliminated and TCI and the Company each
became an owner of a 50% interest in TCI TKR II. In connection with the
restructuring, the historical cost of the net assets received was
reflected as a $137 million decrease to the amount due from related
parties.
Through June 30, 1997, TCI Starz, Inc. ("TCI Starz"), a subsidiary of
TCI, had a 50.1% partnership interest in QE+Ltd. ("QE+"), which
distributes "STARZ!", a first-run movie premium programming service.
Another subsidiary of TCI, Liberty Media Corporation ("Liberty") held
the remaining 49.9% partnership interest, and TCIC was a party to an
affiliation agreement (the "Old Affiliation Agreement") with QE+
related to the distribution of the STARZ! service.
Subsequent to June 30, 1997, Liberty and TCI Starz entered into a
series of transactions pursuant to which, among other matters, the
business of STARZ! and Encore Media Corporation ("Encore") were
contributed to a newly formed limited liability company ("Encore Media
Group"). Upon consummation of the transactions, Liberty owned 100% of
Encore Media Group.
(continued)
I-17
<PAGE> 19
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
In connection with the formation of Encore Media Group, the Old
Affiliation Agreement was canceled, and the Company and a subsidiary of
Encore Media Group entered into a new affiliation agreement (the "EMG
Affiliation Agreement"). Pursuant to the EMG Affiliation Agreement, the
Company pays fixed monthly amounts in exchange for unlimited access to
all of the existing Encore and STARZ! services. The fixed annual
amounts increase annually from $220 million in 1998 to $315 million in
2003, and will increase with inflation through 2022.
Charges to TCIC for programming pursuant to the Old Affiliation
Agreement, the EMG Affiliation Agreement and other related party
programming agreements with certain other TCI subsidiaries attributed
to Liberty Media Group aggregated $110 million and $31 million for the
six months ended June 30, 1998 and 1997, respectively. Such charges are
based upon customary rates charged to others.
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group and TCI Ventures Group at rates set at the
beginning of the year based on projected utilization for that year. The
utilization-based charges are set at levels that management believes to
be reasonable and that approximate the costs Liberty Media Group and
TCI Ventures Group would incur for comparable services on a stand-alone
basis. During the six months ended June 30, 1998 and 1997, Liberty
Media Group was allocated $2 million and $1 million, respectively, and
TCI Ventures Group was allocated $6 million and $4 million,
respectively, in corporate general and administrative costs by TCIC.
Such amounts are included in selling, general and administrative
expenses in the accompanying consolidated financial statements.
During 1996, TCIC transferred, subject to regulatory approval, certain
distribution equipment to a subsidiary of Tele-Communications
International, Inc. in exchange for a (pound)15 million ($23 million
using the applicable exchange rate) principal amount promissory note
(the "TVG LLC Promissory Note"). The TVG LLC Promissory Note was
contributed by TCIC to TCI Ventures Group on September 10, 1997. The
distribution equipment was subsequently leased back to TCIC over a five
year term with semi-annual payments of $2 million, plus expenses.
Effective October 1, 1997, such distribution equipment was transferred
back to TCIC and the related lease and the TVG LLC Promissory Note were
canceled. During the six months ended June 30, 1997, (i) the U.S.
dollar equivalent of interest income earned with respect to the TVG LLC
Promissory Note was $1 million and (ii) the U.S. dollar equivalent of
the lease expense under the above-described lease agreement aggregated
$2 million.
Pursuant to an agreement between TCI Music, Inc., a subsidiary of TCI
("TCI Music") and TCI, certain subsidiaries of TCIC are required to
deliver to TCI Music monthly revenue payments aggregating $18 million
annually (adjusted annually for inflation) through 2017. During the six
months ended June 30, 1998, the aggregate amount paid by TCIC to TCI
Music pursuant to such arrangement was $9 million. Such amount is
included as a reduction of revenue in the accompanying consolidated
statements of operations.
(continued)
I-18
<PAGE> 20
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Through September 30, 1997, Liberty Media Group leased satellite
transponder facilities from a subsidiary of TCIC. Charges by TCIC for
such lease arrangements aggregated $4 million for the six months ended
June 30, 1997.
Since October 1, 1997, TCIC leases satellite transponder facilities and
receives video transport services from entities attributed to TCI
Ventures Group. Charges by TCI Ventures Group for such arrangements and
other related operating expenses for the six months ended June 30, 1998
aggregated $6 million. Such amounts are included in operating costs and
expenses in the accompanying consolidated statements of operations.
A subsidiary of TCI that was attributed to TCI Ventures Group leased
certain equipment under a capital lease. During 1997, such equipment
was subleased to TCIC under an operating lease. In January 1998, the
Company paid $7 million to TCI Ventures Group in exchange for TCI
Ventures Group's assignment of its ownership interest in such
subsidiary to TCIC. Due to the related party nature of the transaction,
the $50 million total of the cash payment and the historical cost of
the net liabilities assumed by TCIC (including capital lease
obligations aggregating $176 million) has been reflected as an increase
of TCIC's common stockholder's deficit.
In addition, a subsidiary attributed to TCI Ventures Group distributed
certain program services to TCIC. Charges to TCIC for such services
aggregated $4 million for each of the six months ended June 30, 1998
and 1997, and are included in operating costs and expenses in the
accompanying consolidated financial statements.
TCIC distributed certain program services to a subsidiary attributed to
TCI Ventures Group. The charges, which approximate TCIC's cost,
aggregated $3 million in each of the six month periods ended June 30,
1998 and 1997. Amounts received by TCIC pursuant to this arrangement
are included in operating costs and expenses in the accompanying
combined financial statements.
(10) Commitments and Contingencies
On October 5, 1992, the United States Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). In 1993 and 1994, the Federal Communications Commission
("FCC") adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such
actions, TCIC's basic and tier service rates and its equipment and
installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. Basic and
tier service rates are evaluated against competitive benchmark rates as
published by the FCC, and equipment and installation charges are based
on actual costs. Any rates for Regulated Services that exceeded the
benchmarks were reduced as required by the 1993 and 1994 rate
regulations. The rate regulations do not apply to the relatively few
systems which are subject to "effective competition" or to services
offered on an individual service basis, such as premium movie and
pay-per-view services.
(continued)
I-19
<PAGE> 21
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting
provisions. However, TCIC's rates for Regulated Services are subject to
review by the FCC, if a complaint is filed by a customer, or the
appropriate franchise authority, if such authority has been certified
by the FCC to regulate rates. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund
the excess portion of rates received. Any refunds of the excess portion
of tier service rates would be retroactive to the date of complaint.
Any refunds of the excess portion of all other Regulated Service rates
would be retroactive to one year prior to the implementation of the
rate reductions.
