-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QebENGitqYW8ew5Dns5/587ngGqeT+9eQUH+YtLpid+haL8jlv+SlOU1onkTb0fR MU3qzPNfTlOFBDts1iwzKg== 0000950123-99-002319.txt : 19990323 0000950123-99-002319.hdr.sgml : 19990323 ACCESSION NUMBER: 0000950123-99-002319 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990319 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 99569353 BUSINESS ADDRESS: STREET 1: 32 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2123875400 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 8-K 1 AT&T CORP. 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: March 19, 1999 AT&T CORP. A New York Commission File I.R.S. Employer Corporation No. 1-1105 No.13-4924710
32 Avenue of the Americas, New York, New York 10013-3412 Telephone Number (212) 387-5400 2 AT&T Corp. ITEM 2. ACQUISITION OF ASSETS On March 9, 1999 AT&T Corp. (AT&T) completed the acquisition of Tele-Communications, Inc. (TCI) through a merger. In the merger, AT&T issued (1) 0.7757 AT&T common shares for each share of TCI Group Series A tracking stock, (2) 0.8533 AT&T common shares for each share of TCI Group Series B tracking stock, (3) one share of newly created Liberty Media Group Class A or Class B tracking stock for each outstanding TCI Liberty Media Group Class A or Class B tracking stock, (4) 0.52 share of newly created Liberty Media Group Class A or Class B tracking stock for each outstanding TCI Ventures Group Class A or Class B tracking stock, and (5) a cash payment in lieu of any fractional AT&T common share or newly created Liberty Media Group tracking share. In the merger, AT&T also exchanged AT&T common shares or newly created Liberty Media Group tracking shares for shares of TCI convertible preferred stock. In total, AT&T issued approximately 439 million common shares (excluding Liberty Media Group tracking shares). ITEM 5 OTHER EVENTS. AT&T is making available the combined financial results of Liberty/Ventures Group (a combination of certain assets of Tele-Communications Inc.,) for the year ended December 31, 1998. Filed as Exhibit 99 to this 8-K is the following information: 1. Report of Independent Accountants. 2. Combined Balance Sheets at December 31, 1998 and 1997. 3. Combined Statements of Operations and Comprehensive Earnings for the years ended December 31, 1998, 1997 and 1996. 4. Combined Statements of Equity for the years ended December 31, 1998, 1997 and 1996. 5. Combined Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. 6. Notes to consolidated financial statements. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of businesses acquired The audited financial statements as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 of Tele-Communications Inc., including the report of independent accountants, filed as Exhibit 99.1 to this 8-K includes the following information: 1. Management's Discussion and Analysis 2. Report of Independent Accountants. 3. Consolidated Balance Sheets at December 31, 1998. 4. Consolidated Statements of Operations and Comprehensive Earnings for the years ended December 31, 1998, 1997 and 1996. 5. Consolidated Statement of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996. 6. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. 7. Notes to consolidated financial statements. 3 AT&T Corp. (b) Pro forma financial information Pursuant to paragraph (b)(2) of Item 7 of Form 8-K, the Company hereby files the pro forma financial information included in Exhibit 99.2 as follows: 1. Unaudited pro forma condensed financial introductory paragraph(s). 2. Unaudited pro forma condensed Balance Sheet at December 31, 1998. 3. Unaudited pro forma condensed Income Statement for the year ended December 31, 1998. 4. Notes to unaudited pro forma condensed financial information. (c) Exhibits Exhibit 23.1 Consent of KPMG LLP Exhibit 23.2 Consent of KPMG LLP Exhibit 99 Liberty Media/Ventures Group financial results and other information for the year ended December 31, 1998. Exhibit 99.1 Tele-Communications Inc. financial results and other information for the year ended December 31, 1998. Exhibit 99.2 AT&T Corp. unaudited pro forma condensed financial results for the year ended December 31, 1998. 4 AT&T Corp. 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. AT&T CORP. /s/ N. S. Cyprus ---------------------------------- By: N. S. Cyprus Vice President and Controller March 18, 1999 5 AT&T Corp. Exhibit Index Exhibit 23.1 Consent of KPMG LLP Exhibit 23.2 Consent of KPMG LLP Exhibit 99 Liberty Media/Ventures Group financial results and other information for the year ended December 31, 1998. Exhibit 99.1 Tele-Communications Inc. financial results and other information for the year ended December 31, 1998. Exhibit 99.2 AT&T Corp. unaudited pro forma condensed financial results for the year ended December 31, 1998. EX-23.1 2 CONSENT OF KPMG LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in (i) the Registration Statements (Nos. 333-47257, 33-34265, 33-34264, 33-29256, 33-21937, 33-39708, 333-47251, 33-56643, 33-50819, 33-50817, 33-54797, 333-47255, 33-28665, 33-63195, 333-70279, 333-70279-01, 333-70279-02 and 333-52757) on Form S-8, (ii) the Registration Statements (Nos. 33-42150, 33-42150-01, 33-42150-02, 33-42150-03, 33-52119, 33-52119-01, 33-52119-02, 33-52119-03, 33-52119-05, 33-45302, 33-45302-01, 333-49419, 333-49419-01, 333-49419-02, 333-49419-03, 333-49419-04 and 333-49419-05) on post-effective amendment on Form S-8 to Form S-4, (iii) the Registration Statement (No. 33-57745) on Form S-4, and (iv) the Registration Statements (Nos. 33-49589, 33-59495, 333-71167 and 333-00573) on Form S-3 of AT&T Corp., of our report, dated March 9, 1999, relating to the consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1998, and 1997, and the related consolidated statements of operations and comprehensive earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the March 19, 1999 Current Report on Form 8-K of AT&T Corp. KPMG LLP Denver, Colorado March 19, 1999 EX-23.2 3 CONSENT OF KPMG LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in (i) the Registration Statements (Nos. 333-47257, 33-34265, 33-34264, 33-29256, 33-21937, 33-39708, 333-47251, 33-56643, 33-50819, 33-50817, 33-54797, 333-47255, 33-28665, 33-63195, 333-70279, 333-70279-01, 333-70279-02 and 333-52757) on Form S-8, (ii) the Registration Statements (Nos. 33-42150, 33-42150-01, 33-42150-02, 33-42150-03. 