<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
incorporation or organization) Identification No.)
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
April 30, 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>
March 31, December 31,
1998 1997
---------- ------------
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ -- 36
Trade and other receivables, net 326 319
Investment in Cablevision Systems Corporation ("CSC"), accounted for under the
equity method (note 3) 645 --
Investments in other affiliates, accounted for under the equity method, and
related receivables (note 4) 259 231
Property and equipment, at cost:
Land 70 70
Distribution systems 9,562 9,547
Support equipment and buildings 1,311 1,351
------- ------
10,943 10,968
Less accumulated depreciation 4,456 4,444
------- ------
6,487 6,524
------- ------
Franchise costs 16,555 17,154
Less accumulated amortization 2,660 2,711
------- ------
13,895 14,443
------- ------
Other assets, net of amortization 316 305
------- ------
$21,928 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>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Liabilities and Common Stockholder's Deficit amounts in millions
Accounts payable $ 161 131
Accrued interest 168 248
Accrued programming expense 261 242
Other accrued expenses 623 651
Debt (note 6) 13,423 13,528
Deferred income taxes 5,325 5,215
Other liabilities 127 125
-------- --------
Total liabilities 20,088 20,140
-------- --------
Minority interests in equity of consolidated subsidiaries 787 787
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 7) 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 1,863 1,857
Accumulated other comprehensive earnings, net of taxes (note 1) 5 4
Accumulated deficit (919) (957)
-------- --------
950 905
Investment in Tele-Communications, Inc. ("TCI"), at cost (1,143) (1,143)
Due from related parties (note 8) (486) (563)
-------- --------
Total common stockholder's deficit (679) (801)
-------- --------
Commitments and contingencies (note 9) $ 21,928 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
March 31,
--------------------
1998 1997
------- -------
amounts in millions
<S> <C> <C>
Revenue (note 8) $ 1,511 1,505
Operating costs and expenses:
Operating:
Related party (note 8) 60 23
Other 504 521
Selling, general and administrative (note 8) 303 282
Stock compensation (note 9) 59 --
Depreciation and amortization 359 331
------- -------
1,285 1,157
------- -------
Operating income 226 348
Other income (expense):
Interest expense (265) (272)
Interest income 1 6
Intercompany interest, net (note 8) 2 3
Share of losses of CSC (note 3) (18) --
Share of earnings (losses) of other affiliates, net (note 4) 32 (12)
Loss on early extinguishment of debt (note 6) (16) --
Minority interests in earnings of consolidated subsidiaries, net (note 7) (43) (26)
Gain on disposition and exchange of assets, net (note 5) 157 18
Other, net 1 (4)
------- -------
(149) (287)
------- -------
Earnings before income taxes 77 61
Income tax expense (39) (22)
------- -------
Net earnings 38 39
Preferred stock dividend requirements (2) (2)
------- -------
Net earnings attributable to common stockholder $ 36 37
======= =======
Comprehensive earnings (note 1) $ 39 44
======= =======
</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
Three months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other Due Total
Common stock Additional comprehensive Investment from common
----------------- paid-in earnings, Accumulated in related stockholder's
Class A Class B capital net of taxes deficit TCI parties deficit
------- ------- ---------- ------------- ----------- ---------- ------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 1 -- 1,857 4 (957) (1,143) (563) (801)
Net earnings -- -- -- -- 38 -- -- 38
Accreted dividends on
redeemable preferred stock -- -- (2) -- -- -- -- (2)
Change in unrealized holding
gains for available-for-sale
securities, net of taxes -- -- -- 1 -- -- -- 1
Gain from contribution of cable
television systems to joint
ventures, net of taxes (note 5) -- -- 58 -- -- -- -- 58
Transfer of net liabilities from
related party (note 8) -- -- (50) -- -- -- -- (50)
Change in due from
related parties -- -- -- -- -- -- 77 77
----- ---- ----- ---- ---- ------ ---- -----
Balance at March 31, 1998 $ 1 -- 1,863 5 (919) (1,143) (486) (679)
===== ==== ===== ==== ==== ====== ==== =====
</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>
Three months ended
March 31,
-----------------------
1998 1997
--------- --------
amounts in millions
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 38 39
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 359 331
Stock compensation 59 --
Payments of obligation relating to stock compensation (27) (1)
Share of losses of CSC 18 --
Share of losses (earnings) of other affiliates, net (32) 12
Loss on early extinguishment of debt 16 --
Deferred income tax expense (benefit) 36 (30)
Minority interests in earnings of consolidated subsidiaries, net 43 26
Gain on disposition and exchange of assets, net (157) (18)
Intercompany tax allocation -- 51
Payments of restructuring charges (3) (16)
Other noncash charges 11 2
Changes in operating assets and liabilities, net of the effect of acquisitions:
Change in receivables (6) 5
Change in accrued interest (80) (103)
Change in other accruals and payables (17) (80)
----- ----
Net cash provided by operating activities 258 218
----- ----
Cash flows from investing activities:
Capital expended for property and equipment (198) (80)
Cash paid for acquisitions (58) (68)
Cash received in exchanges -- 22
Proceeds from disposition of assets 12 140
Additional investments in and loans to affiliates and others (136) --
Collections of loans to affiliates and others 427 1
Other investing activities 2 (21)
----- ----
Net cash provided (used) by investing activities 49 (6)
----- ----
Cash flows from financing activities:
Borrowings of debt 533 284
Repayments of debt (825) (695)
Prepayment penalties on debt (15) --
Payment of redeemable preferred stock dividends (2) (2)
Payment of dividends on subsidiary preferred stock and Trust Preferred Securities (45) (32)
Net change in due from related parties 11 (221)
Proceeds from issuance of Trust Preferred Securities -- 490
----- ----
Net cash used in financing activities (343) (176)
----- ----
Net change in cash and cash equivalents (36) 36
Cash and cash equivalents at beginning of period 36 --
----- ----
Cash and cash equivalents at end of period $ -- 36
===== ====
</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
March 31, 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.