TCIC has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $220
million at June 30, 1998. With respect to TCIC's guarantees of $166
million of such obligations, TCIC has been indemnified for any loss,
claim or liability that TCIC may incur, by reason of such guarantees.
As described in note 6, TCIC also has provided certain credit
enhancements with respect to the 1998 Joint Ventures. The Company also
has guaranteed the performance of certain affiliates and other parties
with respect to such parties' contractual and other obligations.
Although there can be no assurance, management of TCIC believes that it
will not be required to meet its obligations under such guarantees, or
if it is required to fulfill any of such obligations, that they will
not be material to TCIC.
TCIC is a direct obligor or guarantor of the payment of certain amounts
that may be due pursuant to motion picture output, distribution and
license agreements. As of June 30, 1998, the amount of such obligations
or guarantees was approximately $272 million. The future obligations of
TCIC with respect to these agreements is not currently determinable
because such amount is dependent upon the number of qualifying films
released theatrically by certain motion picture studios as well as the
domestic theatrical exhibition receipts upon the release of such
qualifying films.
As described in note 9, TCIC has agreed to make fixed monthly payments
through 2022 to Liberty Media Group pursuant to the EMG Affiliation
Agreement.
The Company is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, the Company is
committed to carry such suppliers' programming on its cable systems.
Additionally, certain of such agreements provide for penalties and
charges in the event the programming is not carried or not delivered to
a contractually specified number of customers.
TCIC is committed to purchase billing services pursuant to three
successive five year agreements. Pursuant to such arrangement, TCIC is
obligated at June 30, 1998 to make minimum payments aggregating
approximately $1.6 billion through 2012. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
(continued)
I-20
<PAGE> 22
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Pursuant to certain agreements between TCI and TCI Music, TCIC is
obligated at June 30, 1998 to make minimum revenue payments through
2017 and minimum license fee payments through 2007 aggregating
approximately $419 million to TCI Music. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
Certain officers and other key employees of the Company hold options
with tandem stock appreciation rights to acquire TCI Group Series A
Stock, Liberty Group Series A Stock and TCI Ventures Group Series A
Stock as well as restricted stock awards of TCI Group Series A Stock,
Liberty Group Series A Stock and TCI Ventures Group Series A Stock.
Estimates of (i) compensation relating to stock appreciation rights
granted to such employees of the Company and (ii) the Company's
allocable portion of compensation with respect to stock appreciation
rights held by certain officers and directors of TCI have been recorded
in the Company's consolidated financial statements. Such estimates are
subject to future adjustment based upon vesting of the related stock
options and stock appreciation rights and the market values of TCI
Group Series A Stock, Liberty Group Series A Stock and TCI Ventures
Group Series A Stock and, ultimately, on the final determination of
market values when such rights are exercised.
TCIC has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is
reasonably possible TCIC may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In
the opinion of management, it is expected that amounts, if any, which
may be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
(continued)
I-21
<PAGE> 23
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital
Terminal Purchase Agreement") with General Instrument Corporation
(formerly NextLevel Systems, Inc., "GI") to purchase advanced digital
set-top devices. The hardware and software incorporated into these
devices will be designed and manufactured to be compatible and
interoperable with the OpenCable(TM) architecture specifications
adopted by CableLabs, the cable television industry's research and
development consortium, in November 1997. NDTC has agreed that Approved
Purchasers will purchase, in the aggregate, a minimum of 6.5 million
set-top devices during calendar years 1998, 1999 and 2000 at an average
price of $318 per basic set-top device. Through June 30, 1998,
approximately 525,000 set-top devices had been purchased pursuant to
this commitment. GI agreed to provide NDTC and its Approved Purchasers
the most favorable prices, terms and conditions made available by GI to
any customer purchasing advanced digital set-top devices. In connection
with NDTC's purchase commitment, GI agreed to grant warrants to
purchase its common stock proportional to the number of devices ordered
by each organization, which as of the effective date of the Digital
Terminal Purchase Agreement, would have represented at least a 10%
equity interest in GI (on a fully diluted basis). Such warrants vest as
annual purchase commitments are met. It is anticipated that the value
associated with such equity interest would be attributed to TCI Group
upon purchase and deployment of the digital set-top devices. See note
2. NDTC has the right to terminate the Digital Terminal Purchase
Agreement if, among other reasons, GI fails to meet a material
milestone designated in the Digital Terminal Purchase Agreement with
respect to the development, testing and delivery of advanced digital
set-top devices.
TCIC has entered into an Operating Lease Agreement (the "Lease") with
an unaffiliated third party (the "Lessor"). Under the Lease, TCIC
agreed to sell to and lease back from the Lessor advanced digital
set-top devices with an initial aggregate net cost of up to $400
million. The initial term of the lease is two years, and it provides
for renewal, at TCIC's option, for up to five additional consecutive
one-year terms. Rent under the lease is payable quarterly. At the end
of the originally scheduled or renewed lease term, TCIC is required to
either (i) purchase the equipment at the Termination Value (as defined
in the lease), or (ii) arrange for the sale of the leased equipment to
a third party and pay the Lessor the difference between the sale price
and a predetermined guaranteed value, which in all cases is less than
the Termination Value. As of June 30, 1998, TCIC has sold and leased
back advanced digital set-top devices under the Lease with an aggregate
cost of $107 million. Current annual lease payments with respect to
such leased equipment are $16 million. The Company has treated the
Lease as an operating lease in the accompanying consolidated financial
statements.
(continued)
I-22
<PAGE> 24
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
During the six months ended June 30, 1998, TCI continued its
enterprise-wide comprehensive efforts to review and correct computer
systems, equipment and related software to ensure they properly
recognize, process and store business information. The computer
systems, equipment and software being evaluated include systems which
are integral to the distribution of TCIC's products and services,
systems that support operations of TCIC and protect its assets, and all
internal use software. TCI is utilizing both internal and external
resources, including the establishment of a year 2000 enterprise
program management office accountable to TCI's executive management to
identify and remediate or replace systems for year 2000 readiness.
During the six months ended June 30, 1998, TCIC began the process of
testing and replacing or remediating critical components of its cable
systems' headend equipment. Although no assurance can be given, TCIC
expects to conclude such testing by December 1998 with replacement or
remediation completed by the end of the first quarter of 1999. Also,
TCIC began the process of remediating systems that control the
commercial advertising in its cable operations. Although no assurance
can be given, those remediation efforts should be complete by mid-1999.
TCIC continued to assess potential year 2000 issues of its affiliated
companies and provided its affiliates with remediation information on
software products and systems. TCIC's business and financial systems
and software which will continue to be utilized by TCIC beyond the year
1999 will be capable of recognizing the year 2000 and therefore should
not require material remediation or replacement.