33-52119, 33-52119-01, 33-52119-02, 33-52119-03, 33-52119-05, 33-45302, 33-45302-01, 333-49419, 333-49419-01, 333-49419-02, 333-49419-03, 333-49419-04 and 333-49419-05) on post-effective amendment on Form S-8 to Form S-4, (iii) the Registration Statement (No. 33-57745) on Form S-4, and (iv) the Registration Statements (Nos. 33-49589, 33-59495, 333-71167 and 333-00573) on Form S 3 of AT&T Corp., of our report, dated March 9, 1999, relating to the combined balance sheets of Liberty/Ventures Group as of December 31, 1998 and 1997, and the related combined statements of operations and comprehensive earnings, equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the March 19, 1999 Current Report on Form 8-K of AT&T Corp. KPMG LLP Denver, Colorado March 19, 1999 EX-99 4 LIBERTY MEDIA/VENTURES GROUP FINANCIAL RESULTS 1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Tele-Communications, Inc.: We have audited and reported separately on the consolidated financial statements of Tele-Communications, Inc. and subsidiaries as of December 31, 1998 and 1997 and for each of the years in the three-year period ended December 31, 1998. We have audited the accompanying combined balance sheets of Liberty/Ventures Group (a combination of certain assets of Tele-Communications, Inc., as defined in note 1) as of December 31, 1998 and 1997, and the related combined statements of operations and comprehensive earnings, equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The combined financial statements of Liberty/Ventures Group are presented for purposes of additional analysis of the consolidated financial statements of Tele-Communications, Inc. and subsidiaries. As more fully described in note 1, the combined financial statements of Liberty/Ventures Group are intended to reflect the performance of the businesses of Tele-Communications, Inc., which produce and distribute programming services, Tele-Communications, Inc.'s principal international assets and substantially all of Tele-Communications, Inc.'s domestic non-cable and non-programming assets. The combined financial statements of Liberty/Ventures Group should be read in conjunction with the consolidated financial statements of Tele-Communications, Inc. and subsidiaries. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Liberty/Ventures Group as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Denver, Colorado March 9, 1999 2 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets December 31, 1998 and 1997
1998 1997 ---- ---- Assets amounts in millions Cash and cash equivalents $ 531 224 Restricted cash (note 11) 17 5 Trade and other receivables, net 185 127 Prepaid program rights 146 104 Committed program rights 117 117 Investments in affiliates, accounted for under the equity method, and related receivables (note 5) 3,079 2,654 Investment in Time Warner, Inc. ("Time Warner") (note 6) 7,083 3,538 Investment in AT&T Corp. ("AT&T") (note 7) 3,556 -- Investment in Sprint Corporation ("Sprint") (notes 2 and 5) 2,446 -- Other investments and related receivables (note 8) 1,298 695 Property and equipment, at cost: Land 8 8 Distribution systems 549 856 Support equipment and buildings 378 153 ------- ------- 935 1,017 Less accumulated depreciation 350 280 ------- ------- 585 737 ------- ------- Intangible assets: Excess cost over acquired net assets 1,030 429 Franchise costs 109 108 ------- ------- 1,139 537 Less accumulated amortization 164 86 ------- ------- 975 451 ------- ------- Other assets, at cost, net of accumulated amortization (note 10) 330 275 ------- ------- $20,348 8,927 ======= =======
(continued) 2 3 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets December 31, 1998 and 1997
1998 1997 ---- ---- amounts in millions Liabilities and Combined Equity Accounts payable $ 78 40 Accrued liabilities 204 168 Program rights payable 156 156 Customer prepayments 134 137 Deferred revenue (note 15) 334 -- Deferred option premium (note 6) -- 306 Capital lease obligations (note 15) 190 387 Debt (note 11) 2,706 757 Deferred income taxes (note 12) 4,458 957 Other liabilities 215 90 ------- ------- Total liabilities 8,475 2,998 ------- ------- Minority interests in equity of attributed subsidiaries (notes 5, 9 and 13) 545 620 Obligation to redeem common stock (note 13) 17 -- Combined equity (note 13): Combined equity 6,896 4,011 Accumulated other comprehensive earnings, net of taxes (note 14) 3,718 768 ------- ------- 10,614 4,779 Due to related parties 697 530 ------- ------- Total combined equity 11,311 5,309 ------- ------- Commitments and contingencies (note 15) $20,348 8,927 ======= =======
See accompanying notes to combined financial statements. 3 4 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Operations and Comprehensive Earnings Years ended December 31, 1998 and 1997 and 1996
1998 1997 1996 ---- ---- ---- amounts in millions Revenue: Unaffiliated parties $ 1,301 1,104 1,136 Related parties (note 13) 258 195 117 Net sales from electronic retailing services -- -- 984 ------- ------- ------- 1,559 1,299 2,237 ------- ------- ------- Cost of sales, operating costs and expenses: Cost of sales -- -- 605 Operating 882 682 750 Selling, general and administrative 427 348 563 Charges from related parties (note 13) 28 75 63 Cost of distribution agreements (note 10) 50 -- -- Stock compensation (note 13) 518 296 10 Depreciation and amortization 243 196 210 ------- ------- ------- 2,148 1,597 2,201 ------- ------- ------- Operating income (loss) (589) (298) 36 Other income (expense): Interest expense (116) (57) (68) Interest expense to related parties (note 13) (10) (18) -- Dividend and interest income 100 57 39 Interest income from related parties (note 13) -- 6 14 Share of losses of affiliates, net (note 5) (1,034) (850) (372) Minority interests in losses of attributed subsidiaries 102 25 26 Gain on dispositions, net (notes 5, 6, 7 and 8) 4,738 420 1,558 Gains on issuance of equity by affiliates and subsidiaries (notes 5, 7, 9 and 10) 357 172 13 Other, net 6 2 9 ------- ------- ------- 4,143 (243) 1,219 ------- ------- ------- Earnings (loss) before income taxes 3,554 (541) 1,255 Income tax benefit (expense) (note 12) (1,397) 130 (457) ------- ------- ------- Net earnings (loss) $ 2,157 (411) 798 ======= ======= ======= Other comprehensive earnings, net of taxes: Foreign currency translation adjustments 3 (22) 35 Unrealized holding gains arising during the period, net of reclassification adjustments 2,947 749 (316) ------- ------- ------- Other comprehensive earnings (loss) 2,950 727 (281) ------- ------- ------- Comprehensive earnings (note 14) $ 5,107 316 517 ======= ======= =======
See accompanying notes to combined financial statements. 4 5 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Equity Years ended December 31, 1998, 1997 and 1996