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").
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.
(continued)
I-6
<PAGE> 8
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). The Company has reclassified its
prior period consolidated balance sheet and consolidated statement of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
or losses be reported in a financial statement in the period in which
they are recognized. The Company has included unrealized holding gains
and losses for 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 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.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $345 million and $375 million for the three
months ended March 31, 1998 and 1997, respectively. Also during these
periods, cash paid for income taxes was not material.
(continued)
I-7
<PAGE> 9
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Summary of cash paid for acquisitions and cash received in exchanges is
as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1998 1997
-------- -------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Aggregate cost basis of assets acquired $(250) (67)
Liabilities assumed, net of current assets 2 2
Deferred tax liability recorded in acquisitions 35 --
Minority interests in equity of acquired entities 2 (3)
Elimination of notes receivable from affiliates 129 --
Change in due from related parties resulting from common
stock of TCI issued in acquisition 24 --
----- -----
Cash paid for acquisitions $ (58) (68)
===== =====
Cash received in exchanges:
Aggregate cost basis of assets acquired $ -- (294)
Historical cost of assets disposed of -- 305
Gain recorded on exchange of assets -- 11
----- -----
Cash received in exchanges $ -- 22
===== =====
</TABLE>
For a description of certain non-cash transactions, see notes 4, 5 and
8.
(3) Investment in Cablevision Systems Corporation
As further described in note 5, TCIC acquired an approximate 18.7%
interest in CSC on March 4, 1998. At March 31, 1998, TCIC owned
13,975,524 shares of CSC Class A common stock, which had a closing
market price of $65.75 per share on March 31, 1998.
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 March 31, 1998 (amounts in millions):
<TABLE>
<S> <C>
Revenue $ 236
Operating, selling, general and administrative expenses (202)
Depreciation and amortization (56)
-----
Operating loss (22)
Interest expense (35)
Other, net (18)
-----
Net loss $ (75)
=====
</TABLE>
(continued)
I-8
<PAGE> 10
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(4) 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>
Three months ended
March 31,
-----------------------
Combined Operations 1998 1997
- ------------------- --------- --------
amounts in millions
<S> <C> <C>
Revenue $ 105 83
Operating, selling, general and administrative expenses (56) (51)
Depreciation and amortization (42) (36)
-------- ------
Operating income (loss) 7 (4)
Interest expense (22) (19)
Other, net 2 2
-------- ------
Net loss $ (13) (21)
======== ======
</TABLE>
During 1997, TCIC adopted the equity method of accounting for its investment in
InterMedia Partners, a California limited partnership ("InterMedia Partners").
In January 1998, 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-9
<PAGE> 11
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(5) Acquisitions and Dispositions
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). Such shares represent an approximate 32.7% equity
interest in CSC's total outstanding shares and an approximate 9% voting
interest in CSC in all matters except for the election of directors, in
which case TCI has an approximate 47% voting interest in the election
of one-fourth of CSC's directors. 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) or 18.7% 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 this
transaction, TCIC recognized a $148 million gain in the accompanying
consolidated statement of operations for the three months ended March
31, 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. In light of TCI's
overall ownership interest in CSC of approximately 32.7%, TCIC will
account for its approximate 18.7% ownership interest in CSC under the
equity method.