Significant third party vendors whose systems are critical to TCIC's
cable operations have been identified and surveyed and confirmations
from such parties have been received indicating that they are either
year 2000 ready or have plans in place to become ready. During the six
months ended June 30, 1998, TCIC completed an independent assessment of
a key financial application externally managed by a third party vendor
and determined that such vendor's systems and software should be
compliant by the end of 1998. Also, TCIC has developed and initiated a
plan with key suppliers who provide systems which are integral to the
distribution of TCIC's products and services to upgrade or replace
non-year 2000 compliant systems on a product-by-product and
site-by-site basis by mid-1999.
Management of TCIC intends to have further communication with primary
vendors identified as having systems that are not year 2000 compliant
to assess those vendors' plans for remediating their own year 2000
issues and to assess the impact on TCIC if such vendors fail to
remediate their year 2000 issues. TCIC continues to evaluate the level
of validation it will require of third parties to ensure their year
2000 readiness.
(continued)
I-23
<PAGE> 25
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Management of TCI has not yet determined the full cost associated with
its year 2000 readiness efforts and the related potential impact on
TCI's financial position, results of operations or cash flows but has
identified certain cost elements that, in the aggregate, are not
expected to be less than $63 million, which includes $3 million of
program management expenses incurred during the six months ended June
30, 1998. TCIC's allocable share of such cost elements is estimated to
be not less than $41 million. Although there can be no assurance, TCIC
anticipates that the costs ultimately required to be paid to ensure
TCIC's year 2000 readiness will not have a material adverse effect on
TCIC's financial position, results of operations or cash flows.
However, there can be no assurance that TCIC's systems or the systems
of other companies on which TCIC relies will be converted in time or
that any such failure to convert by TCIC or other companies will not
have a material adverse effect on its financial position, results of
operations or cash flows.
(continued)
I-24
<PAGE> 26
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information concerning
the results of operations and financial condition of the Company. Such
discussion should be read in conjunction with the accompanying consolidated
financial statements and notes thereto of the Company. Additionally, the
following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and consolidated financial statements included in Part II of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. The
following discussion focuses on material trends, risks and uncertainties
affecting the results of operations and financial condition of the Company.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under this caption are forward-looking. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company (or
entities in which the Company has interests), or industry results, to differ
materially from future results, performance or achievements expressed or implied
by such forward-looking statements. Such risks, uncertainties and other factors
include, among others: general economic and business conditions and industry
trends; the regulatory and competitive environment of the industries in which
the Company, and the entities in which the Company has interests, operate;
uncertainties inherent in new business strategies, uncertainties inherent in the
Company's and its major vendors' year 2000 remediation efforts (including
uncertainties with respect to the availability of equipment and skilled
personnel), new product launches and development plans; rapid technological
changes; the acquisition, development and/or financing of telecommunications
networks and services; the development and provision of programming for new
television and telecommunications technologies; future financial performance,
including availability, terms and deployment of capital; the ability of vendors
to deliver required equipment, software and services; availability of qualified
personnel; changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the FCC, and adverse
outcomes from regulatory proceedings; changes in the nature of key strategic
relationships with partners and joint venturers; competitor responses to the
Company's products and services, and the products and services of the entities
in which the Company has interests, and the overall market acceptance of such
products and services; and other factors. These forward-looking statements (and
such risks, uncertainties and other factors) speak only as of the date of this
Report, and the Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein, to reflect any change in the Company's expectations with regard thereto,
or any other change in events, conditions or circumstances on which any such
statement is based.
(continued)
I-25
<PAGE> 27
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Proposed Merger
TCI and AT&T have agreed to a Merger pursuant to, and subject to the
terms and conditions set forth in, the Merger Agreement dated as of June 23,
1998. In the Merger, TCI will become a wholly-owned subsidiary of AT&T. In
addition, TCI has announced its intention, subject to stockholder approval, to
combine the assets and businesses of Liberty Media Group and TCI Ventures Group.
Consummation of the Merger is subject to the satisfaction or waiver of customary
conditions to closing, including but not limited to, the separate approvals of
the stockholders of AT&T and TCI, receipt of all necessary governmental consents
and approvals, and effectiveness of the registration statement registering the
AT&T Common Stock and AT&T Liberty Tracking Stock to be issued to TCI
stockholders in the Merger. As a result, there can be no assurance that the
Merger will be consummated or, if the Merger is consummated, as to the date of
such consummation. For additional information concerning the Merger, see note 2
to the accompanying consolidated financial statements.
Year 2000
During the six months ended June 30, 1998, TCI continued its
enterprise-wide comprehensive efforts to review and correct computer systems,
equipment and related software to ensure they properly recognize, process and
store business information. The computer systems, equipment and software being
evaluated include systems which are integral to the distribution of TCIC's
products and services, systems that support operations of TCIC and protect its
assets, and all internal use software. TCI is utilizing both internal and
external resources, including the establishment of a year 2000 enterprise
program management office accountable to TCI's executive management to identify
and remediate or replace systems for year 2000 readiness.
During the six months ended June 30, 1998, TCIC began the process of
testing and replacing or remediating critical components of its cable systems'
headend equipment. Although no assurance can be given, TCIC expects to conclude
such testing by December 1998 with replacement or remediation completed by the
end of the first quarter of 1999. Also, TCIC began the process of remediating
systems that control the commercial advertising in its cable operations.
Although no assurance can be given, those remediation efforts should be complete
by mid-1999. TCIC continued to assess potential year 2000 issues of its
affiliated companies and provided its affiliates with remediation information on
software products and systems. TCIC's business and financial systems and
software which will continue to be utilized by TCIC beyond the year 1999 will be
capable of recognizing the year 2000 and therefore should not require material
remediation or replacement.
(continued)
I-26
<PAGE> 28
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Significant third party vendors whose systems are critical to TCIC's
cable operations have been identified and surveyed and confirmations from such
parties have been received indicating that they are either year 2000 ready or
have plans in place to become ready. During the six months ended June 30, 1998,
TCIC completed an independent assessment of a key financial application
externally managed by a third party vendor and determined that such vendor's
systems and software should be compliant by the end of 1998. Also, TCIC has
developed and initiated a plan with key suppliers who provide systems which are
integral to the distribution of TCIC's products and services to upgrade or
replace non-year 2000 compliant systems on a product-by-product and site-by-site
basis by mid-1999.
Management of TCIC intends to have further communication with primary
vendors identified as having systems that are not year 2000 compliant to assess
those vendors' plans for remediating their own year 2000 issues and to assess
the impact on TCIC if such vendors fail to remediate their year 2000 issues.