Accumulated other Due to comprehensive (from) Total Combined earnings, related combined equity net of tax parties equity ------ ---------- ------- ------ amounts in millions Balance at January 1, 1996 $ 3,659 322 7 3,988 Net earnings 798 -- -- 798 Foreign currency translation adjustments (note 14) -- 35 -- 35 Recognition of previously unrealized gains on available-for-sale securities (note 14) -- (364) -- (364) Unrealized gains on available-for-sale securities (note 14) -- 48 -- 48 Repurchase of common stock (38) -- -- (38) Issuance of stock by attributed subsidiary 10 -- -- 10 Other transfers from (to) related parties, net 609 -- (141) 468 ------- ------- ------- ------- Balance at December 31, 1996 5,038 41 (134) 4,945 Net loss (411) -- -- (411) Foreign currency translation adjustments (note 14) -- (22) -- (22) Unrealized gains on available-for-sale securities (note 14) -- 749 -- 749 Contribution to combined equity for issuance of common stock to TCI Employee Stock Purchase Plan 2 -- -- 2 Repurchase of common stock (625) -- -- (625) Excess of consideration paid over carryover basis of net assets acquired from related party (219) -- -- (219) Gain in connection with issuance of stock of affiliate (note 5) 66 -- -- 66 Issuance of stock by attributed subsidiary 19 -- -- 19 Issuance of common stock 30 -- -- 30 Excess of cash received over carryover basis of SUMMITrak Assets 30 -- -- 30 Other transfers from related parties, net 81 -- 664 745 ------- ------- ------- ------- Balance at December 31, 1997 4,011 768 530 5,309 Net earnings 2,157 -- -- 2,157 Foreign currency translation adjustments (note 14) -- 3 -- 3 Unrealized gains on available-for-sale securities (note 14) -- 2,947 -- 2,947 Payments for call agreements (140) -- -- (140) Repurchase of common stock (30) -- -- (30) Premium received in connection with put obligation 2 -- -- 2 Reclassification of redemption amount of common stock subject to put obligation (17) -- -- (17) Gain in connection with issuance of stock of affiliate (note 5) 68 -- -- 68 Gain in connection with issuance of stock by attributed subsidiary (note 9) 2 -- -- 2 Issuance of common stock (note 9) 777 -- (5) 772 Transfer of net liabilities to related party 50 -- -- 50 Assignment of option contract from related party 16 -- (16) -- Other transfers from related parties, net -- -- 188 188 ------- ------- ------- ------- Balance at December 31, 1998 $ 6,896 3,718 697 11,311 ======= ======= ======= =======
See accompanying notes to combined financial statements. 5 6 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- amounts in millions (see note 4) Cash flows from operating activities: Net earnings (loss) $ 2,157 (411) 798 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 243 196 210 Cost of distribution agreements 50 -- -- Stock compensation 518 296 10 Payments of stock compensation (58) (75) (1) Share of losses of affiliates, net 1,034 850 372 Deferred income tax expense 1,393 16 471 Intergroup tax allocation (2) (159) (21) Minority interests in losses of attributed subsidiaries (102) (25) (26) Gain on issuance of equity by affiliates and subsidiaries (357) (172) (13) Gain on disposition of assets, net (4,738) (420) (1,558) Other noncash charges 5 32 18 Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables (49) 9 (53) Change in prepaid expenses and committed program rights (39) (3) (12) Change in payables, accruals, customer prepayments and deferred revenue 11 38 50 ------- ------- ------- Net cash provided by operating activities 66 172 245 ------- ------- ------- Cash flows from investing activities: Cash paid for acquisitions (92) (41) (168) Capital expended for property and equipment (144) (168) (221) Cash balances of deconsolidated subsidiaries -- (39) -- Investments in and loans to affiliates and others (1,404) (683) (536) Return of capital from affiliates 12 5 6 Collections on loans to affiliates and others -- 133 24 Cash paid for cable distribution fees -- -- (32) Cash proceeds from dispositions 423 302 170 Other, net (29) (6) (13) ------- ------- ------- Net cash used by investing activities (1,234) (497) (770) ------- ------- -------
(continued) 6 7 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Cash Flows, continued Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 amounts in millions (see note 4) Cash flows from financing activities: Borrowings of debt 2,199 667 470 Repayments of debt and capital lease obligations (622) (348) (628) Issuance of debentures 229 -- 345 Payments for call agreements (140) -- -- Change in restricted cash (12) (5) -- Cash transfers from related parties (216) 310 293 Repurchase of common stock (30) (625) (38) Repurchase of common stock by attributed subsidiary (24) (42) -- Net proceeds from issuance of stock by attributed subsidiaries 75 148 10 Contributions by minority shareholders of attributed subsidiaries -- 4 319 Other, net 16 (4) (9) ------- ------- ------- Net cash provided by financing activities 1,475 105 762 ------- ------- ------- Effect of exchange rate changes on cash -- -- 4 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 307 (220) 241 Cash and cash equivalents at beginning of year 224 444 203 ------- ------- ------- Cash and cash equivalents at end of year $ 531 224 444 ======= ======= =======
See accompanying notes to combined financial statements. 7 8 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements December 31, 1998, 1997 and 1996 (1) Basis of Presentation The accompanying combined financial statements include the accounts of the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that are attributed to Liberty/Ventures Group, as defined below. All significant intercompany accounts and transactions have been eliminated. The combined financial statements of Liberty/Ventures Group are presented for purposes of additional analysis of the consolidated financial statements of TCI and subsidiaries and should be read in conjunction with such consolidated financial statements. On February 17, 1999, TCI received shareholder approval to combine "Liberty Media Group," a group of TCI's assets which produce and distribute programming services, and "TCI Ventures Group," a group of assets comprised of TCI's principal international assets and businesses and substantially all of TCI's non-cable and non-programming assets (collectively, "Liberty/Ventures Group"). On March 9, 1999, the combination of Liberty Media Group and TCI Ventures Group (the "Liberty/Ventures Combination"), was effected in connection with TCI's Merger with AT&T described in note 2. The Liberty/Ventures Combination did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of creditors of TCI or of holders of TCI's or any of its subsidiaries' debt. At December 31, 1998, Liberty/Ventures Group consisted principally of the following assets and their related liabilities: (i) TCI's businesses which provide programming services including production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products, (ii) TCI's businesses engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing, (iii) TCI's businesses engaged in international cable, telephony and programming businesses (Tele-Communications International, Inc. "TINTA") (iv) TCI's principal interests in the telephony business consisting primarily of TCI's investment in the business of providing wireless communications services, using the radio spectrum for broadband personal communications services ("PCS"), to residential and business customers nationwide under the Sprint(R) brand (a registered trademark of Sprint Communications Company, L.P.) through TCI's holdings of a new class of trading stock of Sprint (the "Sprint PCS Group Stock"), TCI's equity interest in AT&T and Western Tele-Communications, Inc. ("WTCI"), a wholly-owned subsidiary of TCI that provides long distance transport of video, voice and data traffic and other telecommunications services to interexchange carriers on a wholesale basis using primarily a digital broadband microwave