During the first quarter of 1998, TCIC also completed two transactions
whereby TCIC contributed cable television systems serving in the
aggregate approximately 235,000 customers to two separate joint
ventures (collectively, the "Q1 Joint Ventures") in exchange for
non-controlling ownership interests in each of the Q1 Joint Ventures,
and the assumption and repayment by the Q1 Joint Ventures of
intercompany debt owed to TCIC aggregating $343 million. In connection
with such transactions, TCIC has agreed to take certain steps to
support compliance by the Q1 Joint Ventures with their payment
obligations under certain debt instruments, up to an aggregate total
contingent commitment of $294 million. In light of such agreement, the
$97 million aggregate excess of the TCIC debt assumed by the Q1 Joint
Ventures over the historical cost of the remaining net assets
contributed to the Q1 Joint Ventures has been reflected as a direct
decrease to consolidated deficit (net of related deferred income taxes
of $39 million). The Company uses the equity method of accounting to
account for its investments in the Q1 Joint Ventures. The March 4, 1998
CSC transaction and the formation of the Q1 Joint Ventures are
collectively referred to herein as the "Q1 1998 Contribution
Transactions."
(continued)
I-10
<PAGE> 12
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
On April 30, 1998, TCIC contributed certain cable television systems
serving in the aggregate approximately 435,000 customers in Kentucky to
a joint venture in exchange for a 49% limited partnership interest in
such joint venture, and the assumption and repayment by such joint
venture of intercompany debt owned to TCIC and debt owed by TCIC to
external parties aggregating $812 million. In connection with such
transaction, TCIC has agreed to take certain steps to support
compliance by the joint venture with its payment obligations under
certain debt instruments, up to an aggregate total contingent
commitment of $490 million. TCIC will use the equity method of
accounting to account for its investment in this joint venture.
Including the Q1 1998 Contribution Transactions and the above-described
April 30, 1998 transaction, TCIC, as of April 30, 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 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 Q1 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 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.
(6) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
amounts in millions
<S> <C> <C>
Parent company debt:
Notes payable (a) $ 8,216 7,949
Commercial paper 528 533
------- -------
8,744 8,482
Debt of subsidiaries:
Bank credit facilities (b) 3,718 4,268
Notes payable (a) 723 723
Convertible notes (c) 40 40
Capital lease obligations and other debt 198 15
------- -------
$13,423 13,528
======= =======
</TABLE>
(continued)
I-11
<PAGE> 13
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(a) During the three months ended March 31, 1998, TCIC purchased
in the open market certain notes payable which had an
aggregate principal balance of $95 million and fixed interest
rates ranging from 8.75% to 10.125% (the "1998 Purchases"). In
connection with the 1998 Purchases, TCIC recognized a loss on
early extinguishment of debt of $16 million. Such loss related
to prepayment penalties amounting to $15 million and the
retirement of deferred loan costs.
(b) At March 31, 1998, TCIC had approximately $1.8 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.
(c) These convertible notes, which are stated net of unamortized
discount of $166 million at March 31, 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 March 31, 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 March 31, 1998,
the fair value of TCIC's debt was $14,208 million, as compared to a
carrying value of $13,423 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 fixed interest rates (the "Fixed Rate Agreements") of 6.2% and
receives variable interest rates on a notional amount of $10 million at
March 31, 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 March 31, 1998. During
the three months ended March 31, 1998 and 1997, the Company's net
receipts (payments) pursuant to the Fixed Rate Agreements were (less
than $1 million) and $3 million, respectively; and the Company's net
receipts pursuant to the Variable Rate Agreements were $3 million and
$1 million, respectively.
(continued)
I-12
<PAGE> 14
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Information concerning TCIC's Variable Rate Agreements at March 31,
1998 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to
be paid
Expiration Interest rate Notional (received) upon
date to be received amount termination (a)
---------- ------------- -------- ---------------
<S> <C> <C> <C>
September 1998 4.8%-5.4% $ 450 $ 1
April 1999 7.4% 50 (1)
September 1999 6.4% 350 (2)
February 2000 5.8%-6.6% 300 (2)
March 2000 5.8%-6.0% 675 --
September 2000 5.1% 75 2
March 2027 9.7% 300 (18)
December 2036 9.7% 200 (7)
------ -------
$2,400 $ (27)
====== =======
</TABLE>
- -----------------
(a) The estimated amount that TCIC would pay or receive to
terminate the agreements at March 31, 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 March 31, 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 March 31,
1998) and receives a variable rate based on the Constant Maturity
Treasury Index ("CMT") (6.0% at March 31, 1998) on a notional amount of
$400 million through September 2000; and pays a variable rate based on
LIBOR (6.0% at March 31, 1998) and receives a variable rate based on
CMT (6.1% at March 31, 1998) on notional amounts of $95 million through
February 2000. During the three months ended March 31, 1998, TCIC's net
payments pursuant to such agreements were less than $1 million. At
March 31, 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, 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 as of March 31, 1998.
(continued)
I-13
<PAGE> 15
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(7) 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 $35 million and $25 million for the three months ended March
31, 1998 and 1997, respectively, and are included in minority interests
in earnings of consolidated subsidiaries in the accompanying
consolidated financial statements.