TCIC continues to evaluate the level of validation it will require of third
parties to ensure their year 2000 readiness.
Management of TCI has not yet determined the full cost associated with
its year 2000 readiness efforts and the related potential impact on TCI's
financial position, results of operations or cash flows but has identified
certain cost elements that, in the aggregate, are not expected to be less than
$63 million, which includes $3 million of program management expenses incurred
during the six months ended June 30, 1998. TCIC's allocable share of such cost
elements is estimated to be not less than $41 million. Although there can be no
assurance, TCIC anticipates that the costs ultimately required to be paid to
ensure TCIC's year 2000 readiness will not have a material adverse effect on
TCIC's financial position, results of operations or cash flows. However, there
can be no assurance that TCIC's systems or the systems of other companies on
which TCIC relies will be converted in time or that any such failure to convert
by TCIC or other companies will not have a material adverse effect on its
financial position, results of operations or cash flows.
Material Changes in Results of Operations
Revenue
The operation of the Company's cable television systems is regulated at
the federal, state and local levels. The Cable Television Consumer Protection
and Competition Act of 1992 and the Telecommunications Act of 1996
(collectively, the "Cable Acts") established rules under which the Regulated
Services are regulated if a complaint is filed by a customer or if the
appropriate franchise authority is certified by the FCC to regulate rates. At
June 30, 1998, approximately 67% of the Company's basic customers were served by
cable television systems that were subject to such rate regulation.
(continued)
I-27
<PAGE> 29
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Results of Operations (continued)
During the six months ended June 30, 1998, 75% of the Company's revenue
was derived from Regulated Services. As noted above, any increases in rates
charged for Regulated Services are regulated by the Cable Acts. Moreover,
competitive factors may limit the Company's ability to increase its service
rates.
During the first six months of 1998, TCIC consummated the 1998
Contribution Transactions. Since January 1, 1997, TCIC has also consummated
certain other acquisitions and dispositions. Such transactions affect the
comparability of TCIC's results of operations for the three and six months ended
June 30, 1998 and 1997. For additional information, see notes 4 and 6 to the
accompanying consolidated financial statements of the Company.
TCIC's revenue decreased $69 million or 4% for the three months ended
June 30, 1998, as compared to the corresponding prior year period. Exclusive of
the effects of acquisitions, the 1998 Contribution Transactions and other
dispositions, revenue increased 1%. Revenue from TCIC's customers accounted for
2% of such increase in revenue, primarily as a result of a 6% increase in basic
revenue that was partially offset by a 10% decrease in premium revenue. TCIC
experienced a 5% increase in its average basic rate, an increase in the number
of average basic customers of 1%, a 5% decrease in its average premium rate and
a 5% decrease in the number of average premium subscriptions. Additionally, the
December 31, 1997 termination of an agreement pursuant to which TCIC provided
fulfillment services to a third party resulted in a 1 % decrease in revenue.
TCIC's revenue decreased $63 million or 2% for the six months ended
June 30, 1998, as compared to the corresponding prior year period. Exclusive of
the effects of acquisitions, the 1998 Contribution Transactions and other
dispositions, revenue increased 1%. Revenue from TCIC's customers accounted for
1% of such increase in revenue, primarily as a result of a 5% increase in basic
revenue that was partially offset by a 12% decrease in premium revenue. TCIC
experienced a 5% increase in its average basic rate, a decrease in the number of
average basic customers of less than 1%, a 3% decrease in its average premium
rate and a 9% decrease in the number of average premium subscriptions.
Additionally, the December 31, 1997 termination of an agreement pursuant to
which TCIC provided fulfillment services to a third party resulted in a 1%
decrease in revenue. Advertising sales and other revenue accounted for a 1%
increase in revenue.
Operating Costs and Expenses
Operating expenses decreased $46 million or 8% and $26 million or 2%
for the three months and six months ended June 30, 1998, respectively, as
compared to the corresponding prior year periods. Exclusive of the effects of
acquisitions, the 1998 Contribution Transactions and other dispositions, such
expenses increased 1% and 3%, respectively. Such increases relate primarily to
higher programming and labor costs, which were partially offset by reductions
attributable to higher capitalized labor and overhead resulting from increased
installation and construction activities.
(continued)
I-28
<PAGE> 30
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Results of Operations (continued)
TCIC cannot determine whether, and to what extent, increases in the
cost of programming will affect its future operating costs. However, due to
TCIC's obligations under the EMG Affiliation Agreement with Encore Media Group,
it is anticipated that TCIC's programming costs with respect to the STARZ! and
Encore premium services will increase in 1998 and future periods. See note 9 to
the accompanying consolidated financial statements.
Selling, general and administrative expenses increased $27 million or
9% for the three months ended June 30, 1998, as compared to the corresponding
prior year period. Exclusive of the effects of acquisitions, the 1998
Contribution Transactions and other dispositions, such expenses increased 14%.
Such increase was due primarily to general increases in expenses relating to the
launch of digital products and other initiatives, increased data processing
costs, lower launch and other incentives from programming suppliers and other
individually insignificant increases in general and administrative expenses.
Selling, general and administrative expenses increased $48 million or
8% for the six months ended June 30, 1998, as compared to the corresponding
prior year period. Exclusive of the effects of acquisitions, the 1998
Contribution Transactions and other dispositions, such expenses increased 11%.
Such increase was due primarily to general increases in expenses relating to the
launch of digital products and other initiatives, increased data processing
costs and other individually insignificant increases in general and
administrative expenses.
Certain officers and other key employees of the Company hold options
with tandem stock appreciation rights to acquire TCI Group Series A Stock,
Liberty Group Series A Stock and TCI Ventures Group Series A Stock as well as
restricted stock awards of TCI Group Series A Stock, Liberty Group Series A
Stock and TCI Ventures Group Series A Stock. Estimates of (i) compensation
relating to stock appreciation rights granted to such employees of the Company
and (ii) the Company's allocable portion of compensation with respect to stock
appreciation rights held by certain officers and directors of TCI have been
recorded in the Company's consolidated financial statements. Such estimates are
subject to future adjustment based upon vesting of the related stock options and
stock appreciation rights and the market values of TCI Group Series A Stock,
Liberty Group Series A Stock and TCI Ventures Group Series A Stock and,
ultimately, on the final determination of market values when such rights are
exercised.
Depreciation and amortization expense increased $2 million or 1% and
$30 million or 4% for the three and six months ended June 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
increases represent the net effects of decreases due to the 1998 Contribution
Transactions and other dispositions that were more than offset by increases
attributable to acquisitions and capital expenditures.