network located throughout a 12 state region, (v) TCI's businesses engaged in high speed multimedia Internet services, including TCI's interest in At Home Corporation ("@Home") and (vi) other assets, including National Digital Television Center, Inc. ("NDTC"), which provides digital compression and authorization services to programming suppliers and to video distribution outlets. (continued) 8 9 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Targeted Stock TCI's assets and operations were previously included in three separate groups, each of which was tracked separately by public equity securities. These groups were known as Liberty Media Group, TCI Ventures Group and "TCI Group", a group of TCI's assets not attributed to Liberty Media Group or TCI Ventures Group, which is comprised primarily of TCI's domestic cable and communications business. Liberty Media Group was tracked through the Tele-Communications, Inc. Series A Liberty Media Group Common Stock ("Liberty Group Series A Stock") and 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"). TCI Ventures Group was tracked separately through the Tele-Communications, Inc. Series A TCI Ventures Group Common Stock ("TCI Ventures Group Series A Stock") and 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 was intended to reflect the separate performance of Liberty Media Group and the TCI Ventures Group Stock was intended to reflect the separate performance of TCI Ventures Group. TCI Group was tracked through the Tele-Communications, Inc. Series A TCI Group Common Stock (the "TCI Group Series A Stock") and Series B TCI Group Common Stock (the "TCI Group Series B Stock", and together with the TCI Group Series A Stock, the "TCI Group Stock"), respectively. The TCI Group Stock was intended to reflect the separate performance of TCI Group. Each of the separate series of Tele-Communications, Inc. common stock was converted to a series of common stock of AT&T upon the March 9, 1999 merger of TCI into AT&T. See note 2. Collectively, Liberty/Ventures Group and TCI Group are referred to as the "Groups" and individually are referred to as a "Group". The TCI Group Series A Stock, Liberty Group Series A Stock and TCI Ventures Group Series A Stock are sometimes collectively referred to herein as the "Series A Stock," and the TCI Group Series B Stock, Liberty Group Series B Stock and TCI Ventures Group Series B Stock are sometimes collectively referred to herein as the "Series B Stock." Notwithstanding the attribution of assets and liabilities, equity and items of income and expense among TCI Group and Liberty/Ventures Group, each such Group in the capital structure of TCI did not affect the ownership or the respective legal title to such assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each were responsible for their respective liabilities. Holders of TCI Group Stock and Liberty/Ventures Group Stock were common stockholders of TCI and were subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. (continued) 9 10 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Effective with the Liberty/Ventures Combination, debt securities of TCI that were convertible into or exchangeable for shares of TCI Ventures Group Stock were, as a result of the operation of antidilution provisions, adjusted so that there will be delivered upon their conversion or exchange the number of shares of Liberty/Ventures Group Stock that would have been issuable in the Liberty/Ventures Combination with respect to the TCI Ventures Group Stock issuable upon conversion or exchange had such conversion or exchange occurred prior to the record date for the Liberty/Ventures Combination. Options to purchase TCI Ventures Group Stock outstanding at the time of the Liberty/Ventures Combination were adjusted such that the holders of such options have options to purchase that number of shares of Liberty/Ventures Group Stock which the holder would have been entitled to receive had the holder exercised such option to purchase TCI Ventures Group Stock prior to the record date for the Liberty/Ventures Combination. The aggregate exercise price of the previously outstanding options to purchase TCI Ventures Group Stock was not effected by the Liberty/Ventures Combination. Effective with the Liberty/Ventures Combination, preferred stock and debt securities of TCI that were convertible into or exchangeable for shares of Liberty Group Stock did not result in any changes. Such securities will continue to be convertible or exchangeable into the same number of shares of Liberty/Ventures Group Stock. Similarly, options to purchase Liberty Group Stock outstanding at the time of the Liberty/Ventures Combination did not result in any changes. Such options remain options to purchase that number of shares of Liberty/Ventures Group Stock having the same exercise price of the previously outstanding options to purchase Liberty Group Stock. The issuance of shares of Liberty/Ventures Group Stock upon such conversion, exchange or exercise of such convertible securities will not result in any transfer of funds or other assets from TCI Group to Liberty/Ventures Group in consideration of such issuance. In the case of the exercise of such options to purchase Liberty/Ventures Group Stock, the proceeds received upon the exercise of such options will be attributed to Liberty/Ventures Group. (continued) 10 11 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (2) Merger with AT&T On March 9, 1999, AT&T acquired TCI in a merger (the "AT&T/TCI Merger") in which Italy Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into TCI, and TCI thereby became a wholly-owned subsidiary of AT&T. As a result of the AT&T/TCI Merger, each share of TCI Group Series A Stock was converted into 0.7757 of a share of common stock, par value $1.00 per share, of AT&T ("AT&T Common Stock") and each share of TCI Group Series B Stock was converted into 0.8533 of a share of AT&T Common Stock. Upon closing of the AT&T/TCI Merger, the shareholders of Liberty/Ventures Group were issued separate shares of new targeted stock of AT&T in exchange for the shares of Liberty/Ventures Group Stock held. Due to the closing of the Liberty/Ventures Combination occurring simultaneously with the closing of the AT&T/TCI Merger, each share of Liberty Group Series A Stock was converted into one share of a newly created class of AT&T common stock designated as the Class A Liberty Media Group Common Stock, par value $1.00 per share (the "New Liberty Media Group Class A Tracking Stock"), each share of Liberty Group Series B Stock was converted into one share of a newly created class of AT&T common stock designated as the Class B Liberty Media Group Common Stock, par value $1.00 per share (the "New Liberty Media Group Class B Tracking Stock" and together with the New Liberty Media Group Class A Tracking Stock, the "New Liberty Media Group Tracking Stock"), each share of TCI Ventures Group Series A Stock was converted into 0.52 of a share of New Liberty Media Group Class A Tracking Stock and each share of TCI Ventures