(8) Related Party Transactions
At March 31, 1998, amounts due from related parties include (i) $176
million representing the net amount due from TCI and certain
subsidiaries of TCI pursuant to promissory notes, including accrued
interest, and (ii) $310 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
$2 million and $3 million during the three months ended March 31, 1998
and 1997, respectively
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.
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 TCI Music, Inc., a subsidiary of TCI ("TCI
Music"), and certain other subsidiaries attributed to Liberty Media
Group aggregated $56 million and $37 million for the three months ended
March 31, 1998 and 1997, respectively. Such charges are based upon
customary rates charged to others.
(continued)
I-14
<PAGE> 16
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group and TCI Ventures Group at rates set at the
beginning of the year based on projected utilization for that year. The
utilization-based charges are set at levels that management believes to
be reasonable and that approximate the costs Liberty Media Group and
TCI Ventures Group would incur for comparable services on a stand-alone
basis. During the three months ended March 31, 1998 and 1997, Liberty
Media Group was allocated $1 million and less than $1 million,
respectively, and TCI Ventures Group was allocated $2 million and $2
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 TINTA in exchange for a
(pound)15 million ($23 million using the applicable exchange rate)
principal amount promissory note (the "TVG LLC Promissory Note"). The
TVG LLC Promissory Note was contributed by TCIC to TVG LLC 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 three months ended March 31,
1997, (i) the U.S. dollar equivalent of interest income earned with
respect to the TVG LLC Promissory Note was less than $1 million and
(ii) the U.S. dollar equivalent of the lease expense under the
above-described lease agreement aggregated $1 million.
Pursuant to an agreement between 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 three months ended March 31,
1998, the aggregate amount paid by TCIC to TCI Music pursuant to such
arrangement was $5 million. Such amount is included as a reduction of
revenue in the accompanying consolidated statements of operations.
Through September 30, 1997, Liberty Media Group leased satellite
transponder facilities from a subsidiary of TCIC. Charges by TCIC for
such lease arrangements aggregated $2 million for the three months
ended March 31, 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 three months ended March 31,
1998 aggregated $2 million. Such amounts are included in operating
costs and expenses in the accompanying consolidated statements of
operations.
(continued)
I-15
<PAGE> 17
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
A subsidiary of TCI that is 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 consolidated deficit.
In addition, a subsidiary attributed to TCI Ventures Group distributed
certain program services to TCIC. Charges to TCIC for such services
aggregated $2 million for each of the three months ended March 31, 1998
and 1997, and are included in operating costs and expenses in the
accompanying consolidated financial statements.
A tax sharing agreement (as amended, the "Old Tax Sharing Agreement")
among TCI, the Company and certain other subsidiaries of TCI was
implemented effective July 1, 1995. The Old Tax Sharing Agreement
formalized certain of the elements of a pre-existing tax sharing
arrangement and contains additional provisions regarding the allocation
of certain consolidated income tax attributes and the settlement
procedures with respect to the intercompany allocation of current tax
attributes. Under the Old Tax Sharing Agreement, the Company was
responsible to TCI for its share of consolidated income tax liabilities
(computed as if TCI were not liable for the alternative minimum tax)
determined in accordance with the Old Tax Sharing Agreement, and TCI
was responsible to the Company to the extent that the income tax
attributes generated by the Company and its subsidiaries were utilized
by TCI to reduce its consolidated income tax liabilities (computed as
if TCI were not liable for the alternative minimum tax). The tax
liabilities and benefits of such entities so determined are charged or
credited to an intercompany account between TCI and the Company. Such
intercompany account is required to be settled only upon the date that
an entity ceases to be a member of TCI's consolidated group for federal
income tax purposes. Under the Old Tax Sharing Agreement, TCI retains
the burden of any alternative minimum tax and has the right to receive
the tax benefits from an alternative minimum tax credit attributable to
any tax period beginning on or after July 1, 1995 and ending on or
before October 1, 1997.
(continued)
I-16
<PAGE> 18
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Effective October 1, 1997 (the "Effective Date"), the Old Tax Sharing
Agreement was replaced by a new tax sharing agreement, as amended by
the First Amendment thereto (the "New Tax Sharing Agreement"), which
governs the allocation and sharing of income taxes by TCI Group,
Liberty Media Group and TCI Ventures Group (each a "Group"). The
Company and its subsidiaries are members of TCI Group for purposes of
the New Tax Sharing Agreement. Effective for periods on and after the
Effective Date, federal income taxes will be computed based upon the
type of tax paid by TCI (on a regular tax or alternative minimum tax
basis) on a separate basis for each Group. Based upon these separate
calculations, an allocation of tax liabilities and benefits will be
made such that each Group will be required to make cash payments to TCI
based on its allocable share of TCI's consolidated federal income tax
liabilities (on a regular tax or alternative minimum tax basis, as
applicable) attributable to such Group and actually used by TCI in
reducing its consolidated federal income tax liability. Tax attributes
and tax basis in assets would be inventoried and tracked for ultimate
credit to or charge against each Group. Similarly, in each taxable
period that TCI pays alternative minimum tax, the federal income tax
benefits of each Group, computed as if such Group were subject to
regular tax, would be inventoried and tracked for payment to or payment
by each Group in years that TCI utilizes the alternative minimum tax
credit associated with such taxable period. The Group generating the
unutilized tax benefits would receive a cash payment only if, and when,
the unutilized taxable losses of the other Group are actually utilized.