Other Income and Expenses
TCIC's interest expense decreased $47 million or 17% and $54 million or
10% for the three and six months ended June 30, 1998, respectively, as compared
to the corresponding prior year periods. Such decreases are primarily the result
of debt reductions attributable to the 1998 Contribution Transactions.
(continued)
I-29
<PAGE> 31
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Results of Operations (continued)
TCIC's share of CSC's losses, including amortization of the difference
between the recorded value of TCIC's investment in CSC and TCIC's proportionate
share of CSC's net deficiency, aggregated $28 million and $46 million for the
three months ended June 30, 1998 and for the period from March 4, 1998 through
June 30, 1998, respectively. As described in note 4 to the accompanying
consolidated financial states of TCIC, TCIC acquired an approximate 18.6% of
ownership interest in CSC on March 4, 1998.
TCIC's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in the
domestic cable television business. TCIC's share of net earnings (losses) of
other affiliates aggregated $(3 million) and $29 million for the three and six
months ended June 30, 1998, respectively, as compared to $(10 million) and $(22
million) for the corresponding prior year periods. A significant portion of the
change from the six months ended June 30, 1997 to the six months ended June 30,
1998 is attributable to the Company's share of a 1998 gain recognized by
InterMedia Partners on the sale of certain cable television systems. Such gain
was recognized by InterMedia Partners prior to the time that the Company began
to consolidate InterMedia Partners. See note 5 to the accompanying consolidated
financial statements.
During the six months ended June 30, 1998 and 1997, TCIC purchased
certain notes payable which had aggregate principle balances of $299 million and
$190 million, respectively. In connection with such purchases, TCIC recognized
losses on early extinguishment of debt of $38 million and $11 million for the
six months ended June 30, 1998 and 1997, respectively. Such losses relate to
prepayment penalties and the retirement of deferred loan costs.
Minority interests in earnings of consolidated subsidiaries aggregated
$46 million and $89 million for the three and six months ended June 30, 1998,
respectively, as compared to $55 million and $81 million for the corresponding
prior year periods. The majority of such amounts represent the accrual of
dividends on the Trust Preferred Securities issued in 1997 and 1996 and the
accrual of dividends on certain preferred securities issued in August 1996 by a
subsidiary of the Company. See note 8 to the accompanying consolidated financial
statements.
Gain on disposition of assets of $193 million for the six months ended
June 30, 1998 relates primarily to the March 4, 1998 contribution of cable
television systems by TCIC to CSC. Such gain represents the excess of the $663
million fair value of CSC Class A common shares received by TCIC over the
historical cost of the net assets transferred by TCIC to CSC. See note 4 to the
accompanying consolidated financial statements.
Net Losses
As a result of the above described fluctuations in the Company's
results of operations, (i) TCIC's net loss (before preferred stock dividend
requirements) of $111 million for the three months ended June 30, 1998 changed
by $98 million, as compared to TCIC's net loss (before preferred stock dividend
requirements) of $13 million for the three months ended June 30, 1997, and (ii)
TCIC's net loss (before preferred stock dividend requirements) of $73 million
for the six months ended June 30, 1998 changed by $99 million, as compared to
TCIC's net earnings (before preferred stock dividend requirements) of $26
million for the six months ended June 30, 1997.
(continued)
I-30
<PAGE> 32
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
MATERIAL CHANGES IN FINANCIAL CONDITION
On March 4, 1998, subsidiaries of TCI (including certain subsidiaries
of TCIC) contributed to CSC certain of its cable television systems serving
approximately 830,000 customers in exchange for approximately 24.5 million newly
issued CSC Class A common shares (as adjusted for a stock dividend). CSC also
assumed and repaid approximately $574 million of debt owed by TCIC to external
parties and $95 million of debt owed to TCI. As a part of such transaction, TCIC
subsidiaries contributed to CSC cable television systems serving approximately
410,000 customers in exchange for approximately 14.0 million shares (as adjusted
for a stock dividend) and CSC assumed approximately $78 million of intercompany
debt owed to TCIC. TCIC has also entered into letters of intent with CSC which
provide for TCIC to acquire a cable system in Michigan and an additional 3% of
CSC's Class A common shares and for CSC to (i) acquire cable systems serving
approximately 250,000 customers in Connecticut and (ii) assume $110 million of
TCIC's debt. The ability of TCIC to sell or increase its investment in CSC is
subject to certain restrictions and limitations set forth in a stockholders
agreement with CSC. For additional information concerning the CSC Transaction,
see note 4 to the accompanying consolidated financial statements.
In addition to the above described CSC transaction, TCIC completed the
1998 Joint Ventures during the first six months of 1998, whereby TCIC
contributed cable television systems serving in the aggregate approximately
670,000 customers to three separate joint ventures in exchange for
non-controlling ownership interests in each of the 1998 Joint Ventures, and the
assumption and repayment by the 1998 Joint Ventures of debt owed by TCIC to
external parties aggregating $323 million and intercompany debt owed to TCIC
aggregating $833 million. In connection with the 1998 Joint Ventures, TCIC has
agreed to take certain steps to support compliance each of the 1998 Joint
Ventures with their payment obligations under certain debt instruments, up to an
aggregate contingent commitment of $784 million. In light of such contingent
commitments, the Company has deferred any gains on the formation of the 1998
Joint Ventures. Such deferred gains, which aggregated $163 million, will not be
recognized until such time as the Company's contingent commitments with respect
to the 1998 Joint Ventures are eliminated. The Company uses the equity method of
accounting to account for its investments in the 1998 Joint Ventures.
Including the 1998 Contribution Transactions, TCIC, as of July 31,
1998, has, since January 1, 1997, contributed, or signed agreements or letters
of intent to contribute within the next twelve months, certain cable television
systems (the "Contributed Cable Systems") serving approximately 3.5 million
basic customers to joint ventures in which TCIC will retain non-controlling
ownership interests (the "Contribution Transactions"). Following the completion
of the Contribution Transactions, TCIC will no longer consolidate the
Contributed Cable Systems. Accordingly, it is anticipated that the completion of
the Contribution Transactions, as currently contemplated, will result in an
aggregate estimated reduction (based on actual amounts with respect to the 1998
Contribution Transactions and currently contemplated amounts with respect to the
pending Contribution Transactions) to TCIC's debt of $4.2 billion and aggregate
estimated reductions (based on 1997 amounts) to TCIC's annual revenue and annual
operating income before depreciation, amortization and other non-cash items and
stock compensation of $1.5 billion and $735 million, respectively. No assurance
can be given that any of the pending Contribution Transactions will be
consummated.