Group Series B Stock was converted into 0.52 of a share of New Liberty Media Group Class B Tracking Stock. Effective with the AT&T/TCI Merger, each share of TCI's Convertible Preferred Stock Series C-Liberty Media Group was converted into 56.25 shares of New Liberty Media Group Class A Tracking Stock and each share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H was converted into 0.590625 of a share of New Liberty Media Group Class A Tracking Stock. In general, the holders of shares of New Liberty Media Group Class A Tracking Stock and the holders of shares of New Liberty Media Group Class B Tracking Stock will vote together as a single class with the holders of shares of AT&T Common Stock on all matters presented to such stockholders, with the holders being entitled to one-tenth (1/10th) of a vote for each share of New Liberty Media Group Class A Tracking Stock held, 1 vote per share of New Liberty Media Group Class B Tracking Stock held and 1 vote per share of AT&T Common Stock held. (continued) 11 12 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The shares of New Liberty Media Group Tracking Stock issued in the AT&T/TCI Merger are intended to reflect the separate performance of the businesses and assets attributed to Liberty/Ventures Group. Pursuant to, and subject to the terms and conditions set forth in, the Agreement and Plan of Restructuring and Merger, dated as of June 23, 1998, immediately prior to the AT&T/TCI Merger, certain assets previously attributed to Liberty/Ventures Group (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and Teleport Communications Group, Inc. ("TCG") (see note 7), the stock of @Home attributed to Liberty/Ventures Group, the assets and business of NDTC and Liberty/Ventures Group's equity interest in WTCI) were transferred to TCI in exchange for approximately $5.5 billion in cash. Also, upon consummation of the AT&T/TCI Merger, through a new tax sharing agreement between Liberty/Ventures Group and AT&T, Liberty/Ventures Group is entitled to the benefit of approximately $2 billion in net operating loss carryforwards available to the entities included in TCI's consolidated income tax return as of the date of the AT&T/TCI Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service and are subject to limitations on usage which may affect the ultimate amount utilized. Additionally, certain warrants previously attributed to TCI Group were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. Certain agreements entered into at the time of the AT&T/TCI Merger provide, among other things, for preferred vendor status to Liberty/Ventures Group for digital basic distribution on AT&T's systems of new programming services created by Liberty/Ventures Group and for a renewal of existing affiliation agreements. Pursuant to amended corporate governance documents for the entities included in Liberty/Ventures Group and certain agreements among AT&T and TCI, the business of Liberty/Ventures Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T/TCI Merger. Pursuant to a proposed final judgment (the "Final Judgment") agreed to by TCI, AT&T and the United States Department of Justice (the "DOJ") on December 31, 1998, Liberty/Ventures Group transferred all of its beneficially owned securities (the "Sprint Securities") of Sprint to a trustee (the "Trustee") prior to the AT&T/TCI Merger. The Final Judgment, if entered by the United States District Court for the District of Columbia, would require the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities sufficient to cause Liberty/Ventures Group to beneficially own no more than 10% of the outstanding Series 1 PCS Stock of Sprint on a fully diluted basis on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty/Ventures Group. The Final Judgment would provide that the Trustee vote the Sprint Securities beneficially owned by Liberty/Ventures Group in the same proportion as other holders of Sprint's PCS Stock so long as such securities are held by the trust. The Final Judgment would also prohibit the acquisition of Liberty/Ventures Group of additional Sprint Securities, with certain exceptions, without the prior written consent of the DOJ. (continued) 12 13 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (3) Summary of Significant Accounting Policies Cash Equivalents Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1998 and 1997 was not material. Program Rights Prepaid program rights are amortized on a film-by-film basis over the specific number of exhibitions. Committed program rights and program rights payable are recorded at the estimated cost of the programs when the film is available for airing less prepayments. These amounts are amortized on a film-by-film basis over the anticipated number of exhibitions. Investments All marketable equity securities held by Liberty/Ventures Group are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a component of accumulated other comprehensive earnings in combined equity. Realized gains and losses are determined on a specific-identification basis. Other investments in which the ownership interest is less than 20% and are not considered marketable securities are carried at the lower of cost or net realizable value. For those investments in affiliates in which TCI's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize Liberty/Ventures Group's share of net earnings or losses of the affiliates as they occur rather then as dividends or other distributions are received, limited to the extent of Liberty/Ventures Group's investment in, advances to and commitments for the investee. Liberty/Ventures Group's share of net earnings or losses of affiliates includes the amortization of the difference between Liberty/Ventures Group's investment and its share of the net assets of the investee. However, recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to Liberty/Ventures Group's ownership interest in such affiliates. Changes in Liberty/Ventures Group's proportionate share of the underlying equity of an attributed subsidiary or equity method investee, which result from the issuance of additional equity securities by such attributed subsidiary or equity investee, generally are recognized as gains or losses in Liberty/Ventures Group's combined statements of operations. (continued) 13 14 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Property and Equipment Property and equipment, including significant improvements, is stated at cost which includes acquisition costs allocated to tangible assets acquired. Equipment acquired under capital leases are stated at the present value of minimum lease payments, not to exceed the fair value of the leased asset. Construction and initial customer installation costs, including interest during construction, material, labor and applicable overhead, are capitalized. Interest capitalized during 1998, 1997 and 1996 was not material. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 20 years for distribution systems (3 to 5 years for converters and in-home wiring and 10 to 20 years for the remaining components of the distribution system) and 3 to 40 years for support equipment and buildings (3 to 5 years for support equipment and 10 to 40 years for buildings and improvements). Equipment held under capital leases are depreciated on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Repairs and maintenance are charged to operations, and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of cable property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains and losses relating to cable property are only recognized in connection with sales of properties in their entirety. Gains and losses relating to all other assets are recognized at the time of disposal. Excess Cost Over Acquired Net Assets Excess cost over acquired net assets consists of the difference between the cost of acquiring non-cable entities and amounts assigned to their tangible assets. Such amounts are amortized on a straight-line basis over 5 to 30 years. Franchise Costs Franchise costs generally include the difference between the cost of acquiring cable companies and amounts allocated to their tangible assets. Such amounts are amortized on a straight-line basis over 40 years. Impairment of Long-lived Assets Liberty/Ventures Group periodically reviews the carrying amounts of property, plant and equipment and its intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. (continued) 14 15 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Minority Interests Recognition of minority interests' share of losses of attributed subsidiaries is generally limited to the amount of such minority interests' allocable portion of the common equity of those attributed subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of attributed subsidiaries have the right to cause Liberty/Ventures Group to repurchase such holders' common equity. Preferred stock (and accumulated dividends thereon) of attributed subsidiaries are included in minority interests in equity of attributed subsidiaries. Dividend requirements on such preferred stocks are reflected as minority interests in losses of attributed subsidiaries in the accompanying combined statements of operations and comprehensive earnings. Foreign Currency Translation The functional currency of Liberty/Ventures Group is the United States ("U.S.") dollar. The functional currency of Liberty/Ventures Group's foreign operations generally is the applicable local currency for each foreign subsidiary and foreign equity method investee. In this regard, the functional currency of certain of Liberty/Ventures Group's foreign subsidiaries and foreign equity investees is the Argentine peso, the United Kingdom ("UK") pound sterling ("pound sterling" or "pounds"), the French franc ("FF") and the Japanese yen ("(Y)"). All amounts presented herein with respect to operations in Argentina are stated in U.S. dollars because the Argentine government has maintained an exchange rate of one U.S. dollar to one Argentine peso since April of 1991. However, no assurance can be given that the Argentine government will maintain such an exchange rate in future periods. Assets and liabilities of foreign subsidiaries and foreign equity investees are translated at the spot rate in effect at the applicable reporting date, and the combined statements of operations and Liberty/Ventures Group's share of the results of operations of its foreign equity affiliates are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive earnings in combined equity. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the accompanying combined statements of operations and comprehensive earnings as unrealized (based on the applicable period end exchange rate) or realized upon settlement of the transactions. Cash flows from attributed foreign subsidiaries are calculated in their functional currencies. The effect of exchange rate changes on cash balances held in foreign currencies is reported as a separate line item in the accompanying statements of cash flows. Unless otherwise indicated, convenience translations of foreign currencies into U.S. dollars are calculated using the applicable spot rate at December 31, 1998, as published in The Wall Street Journal. (continued) 15 16 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Foreign Currency Derivatives From time to time, Liberty/Ventures Group uses certain derivative financial instruments to manage its foreign currency risks. Amounts receivable or payable pursuant to derivative financial instruments that qualify as hedges of existing assets, liabilities and firm commitments are deferred and reflected as an adjustment of the carrying amount of the hedged item. Market value changes in all other derivative financial instruments are recognized currently in the combined statements of operations and comprehensive earnings. At December 31, 1998 and 1997, Liberty/Ventures Group had no significant deferred hedging gains or losses. Derivative Instruments and Hedging Activities The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, ("Statement 133"), which is effective for all fiscal years beginning after June 15, 1999. Statement 133 establishes accounting and reporting standards for derivative instruments and hedging activities by requiring that all derivative instruments be reported as assets or liabilities and measured at their fair values. Under Statement 133, changes in the fair values of derivative instruments are recognized immediately in earnings unless those instruments qualify as hedges of the (1) fair values of existing assets, liabilities, or firm commitments, (2) variability of cash flows of forecasted transactions, or (3) foreign currency exposures of net investments in foreign operations. Although management of Liberty/Ventures Group has not completed its assessment of the impact of Statement 133 on its combined results of operations and financial position, management estimates that the impact of Statement 133 will not be material. Revenue Recognition Programming revenue is recognized in the period during which programming is provided, pursuant to affiliation agreements. Advertising revenue is recognized, net of agency commissions, in the period during which underlying advertisements are broadcast. Cable revenue is recognized in the period that services are rendered. Cable installation revenue is recognized in the period the related services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution system. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified for comparability with the 1998 presentation. (continued) 16 17 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (4) Supplemental Disclosures to Combined Statements of Cash Flows Cash paid for interest was $112 million , $60 million and $52 million for the years ended December 31, 1998, 1997 and 1996, respectively. Cash paid for income taxes during the years ended December 31, 1998, 1997 and 1996 was $29 million, $35 million and $14 million, respectively. In addition, Liberty/Ventures Group received income tax refunds amounting to $15 million during the year ended December 31, 1996.