If the unutilized taxable losses expire without ever being utilized,
the Group generating the utilized tax benefits will never receive
payment for such benefits. Pursuant to the New Tax Sharing Agreement,
state and local income taxes are calculated on a separate return basis
for each Group (applying provisions of state and local tax law and
related regulations as if the Group were a separate unitary or combined
group for tax purposes), and TCI's combined or unitary tax liability is
allocated among the Groups based upon such separate calculation.
Notwithstanding the foregoing, items of income, gain, loss, deduction
or credit resulting from certain specified transactions that are
consummated after the Effective Date pursuant to a letter of intent or
agreement that was entered into prior to the Effective Date will be
shared and located pursuant to the terms of the Old Tax Sharing
Agreement, as amended.
(continued)
I-17
<PAGE> 19
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(9) 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.
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 $186
million at March 31, 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.
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 March 31, 1998, the amount of such
obligations or guarantees was approximately $295 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 8, TCIC has agreed to make fixed monthly payments
through 2022 to Liberty Media Group pursuant to the EMG Affiliation
Agreement.
(continued)
I-18
<PAGE> 20
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
As described in note 5, the Company has significant contingent
obligations with respect to certain of its affiliates.
The Company is a party to affiliation agreements with several of its
programming suppliers. Pursuant to these agreements, the Company is
committed to carry such suppliers programming on its cable systems.
Several of these 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 March 31, 1998 to make minimum payments aggregating
approximately $1.6 billion through 2012. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
Pursuant to certain agreements between TCI and TCI Music, TCIC is
obligated at March 31, 1998 to make minimum revenue payments through
2017 and minimum license fee payments through 2007 aggregating
approximately $425 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 value 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
value when the 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-19
<PAGE> 21
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Effective as of December 16, 1997, National Digital Television Center,
Inc. ("NDTC"), a subsidiary of TCI and a member of TCI Ventures Group
on behalf of TCIC and other cable operators that may be designated from
time to time by NDTC ("Approved Purchasers"), entered into an agreement
(the "Digital terminal Purchase Agreement") with General Instrument
Corporation (formerly NextLevel Systems, Inc., "GI") to purchase
advanced digital set-top devices. The hardware and software
incorporated into these devices will be designed and manufactured to be
compatible and interoperable with the Open Cable (R) 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 418 per basic set-top device (including a
required royalty payment). 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 10% equity interest in GI (on a fully diluted basis). 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.
During the three months ended March 31, 1998, TCIC continued its
enterprise-wide comprehensive review of its computer systems and
related software to ensure systems properly recognize the year 2000 and
continue to process business information. The systems being evaluated
include all internal use software and devices and those systems and
devices that manage the distribution of TCIC's products. TCIC is
utilizing both internal and external resources to identify, correct or
reprogram, and test systems for year 2000 readiness.
As of March 31, 1998, TCIC had inventoried substantially all of its
cable systems and began its assessment of the systems that will require
remediation or replacement. Inventoried systems include TCIC's
financial systems and related software, its business systems, data and
voice networks, engineering systems and facilities and related software
supporting the distribution of TCIC's products and other equipment and
systems potentially impacted by the year 2000. Additionally, TCIC began
efforts to assess potential year 2000 issues of its affiliated
companies that are not managed by TCIC and continued to have formal
communications with its principal vendors to determine their year 2000
readiness.
(continued)
I-20
<PAGE> 22
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC completed a preliminary assessment of its systems and related
software that support TCIC's financial applications. For those
financial systems and software which will continue to be utilized by
TCIC beyond the year 1999, TCIC has tentatively concluded that such
systems are capable of recognizing the year 2000 and therefore will not
require material remediation or replacement. One of TCIC's financial
applications is externally managed by a third party vendor and such
financial application will be replaced with software provided by such
vendor. No assurances can be given that as TCIC completes its year 2000
assessment, additional internally managed systems will not be
identified as requiring remediation or replacement. TCIC has completed
an initial assessment of its business systems, including networks,
engineering systems and facilities and related software supporting the
distribution of TCIC's products and has tentatively concluded that
certain portions of those systems will require remediation or
replacement. Although no assurance can be given, management of TCIC
anticipates that such systems will be remediated or replaced prior to
the year 2000.