(continued)
I-31
<PAGE> 33
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
A subsidiary of TCI that was attributed to TCI Ventures Group leased
certain equipment under a capital lease. During 1997, such equipment was
subleased to TCIC under an operating lease. In January 1998, the Company paid $7
million to TCI Ventures Group in exchange for TCI Ventures Group's assignment of
its ownership interest in such subsidiary to TCIC. Due to the related party
nature of the transaction, the $50 million total of the cash payment and the
historical cost of the net liabilities assumed by TCIC (including capital lease
obligations aggregating $176 million) has been reflected as an increase of
TCIC's common stockholder's deficit.
At June 30, 1998, subsidiaries of the Company had approximately $2.6
billion of availability in unused lines of credit, excluding amounts related to
lines of credit which provide availability to support commercial paper. Although
such subsidiaries were in compliance with the restrictive covenants contained in
its credit facilities at said date, additional borrowings under the credit
facilities are subject to the subsidiaries' continuing compliance with such
restrictive covenants after giving effect to such additional borrowings. Such
restrictive covenants require, among other things, the maintenance of certain
earnings, specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and include
certain limitations on indebtedness, investments, guarantees, dispositions,
stock repurchases and/or dividend payments. See note 7 to the accompanying
consolidated financial statements for additional information regarding the
Company's debt.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of "Operating Cash
Flow" (operating income before depreciation, amortization, other non-cash items
and stock compensation) ($1,273 million and $1,358 million during the six months
ended June 30, 1998 and 1997, respectively) to interest expense ($492 million
and $546 million during the six months ended June 30, 1998 and 1997,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 259% and 249% during the
six months ended June 30, 1998 and 1997, respectively. Management of the Company
believes that the foregoing interest coverage ratio is adequate in light of the
relative predictability of its cable television operations and interest expense.
However, the Company's current intent is to continue to reduce its outstanding
indebtedness such that its interest coverage ratio could be increased. There is
no assurance that the Company will be able to achieve such objective. In the
event the Company is unable to achieve such objective, management believes that
net cash provided by operating activities, the ability of the Company and its
subsidiaries to obtain additional financing (including the subsidiaries
available lines of credit and access to public debt markets), issuances and
sales of equity of its subsidiaries and proceeds from disposition of assets will
provide adequate sources of short-term and long-term liquidity in the future.
See the Company's consolidated statements of cash flows included in the
accompanying consolidated financial statements.
Operating Cash Flow is a measure of value and borrowing capacity within
the cable television industry and is not intended to be a substitute for cash
flows provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
(continued)
I-32
<PAGE> 34
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($541 million and $846 million
during the six months ended June 30, 1998 and 1997, respectively) generally
reflects net cash from the operations of the Company available for the Company's
liquidity needs after taking into consideration the aforementioned additional
substantial costs of doing business not reflected in Operating Cash Flow.
The amount of capital expended by TCIC for property and equipment was
$475 million, $170 million and $571 million during the six months ended June 30,
1998 and 1997, and the year ended December 31, 1997, respectively. In light of
TCIC's plans to upgrade the capacity of its cable distribution systems, and its
plans to increase the number of customers who subscribe to digital video
services, TCIC anticipates that its annual capital expenditures during the next
several years will significantly exceed the amount expended during 1997. In this
regard, TCIC estimates that it will expend approximately $1.7 billion to $1.9
billion over the next three years to expand the capacity of its cable
distribution systems. TCIC expects that the actual amount of capital that will
be required in connection with its plans to increase the number of digital video
service customers will be significant. However, TCIC cannot reasonably estimate
such actual capital requirement since such actual capital requirement is
dependent upon the extent of any customer increases and the average installed
per-unit cost of digital set-top devices. As described below, TCI is obligated
to purchase a significant number of digital set-top devices over the next three
years.
TCIC's restricted cash includes proceeds received in connection with
certain asset dispositions. Such proceeds, which aggregated $303 million and $34
million at June 30,1998, and December 31, 1997, respectively, are designated to
be reinvested in certain identified assets for income tax purposes.
TCIC has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $220 million at
June 30, 1998. With respect to TCIC's guarantees of $166 million of such
obligations, TCIC has been indemnified for any loss, claim or liability that
TCIC may incur, by reason of such guarantees. TCIC also has provided certain
credit enhancements with respect to the 1998 Joint Ventures. See note 6 to the
accompanying consolidated financial statements. The Company also has guaranteed
the performance of certain affiliates and other parties with respect to such
parties' contractual and other obligations. Although there can be no assurance,
management of TCIC believes that it will not be required to meet its obligations
under such guarantees, or if it is required to meet any of such obligations,
that they will not be material to TCIC.
TCIC's fixed annual commitments pursuant to the EMG Affiliation
Agreement increase annually from $220 million in 1998 to $315 million in 2003,
and will increase with inflation through 2022.
The Company is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, the Company is committed to
carry such suppliers' programming on its cable systems. Additionally, certain of
such agreements provide for penalties and charges in the event the programming
is not carried or not delivered to a contractually specified number of
customers.
(continued)
I-33
<PAGE> 35
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
TCIC is committed to purchase billing services pursuant to three
successive five year agreements. Pursuant to such arrangement, TCIC is obligated
at June 30, 1998 to make minimum payments aggregating approximately $1.6 billion
through December 2012. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
Pursuant to certain agreements between TCI and TCI Music, TCIC is
obligated at June 30, 1998 to make minimum revenue payments through 2017 and
minimum license fee payments through 2007 aggregating approximately $419 million
to TCI Music. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
TCIC is a direct obligor or guarantor of the payment of certain amounts
that may be due pursuant to motion picture output, distribution and license
agreements. As of June 30, 1998, the amount of such obligations or guarantees
was approximately $272 million. The future obligations of TCIC with respect to
these agreements is not currently determinable because such amount is dependent
upon the number of qualifying films released theatrically by certain motion
picture studios as well as the domestic theatrical exhibition receipts upon the
release of such qualifying films.
Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
Approved Purchasers that may be designated from time to time by NDTC, entered
into the Digital Terminal Purchase Agreement with GI to purchase advanced
digital set-top devices. The hardware and software incorporated into these
devices will be designed and manufactured to be compatible and interoperable
with the OpenCable(TM) architecture specifications adopted by CableLabs, the
cable television industry's research and development consortium, in November
1997. NDTC has agreed that Approved Purchasers will purchase, in the aggregate,
a minimum of 6.5 million set-top devices during calendar years 1998, 1999 and
2000 at an average price of $318 per basic set-top device. Through June 30,
1998, approximately 525,000 set-top devices had been purchased pursuant to this
commitment. GI agreed to provide NDTC and its Approved Purchasers the most
favorable prices, terms and conditions made available by GI to any customer
purchasing advanced digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization, which as of
the effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted basis).
Such warrants vest as annual purchase commitments are met. It is anticipated
that the value associated with such equity interest would be attributed to TCI
Group upon purchase and deployment of the digital set-top devices. See note 2 to
the accompanying consolidated financial statements. NDTC has the right to
terminate the Digital Terminal Purchase Agreement if, among other reasons, GI
fails to meet a material milestone designated in the Digital Terminal Purchase
Agreement with respect to the development, testing and delivery of advanced
digital set-top devices.
(continued)
I-34
<PAGE> 36
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
TCIC has entered into an Operating Lease Agreement with an unaffiliated
third party (the "Lessor"). Under the Lease, TCIC agreed to sell to and lease
back from the Lessor advanced digital set-top devices with an initial aggregate
net cost of up to $400 million. The initial term of the lease is two years, and
it provides for renewal, at TCIC's option, for up to five additional consecutive
one-year terms. Rent under the lease is payable quarterly. At the end of the
originally scheduled or renewed lease term, TCIC is required to either (i)
purchase the equipment at the Termination Value (as defined in the lease), or
(ii) arrange for the sale of the leased equipment to a third party and pay the
Lessor the difference between the sale price and a predetermined guaranteed
value, which in all cases is less than the Termination Value. As of June 30,
1998, TCIC has sold and leased back advanced digital set-top devices under the
Lease with an aggregate cost of $107 million. Current annual lease payments with
respect to such leased equipment are $16 million. The Company has treated the
Lease as an operating lease in the accompanying consolidated financial
statements.
The Company's various partnerships and other affiliates accounted for
by the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company), through
net cash provided by their own operating activities and in certain circumstances
through required capital contributions from their partners.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into Interest Rate Swaps pursuant to which
it (i) pays a fixed interest rate of 6.2% and receives variable interest rates
on a notional amount of $10 million at June 30, 1998 and (ii) pays variable
interest rates and receives fixed interest rates ranging from 4.8% to 9.7% on
notional amounts of $2,400 million at June 30, 1998. During the six months ended
June 30, 1998 and 1997, the Company's net payments pursuant to the Fixed Rate
Agreement were less than $1 million and $4 million, respectively; and the
Company's net receipts pursuant to the Variable Rate Agreements were $4 million
and $11 million, respectively.
At June 30, 1998, the Company would be required to pay less than $1
million to terminate the Fixed Rate Agreement and would be entitled to receive
$43 million upon termination of the Variable Rate Agreements.
In addition to the Fixed and Variable Rate Agreements, TCIC entered
into Interest Rate Swaps pursuant to which it pays a variable rate based on
LIBOR (6.1% at June 30, 1998) and receives a variable rate based on CMT (5.9% at
June 30, 1998) on a notional amount of $400 million through September 2000; and
pays a variable rate based on LIBOR (6.0% at June 30, 1998) and receives a
variable rate based on CMT (6.0% at June 30, 1998) on notional amounts of $95
million through February 2000. During the six months ended June 30, 1998, TCIC's
net payments pursuant to such agreements were less than $1 million. At June 30,
1998, TCIC would be required to pay an estimated $3 million to terminate such
Interest Rate Swaps.
(continued)
I-35
<PAGE> 37
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, the Company does not anticipate that
it will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, as of June 30, 1998, TCIC does
not anticipate material near-term losses in future earnings, fair values of cash
flows resulting from derivative financial instruments. See note 7 to the
accompanying consolidated financial statements for additional information
regarding Interest Rate Swaps.
At June 30, 1998, after considering the net effect of the
aforementioned Interest Rate Swaps, TCIC has $6,891 million (or 55%) of fixed
rate debt and $5,752 million (or 45%) of variable-rate debt. Accordingly, in an
environment of rising interest rates, TCIC expects that it would experience an
increase in interest expense.
I-36
<PAGE> 38
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There were no new material legal proceedings or material developments
in previously reported legal proceedings during the quarter ended June
30, 1998 to which the Company or any of its consolidated subsidiaries
is a party or of which any of its property is subject, except as
follows:
New Developments in Previously Reported Litigation
As previously reported, on December 9, 1996, C. Lamont Smith and The
Black Movie Channel, LLC filed suit in the District Court for the City
and County of Denver against subsidiaries of Tele-Communications, Inc.
(TCI Communications, Inc.; Mile Hi Cable Partners, LP; Liberty Media
Corporation and Encore Media Corporation); Black Entertainment
Television; Steve Santamaria; Media Management Group, Inc. and Virginia
Butler. On August 5, 1997, the trial court entered an Order dismissing
all of plaintiffs' claims against defendants Liberty and Encore as well
as plaintiffs' first, second, fifth, and a portion of the twelfth claim
for relief against the remaining TCI defendants. The partnership's
motion for judgment on the pleadings was denied with respect to
plaintiffs' remaining claims. The trial court certified its rulings for
an immediate appeal, which was filed by plaintiffs and will take from
12 to 18 months for a decision from the appellate court. Based upon the
facts available, management believes that, although no assurance can be
given as to the outcome of this action, the ultimate disposition should
not have a material adverse effect upon the financial condition of the
Company.
II-1
<PAGE> 39
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Item 1. Legal Proceedings (continued).
As previously reported, in January of 1995, two class action complaints
("Actions") were filed against Interactive Network, Inc.
("Interactive") and certain of its then current and former officers and
directors (collectively the "Interactive Defendants") in the United
States District Court for the Northern District of California which
sought unspecified damages for alleged violations of the disclosure
requirements of the federal securities laws. The actions were filed on
behalf of a class of shareholders that purchased the stock of
Interactive during the period of August 15, 1994 through November 22,
1994. Pursuant to an order of the Court, the Actions were consolidated
and in April 1995, a Consolidated Amended Class Action Complaint
captioned In re Interactive Network Inc. Securities Litigation
("Consolidated Case") was filed in the same court which sought damages
against the Interaction Defendants for violation of the federal
securities law disclosure requirements during the class period May 2,
1994 through March 31, 1995. On or about January 13, 1997, Plaintiffs
filed a Fourth Amended Complaint, seeking damages against the
Interactive Defendants and Tele-Communications, Inc., TCI
Communications, Inc., TCI Development Corporation, and Gary Howard
(collectively, "the TCI Defendants") for violation of federal
securities law disclosure requirements during the class period May 16,
1994 through March 31, 1995. In addition, the Fourth Amended Complaint
sought damages against the TCI Defendants based upon the allegation
that they were "controlling persons" of Interactive at the time the
alleged wrongs took place. On January 30, 1997, the TCI Defendants and
the Interactive Defendants separately moved to dismiss the Fourth
Amended Complaint on the ground that it failed to state a cause of
action against them. On April 4, 1997, the Court issued an order
dismissing, with prejudice, the primary liability claims against the
TCI Defendants. The Court granted the Plaintiffs leave to amend their
Complaint as to their claim for violation of federal securities law
disclosure requirements against the Interactive Defendants. The Court
further granted Plaintiffs leave to amend their "controlling person"
claim against the TCI Defendants. On or about April 30, 1997,
Plaintiffs filed a Fifth Amended Complaint seeking damages for
violation of federal securities law disclosure requirements against the
Interactive and TCI Defendants during the class period January 19, 1994
through March 31, 1995. The Fifth Amended Complaint also seeks damages
against the TCI Defendants as "controlling persons." On October 9,
1997, the Court granted the Interactive Defendants' Motion to Dismiss
with Prejudice substantial portions of the Fifth Amended Complaint. On
March 30, 1998 the Court entered a stipulated order dismissing all of
the TCI Defendants from the consolidated case. The stipulated dismissal
did not have any adverse effect upon the financial condition of the
Company. Such stipulated dismissal represents the final resolution of
this matter and this case will not be reported on in the future.