Significant third party vendors whose systems are critical to TCIC's
cable operations have been identified and/or surveyed and confirmations
from such parties have been received indicating that they are either
year 2000 ready or have plans in place to ensure readiness. 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's assessment of the impact of the year 2000 date change should be
complete by the end of 1998. TCIC continues to evaluate the level of
validation it will require of third parties to ensure their year 2000
readiness. Management of TCIC has not yet determined the cost
associated with its year 2000 readiness efforts and the related
potential impact on TCIC's results of operations but has identified
certain cost elements that, in the aggregate, are not expected to be
less than $20 million. Amounts expended to date have not been material,
although there can be no assurance that costs ultimately required to be
paid to ensure TCIC's year 2000 readiness will not have an adverse
effect on TCIC's financial position. Additionally, 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 an adverse effect on
its financial position.
I-21
<PAGE> 23
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, 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.
Year 2000
During the three months ended March 31, 1998, TCIC continued its
enterprise-wide comprehensive review of its computer systems and related
software to ensure systems properly recognize the year 2000 and continue to
process business information. The systems being evaluated include all internal
use software and devices and those systems and devices that manage the
distribution of TCIC's products. TCIC is utilizing both internal and external
resources to identify, correct or reprogram, and test systems for year 2000
readiness.
(continued)
I-22
<PAGE> 24
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
As of March 31, 1998, TCIC had inventoried substantially all of its
cable systems and began its assessment of the systems that will require
remediation or replacement. Inventoried systems include TCIC's financial systems
and related software, its business systems, data and voice networks, engineering
systems and facilities and related software supporting the distribution of
TCIC's products and other equipment and systems potentially impacted by the year
2000. Additionally, TCIC began efforts to assess potential year 2000 issues of
its affiliated companies that are not managed by TCIC and continued to have
formal communications with its principal vendors to determine their year 2000
readiness.
TCIC completed a preliminary assessment of its systems and related
software that support TCIC's financial applications. For those financial systems
and software which will continue to be utilized by TCIC beyond the year 1999,
TCIC has tentatively concluded that such systems are capable of recognizing the
year 2000 and therefore will not require material remediation or replacement.
One of TCIC's financial applications is externally managed by a third party
vendor and such financial application will be replaced with software provided by
such vendor. No assurances can be given that as TCIC completes its year 2000
assessment, additional internally managed systems will not be identified as
requiring remediation or replacement. TCIC has completed an initial assessment
of its business systems, including networks, engineering systems and facilities
and related software supporting the distribution of TCIC's products and has
tentatively concluded that certain portions of those systems will require
remediation or replacement. Although no assurance can be given, management of
TCIC anticipates that such systems will be remediated or replaced prior to the
year 2000.
Significant third party vendors whose systems are critical to TCIC's
cable operations have been identified and/or surveyed and confirmations from
such parties have been received indicating that they are either year 2000 ready
or have plans in place to ensure readiness. 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 asses the impact on TCIC if such vendors fail to
remediate their year 2000 issues.
TCIC's assessment of the impact of the year 2000 date change should be
complete by the end of 1998. TCIC continues to evaluate the level of validation
it will require of third parties to ensure their year 2000 readiness. Management
of TCIC has not yet determined the cost associated with its year 2000 readiness
efforts and the related potential impact on TCIC's results of operations but has
identified certain cost elements that, in the aggregate, are not expected to be
less than $20 million. Amounts expended to date have not been material, although
there can be no assurance that costs ultimately required to be paid to ensure
TCIC's year 2000 readiness will not have an adverse effect on TCIC's financial
position. Additionally, 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 an
adverse effect on its financial position.
(continued)
I-23
<PAGE> 25
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
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
March 31, 1998, approximately 68% of the Company's basic customers were served
by cable television systems that were subject to such rate regulation.
During the three months ended March 31, 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 quarter of 1998, TCIC consummated the Q1 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 months ended March
31, 1998 and 1997. For additional information, see note 5 to the accompanying
consolidated financial statements of the Company.
TCIC's revenue increased $6 million or less than 1% for the three
months ended March 31, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the Q1 1998 Contribution Transactions
and other dispositions, revenue increased 2%. 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 13% 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 2% decrease in its
average premium rate and an 11% 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 components
accounted for the remaining 2% increase in revenue.
Operating Costs and Expenses
Operating expenses increased $20 million or 4% for the three months
ended March 31, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the Q1 1998 Contribution Transactions
and other dispositions, such expenses increased 8%. Programming expenses
accounted for the majority of such increase. 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 8 to the accompanying consolidated financial
statements.
(continued)
I-24
<PAGE> 26
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Results of Operations (continued)
Selling, general and administrative expenses increased $21 million or
7% for the three months ended March 31, 1998, as compared to the corresponding
prior year period. Exclusive of the effects of acquisitions, the Q1 1998
Contribution Transactions and other dispositions, such expenses increased 12%.
Such increase is due primarily to lower launch and other incentives from
programming suppliers, increased marketing costs relating to the launch of
digital products and other initiatives, 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 value 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 value when the rights are
exercised.
Depreciation and amortization expense increased $28 million or 8% for
the three months ended March 31, 1998, as compared to the corresponding prior
year period. Such increase represents the net effect of decreases due to the Q1
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 $7 million or 3% for the three months
ended March 31, 1998, as compared to the corresponding prior year period, as
TCIC's weighted average interest rate on borrowings and weighted average debt
balances were comparable between the periods.
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 $18 million for the period from March
4, 1998 through March 31, 1998. As described in note 5 to the accompanying
consolidated financial states of TCIC, TCIC acquired an approximate 18.7% of
ownership interest in CSC on March 4, 1998.
(continued)
I-25
<PAGE> 27
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Results of Operations (continued)
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
affiliates was $32 million and $(12 million) during the three months ended March
31, 1998 and 1997, respectively. A significant portion of the change from the
1997 period to the 1998 period 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 4 to the
accompanying consolidated financial statements.
During the three months ended March 31, 1998, TCIC purchased in the
open market certain notes payable which had an aggregate principle balance of
$95 million. In connection with such purchases, TCIC recognized a loss on early
extinguishment of debt of $16 million. Such loss related to prepayment penalties
and the retirement of deferred loan costs.
Minority interests in earnings of consolidated subsidiaries aggregated
$43 million and $26 million for the three months ended March 31, 1998 and 1997,
respectively. 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 7 to the accompanying consolidated financial
statements.
Gain on disposition of assets of $157 million for the three months
ended March 31, 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 5 to the
accompanying consolidated financial statements.
Net Earnings
As a result of the above described fluctuations in the Company's
results of operations, TCIC's net earnings (before preferred stock dividend
requirements) of $38 million for the three months ended March 31, 1998 changed
by $1 million, as compared to TCIC's net earnings (before preferred stock
dividend requirements) of $39 million for the corresponding prior year period.
(continued)
I-26
<PAGE> 28
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). Such shares
represent an approximate 32.7% equity interest in CSC's total outstanding shares
and an approximate 9% voting interest in CSC in all matters except for the
election of directors, in which case TCI has an approximate 47% voting interest
in the election of one-fourth of CSC's directors. 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) or 18.7% 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 this transaction, TCIC recognized a $148 million gain in the accompanying
consolidated statement of operations for the three months ended March 31, 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.
During the first quarter of 1998, TCIC also completed the Q1 Joint
Ventures whereby TCIC contributed cable television systems serving in the
aggregate approximately 235,000 customers to two separate joint ventures in
exchange for non-controlling ownership interests in each of the Q1 Joint
Ventures, and the assumption and repayment by the Q1 Joint Ventures of
intercompany debt owed to TCIC aggregating $343 million. In connection with the
Q1 Joint Ventures, TCIC has agreed to take certain steps to support compliance
by the Q1 Joint Ventures with their payment obligations under certain debt
instruments, up to an aggregate total contingent commitment of $294 million. In
light of such agreement, the $97 million aggregate excess of the TCIC debt
assumed by the Q1 Joint Ventures over the historical cost of the remaining net
assets contributed to the Q1 Joint Ventures has been reflected as a direct
decrease to consolidated deficit (net of related deferred income taxes of $39
million). The Company uses the equity method of accounting to account for its
investments in the Q1 Joint Ventures.
On April 30, 1998, TCIC contributed certain cable television systems
serving in the aggregate approximately 435,000 customers in Kentucky to a joint
venture in exchange for a 49% limited partnership interest in such joint
venture, and the assumption and repayment by such joint venture of intercompany
debt owed to TCIC and debt owed by TCIC to external parties aggregating $812
million. In connection with such transaction, TCIC has agreed to take certain
steps to support compliance by the joint venture with its payment obligations
under certain debt instruments, up to an aggregate total contingent commitment
of $490 million. TCIC will use the equity method of accounting to account for
its investment in this joint venture.
(continued)
I-27
<PAGE> 29
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
Including the Q1 1998 Contribution Transactions and the above-described
April 30, 1998 transaction, TCIC, as of April 30, 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 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 Q1 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 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.
A subsidiary of TCI that is 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 consolidated deficit.
At March 31, 1998, subsidiaries of the Company had approximately $1.8
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 6 to the accompanying
consolidated financial statements for additional information regarding the
Company's debt.
(continued)
I-28
<PAGE> 30
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
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 and stock
compensation) ($644 million and $679 million during the three months ended March
31, 1998 and 1997, respectively) to interest expense ($265 million and $272
million during the three months ended March 31, 1998 and 1997, respectively), is
determined by reference to the consolidated statements of operations. The
Company's interest coverage ratio was 243% and 250% during the three months
ended March 31, 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.
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 ($258 million and $218 million
during the three months ended March 31, 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
$198 million, $80 million and $571 million during the three months ended March
31, 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.