II-2
<PAGE> 40
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Item 1. Legal Proceedings (continued).
As previously reported, on February 24, 1997, James Dalton, et al.
filed suit in District Court for Arapahoe County, Colorado, Case No.
97-CV421, against Tele-Communications, Inc. and certain current and
former officers of TCI and its subsidiary, TCI Communications, Inc.
(John C. Malone, Brendan R. Clouston, Barry P. Marshall, Camille K.
Jayne, Sadie N. Decker, Bruce W. Ravenel, Gerald W. Gaines, Bernard W.
Schotters, II) and Daniel L. Ritchie and Donne F. Fisher, in their
capacity as co-personal representatives of the Estate of Bob Magness.
Plaintiffs filed this action under the Colorado Securities Act and
Colorado common law on behalf of all persons who purchased TCI
securities from January 10, 1996 through October 24, 1996 ("the class
period"). On September 3, 1997, defendants motion to dismiss was
denied. Defendants answered the Complaint on October 3, 1997. Discovery
is proceeding and the parties have agreed to attend a mediation which
will take place at some date in the future. Based upon the facts
available, management believes that, although no assurances can be
given as to the outcome of this action, the ultimate disposition should
not have a material adverse effect upon the financial condition of the
Company.
Item 6. Exhibit and Reports on Form 8-K.
(a) Exhibit -
(10) Letter Agreement dated as of November 7, 1997, between
the Company and Marvin Jones
(27) TCI Communications, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended
June 30, 1998:
<TABLE>
<CAPTION>
Date of Item
Report Reported Financial Statements Filed
------- -------- --------------------------
<S> <C> <C>
May 6, 1998 Item 5 None.
May 8, 1998, as Items 2, 5 and 7 CSC Holdings, Inc. (formerly
amended on Cablevision Systems
June 30, 1998 Corporation)
Years ended
December 31, 1997,
1996 and 1995
</TABLE>
II-3
<PAGE> 41
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.
TCI COMMUNICATIONS, INC.
Date: August 14, 1998 By: /s/ Marvin L. Jones
----------------------------------
Marvin L. Jones
President and Chief
Executive Officer
Date: August 14, 1998 By: /s/ Stephen M. Brett
----------------------------------
Stephen M. Brett
Executive Vice President,
General Counsel and
Secretary
Date: August 14, 1998 By: /s/ Bernard W. Schotters
----------------------------------
Bernard W. Schotters
Executive Vice President
(Principal Financial
Officer)
Date: August 14, 1998 By: /s/ Ann M. Koets
----------------------------------
Ann M. Koets
Executive Vice President
(Principal Accounting
Officer)
II-4
<PAGE> 42
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
(10) Letter Agreement dated as of November 7, 1997, between the
Company and Marvin Jones
(27) TCI Communications, Inc. Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10
November 7, 1997
Mr. Marvin Jones
TCI Communications, Inc.
5619 DTC Parkway
Englewood, CO 80111
Dear Marvin:
Thank you for the services to TCI Communications, Inc.
("TCIC") you rendered during the last eight months. This letter agreement sets
forth our understanding as to compensation matters between TCIC and you. Your
annual salary shall be at the rate of $560,000 per year commencing July 1, 1997.
You will receive the same benefits that other senior executives of your level at
TCIC (or Executive Vice Presidents of Tele-Communications, Inc. ("TCI"))
receive. We will consider increases to this annual compensation from time to
time. We will continue to pay you your annual salary until January 1, 2000, or
such later date as to which we shall mutually agree, (the "Term") unless you
voluntarily resign or are terminated for cause. If you die or become disabled to
the extent that you cannot perform your duties, TCIC agrees to pay such annual
salary to your estate or designated beneficiaries.
You will be Executive Vice President and Chief Operating
Officer of TCIC and report to me in my capacity as President and Chief Executive
Officer of TCIC. You will, of course, devote your full time to the providing of
these services.
You will be reimbursed for normal reimbursable expenses
incurred in performing your duties pursuant to TCIC's then standards, but you
shall have the same standards as those of Executive Vice Presidents of TCI.
<PAGE> 2
Mr. Marvin Jones
November 7, 1997
Page Two
If this agreement is terminated prior to the expiration of the
Term for any reason other than cause or your voluntary resignation, you will be
paid the greater of the balance due between the date of termination and January
1, 2000, or two years' annual compensation at its then current level, and all
options granted to you will immediately vest; such options will also vest upon
the expiration of the Term if you are providing the services required hereby
immediately prior to the expiration of the Term.
TCI's Compensation Committee will consider granting to you,
along with other senior officers of TCIC, options in certain TCI securities,
although there are no obligations to grant you additional options.
Again, thank you for your fine work on behalf of TCIC. I hope
this meets with your approval. If so, please indicate by signing in the space
below.
Sincerely,
/s/ Leo J. Hindery, Jr.
Leo J. Hindery, Jr.
SMB/sww
AGREED AND ACCEPTED
this 7th day of November, 1997.
/s/ Marvin Jones
- -------------------------------
Marvin Jones
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TCI COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 382
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,654
<DEPRECIATION> 4,468
<TOTAL-ASSETS> 21,290
<CURRENT-LIABILITIES> 0
<BONDS> 12,643
232
0
<COMMON> 1
<OTHER-SE> (462)
<TOTAL-LIABILITY-AND-EQUITY> 21,290
<SALES> 0
<TOTAL-REVENUES> 2,987
<CGS> 0
<TOTAL-COSTS> 1,080
<OTHER-EXPENSES> 724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 492
<INCOME-PRETAX> (32)
<INCOME-TAX> 41
<INCOME-CONTINUING> (73)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