(continued)
I-29
<PAGE> 31
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
TCIC has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $186 million at
March 31, 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. 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 has significant contingent obligations with respect to certain of
its affiliates. See note 5 to the accompanying consolidated financial
statements.
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 several of its
programming suppliers. Pursuant to these agreements, the Company is committed to
carry such suppliers programming on its cable systems. Several of these
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 March 31, 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 March 31, 1998 to make minimum revenue payments through 2017 and
minimum license fee payments through 2007 aggregating approximately $425 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 March 31, 1998, the amount of such obligations or guarantees
was approximately $295 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.
(continued)
I-30
<PAGE> 32
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
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 (including a required
royalty payment). 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). 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.
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 fixed interest rates of 6.2% and receives variable interest rates on
a notional amount of $10 million at March 31, 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 March 31, 1998. During the three months
ended March 31, 1998 and 1997, the Company's net receipts (payments) pursuant to
the Fixed Rate Agreements were (less than $1 million) and $3 million,
respectively; and the Company's net receipts pursuant to the Variable Rate
Agreements were $3 million and $1 million, respectively.
The Fixed Rate Agreement expires in August 1998. At March 31, 1998, the
Company would be required to pay less than $1 million to terminate the Fixed
Rate Agreement.
(continued)
I-31
<PAGE> 33
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Material Changes in Financial Condition (continued)
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 March 31, 1998) and receives a variable rate based on CMT (6.0%
at March 31, 1998) on a notional amount of $400 million through September 2000;
and pays a variable rate based on LIBOR (6.0% at March 31, 1998) and receives a
variable rate based on CMT (6.1% at March 31, 1998) on notional amounts of $95
million through February 2000. During the three months ended March 31, 1998,
TCIC's net payments pursuant to such agreements were less than $1 million. At
March 31, 1998, TCIC would be required to pay an estimated $3 million to
terminate such Interest Rate Swaps.
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, the Company does not anticipate that
it will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, TCIC does not anticipate material
near-term losses in future earnings, fair values of cash flows resulting from
derivative financial instruments as of March 31, 1998. See note 6 to the
accompanying consolidated financial statements for additional information
regarding Interest Rate Swaps.
At March 31, 1998, after considering the net effect of the
aforementioned Interest Rate Swaps, TCIC has $6,452 million (or 48%) of fixed
rate debt and $6,971 million (or 52%) of variable-rate debt. Accordingly, in an
environment of rising interest rates, TCIC expects that it would experience an
increase in interest expense.
I-32
<PAGE> 34
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 March
31, 1998 to which the Company or any of its consolidated subsidiaries
is a party or to which any of its property is subject, except as
follows:
As previously reported, on February 9, 1994, Les Dunnaville and Jay
Sharrieff, former employees of United Cable Television of Baltimore
Limited Partnership, filed an amended complaint in the Circuit Court
for Baltimore City against United Cable Television of Baltimore Limited
Partnership, TCI Cablevision of Maryland, Tele-Communications, Inc. and
three company employees, Roy Harbert, Tony Peduto, and Richard Bushey.
This case was settled in April of 1998. The settlement did not have a
material adverse effect upon the financial condition of the Company.
This case will not be reported on in the future.
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 Company 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> 35
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Item 6. Exhibit and Reports on Form 8-K.
(a) Exhibit -
(27) TCI Communications, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31, 1998:
<TABLE>
<CAPTION>
Date of Item
Report Reported Financial Statements Filed
------ -------- --------------------------
<S> <C> <C> <C>
February 24, 1998 Item 5 None.
</TABLE>
II-2
<PAGE> 36
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: May 13, 1998 By: /s/ Leo J. Hindery, Jr.
------------------------------------
Leo J. Hindery, Jr.
President and Chief
Executive Officer
Date: May 13, 1998 By: /s/ Stephen M. Brett
------------------------------------
Stephen M. Brett
Executive Vice President, General
Counsel and Secretary
Date: May 13, 1998 By: /s/ Bernard W. Schotters
------------------------------------
Bernard W. Schotters
Executive Vice President
(Principal Financial Officer)
Date: May 13, 1998 By: /s/ Gary K. Bracken
------------------------------------
Gary K. Bracken
Executive Vice President and
Controller
(Principal Accounting Officer)
II-3
<PAGE> 37
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:
(27) TCI Communications, Inc. Financial Data Schedule
<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 THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 326
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,943
<DEPRECIATION> 4,456
<TOTAL-ASSETS> 21,928
<CURRENT-LIABILITIES> 0
<BONDS> 13,423
232
0
<COMMON> 1
<OTHER-SE> (680)
<TOTAL-LIABILITY-AND-EQUITY> 21,928
<SALES> 0
<TOTAL-REVENUES> 1,511
<CGS> 0
<TOTAL-COSTS> 564
<OTHER-EXPENSES> 359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 265
<INCOME-PRETAX> 77
<INCOME-TAX> 39
<INCOME-CONTINUING> 38
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