Years ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- amounts in millions ------------------- Cash paid for acquisitions: Fair value of assets acquired $ 162 452 688 Net liabilities assumed (107) (209) (115) Debt issued to related parties and others -- (404) (52) Contribution to combined equity from TCI for acquisitions -- -- (196) Deferred tax asset (liability) recorded in acquisition -- 112 (37) Increase in minority interests in equity of attributed subsidiaries due to issuance of shares by attributed subsidiary -- -- (43) Minority interest in equity of acquired attributed subsidiaries 39 (129) (77) Excess consideration paid over carryover basis of net assets acquired from related party -- 219 -- Gain in connection with the issuance of shares by attributed subsidiary (2) -- -- ----- ----- ----- Cash paid for acquisitions $ 92 41 168 ===== ===== =====
(continued) 17 18 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Significant noncash investing and financing activities are as follows:
Years ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- amounts in millions Costs of distribution agreements $ 74 173 -- ===== ===== === Property and equipment purchased under capital leases $ 13 176 64 ===== ===== === Noncash acquisition of minority interest in attributed subsidiaries (notes 9 and 13): Fair value of assets $(741) (29) -- Deferred tax liability recorded 154 -- -- Minority interests in equity of attributed subsidiaries (185) (1) -- Liberty Group Stock issued 772 30 -- ----- ----- --- $ -- -- -- ===== ===== === Common stock received in exchange for option (note 6) $ -- 306 -- ===== ===== === Preferred stock received in exchange for common stock and note receivable (note 8) $ -- 371 -- ===== ===== === Exchange of attributed subsidiaries for note receivable and equity investments $ -- -- 574 ===== ===== ===
Liberty/Ventures Group ceased to include Flextech p.l.c. ("Flextech") and Cablevision S.A. ("Cablevision") in its combined financial results and began to account for Flextech and Cablevision using the equity method of accounting, effective January 1, 1997 and October 1, 1997, respectively. The effects of changing the method of accounting for Liberty/Ventures Group's ownership interests in Flextech and Cablevision as of December 31, 1997 from the consolidation method to the equity method are summarized below (amounts in millions): Assets (other than cash and cash equivalents) reclassified to investments in affiliates $(596) Liabilities reclassified to investments in affiliates 484 Minority interests in equity of attributed subsidiaries reclassified to investments in affiliates 151 ----- Decrease in cash and cash equivalents $ 39 =====
(continued) 18 19 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (5) Investments in Affiliates Liberty/Ventures Group has various investments accounted for under the equity method. The following table includes Liberty/Ventures Group's carrying amount and percentage ownership of the more significant investments at December 31, 1998 and the carrying amount at December 31, 1997:
December 31, 1998 December 31, 1997 ----------------- ----------------- Percentage Carrying Carrying Ownership Amount Amount --------- ------ ------ amounts in millions USA Networks, Inc. ("USAI") and related investments 21% 1,042 348 Sprint Spectrum Holding Company L.P., MinorCo, L.P. and PhillieCo Partnership I, L.P. (the "PCS Ventures") -- -- 607 Telewest Communications plc ("Telewest") 22% 515 324 Flextech 37% 320 261 Cablevision 28% 315 239 Various foreign equity investments (other than Telewest, Flextech and Cablevision) various 346 209 QVC, Inc. ("QVC") 43% 197 134 TCG -- -- 295 Other various 344 237 ----- ---- 3,079 2,654 ===== =====
Summarized unaudited combined financial information for affiliates is as follows:
December 31, ------------ 1998 1997 ---- ---- Combined Financial Position amounts in millions Investments $ 2,003 4,085 Property and equipment, net 8,147 7,250 Franchise costs and other intangibles, net 14,395 7,870 Other assets, net 7,553 10,763 ------- ------- Total assets $32,098 29,968 ======= ======= Debt $15,264 16,051 Other liabilities 11,620 7,724 Owners' equity 5,214 6,193 ------- ------- Total liabilities and equity $32,098 29,968 ======= =======
(continued) 19 20 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements
Years ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- amounts in millions Combined Operations Revenue $ 14,062 7,107 4,576 Operating expenses (13,092) (7,635) (4,727) Depreciation and amortization (2,629) (1,152) (547) -------- -------- -------- Operating loss (1,659) (1,680) (698) Interest expense (1,728) (656) (375) Other, net (166) (443) (267) -------- -------- -------- Net loss $ (3,553) (2,779) (1,340) ======== ======== ========
Pursuant to an agreement among Liberty/Ventures Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty/Ventures Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Silver King Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $4 million in cash, representing the exercise price of the Silver King Option. BDTV-I is a corporation formed by Liberty/Ventures Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty/Ventures Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the Silver King Option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the Federal Communications Commission ("FCC") in June 1996, subject, however, to the condition that the equity interest of Liberty/Ventures Group in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). (continued) 20 21 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. Liberty/Ventures Group accounted for the HSN Merger as a sale of a portion of its investment in HSN and accordingly, recorded a pre-tax gain of approximately $47 million. In order to effect the HSN Merger in compliance with the FCC Order, Liberty/Ventures Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty/Ventures Group received (i) 15.6 million shares of Class B common stock of Silver King, all of which shares Liberty/Ventures Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up to an additional 5.2 million shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty/Ventures Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty/Ventures Group's percentage equity interest), and (iii) approximately 739,000 shares of Class B common stock and 17.6 million shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty/Ventures Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty/Ventures Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. As a result of the HSN Merger, HSN is no longer included in the combined financial results of Liberty/Ventures Group. Subsequent to the HSN Merger, Silver King was renamed HSN, Inc. ("HSNI"). In February 1998, pursuant to an Investment Agreement among Universal Studios, Inc. ("Universal"), HSNI, HSN and Liberty/Ventures Group, HSNI consummated a transaction (the "Universal Transaction") through which Universal sold its 50% interest in USAI, to HSNI and Universal contributed the remaining 50% interest in USAI and its domestic television production and distribution operations to HSNI. Subsequent to these transactions, HSNI was renamed USAI. At the closing of the Universal Transaction, Universal (i) was issued 6 million shares of USAI's Class B common stock, 7 million shares of USAI's common stock and 109 million common equity shares ("LLC Shares") of USANi LLC, a limited liability company formed to hold all of the businesses of USAI and its subsidiaries, except for its broadcasting business and its equity interest in Ticketmaster Group, Inc. and (ii) received a cash payment of $1.3 billion. Pursuant to an Exchange Agreement relating to the LLC Shares (the "LLC Exchange Agreement"), approximately 74 million of the LLC Shares issued to Universal are each exchangeable for one share of USAI's Class B common stock and the remainder of the LLC Shares issued to Universal are each exchangeable for one share of USAI's common stock. (continued) 21 22 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements At the closing of the Universal Transaction, Liberty/Ventures Group was issued 1.2 million shares of USAI's Class B common stock. Of such shares, 800,000 shares of Class B common stock were contributed to BDTV IV INC. (collectively with BDTV-I, BDTV-II and BDTV III INC., "BDTV"), a newly-formed entity having substantially the same terms as BDTV-I, BDTV-II and BDTV III INC. Liberty/Ventures Group accounts for its investment in BDTV under the equity method. On June 24, 1998, USAI consummated the previously announced agreement to acquire the remaining stock of Ticketmaster Group, Inc. which it did not previously own through a tax-free merger (the "Ticketmaster Transaction"). In connection with the increases in USAI's equity, net of the dilution of Liberty/Ventures Group's ownership interest, that resulted from the issuance of common stock by USAI in the Universal Transaction and the Ticketmaster Transaction, Liberty/Ventures Group recorded a $64 million increase to combined equity (after deducting a deferred tax liability of $42 million) and an increase to investment in affiliates of $106 million. No gain was recognized in the combined statements of operations and comprehensive earnings due primarily to Liberty/Ventures Group's commitment to purchase additional equity interests in USAI. In connection with the Universal Transaction, each of Universal and Liberty/Ventures Group was granted a preemptive right with respect to future issuances of USAI's common stock, subject to certain limitations, to maintain their respective percentage ownership interests in USAI that they had prior to such issuances. In connection with such right, during 1998, Liberty/Ventures Group purchased approximately 4.7 million shares of USAI's common stock and approximately 22.9 million LLC Shares for an aggregate cost of approximately $560 million. Pursuant to the LLC Exchange Agreement, each LLC Share issued or to be issued to Liberty/Ventures Group is exchangeable for one share of USAI's common stock. At December 31, 1998, Liberty/Ventures Group held 24.4 million shares of USAI's common stock through BDTV and 5.2 million shares of USAI's common stock directly. Additionally, Liberty/Ventures Group held 22.9 million LLC Shares at December 31, 1998 as well as shares of HSN's common stock which are exchangeable for 16.6 million shares of USAI's common stock. Liberty/Ventures Group's direct ownership of USAI is restricted under the FCC Order. Assuming the exchange of Liberty/Ventures Group's shares in HSN and its LLC Shares for USAI common stock, and the exchange of certain securities owned by Universal and certain of its affiliates for USAI common stock, Liberty/Ventures Group would own 69.1 million shares or approximately 21% of USAI, including shares held through BDTV at December 31, 1998. USAI's common stock had a closing market value of $33-1/8 per share on December 31, 1998. During the years ended December 31, 1998, 1997 and 1996, Liberty/Ventures Group's share of affiliates' earnings (losses) from its interests in USAI and related investments accounted for $30 million, $3 million and ($1 million), respectively. (continued) 22 23 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The PCS Ventures included Sprint Spectrum Holding Company, L. P. ("Sprint Spectrum") and MinorCo, L.P. (collectively, "Sprint PCS") and PhillieCo Partnership I, L.P. ("PhillieCo"). The partners of each of the Sprint PCS partnerships were subsidiaries of Sprint, Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and Liberty/Ventures Group. The partners of PhillieCo were subsidiaries of Sprint, Cox and Liberty/Ventures Group. Liberty/Ventures Group had a 30% partnership interest in each of the Sprint PCS partnerships and a 35% partnership interest in PhillieCo. During the years ended December 31, 1998, 1997 and 1996, the PCS Ventures accounted for $629 million, $493 million and $133 million, respectively, of Liberty/Ventures Group's share of affiliates' losses. On November 23, 1998, Liberty/Ventures Group, Comcast, and Cox exchanged their respective interests in Sprint PCS and PhillieCo (the "PCS Exchange") for shares of Sprint PCS Group Stock which tracks the performance of Sprint's newly created PCS Group (consisting initially of the PCS Ventures and certain PCS licenses which were separately owned by Sprint). The Sprint PCS Group Stock collectively represents an approximate 17% voting interest in Sprint. As a result of the PCS Exchange, Liberty/Ventures Group holds the Sprint Securities which consists of shares of Sprint PCS Group Stock, as well as certain additional securities of Sprint exercisable for or convertible into such securities, representing approximately 24% of the equity value of Sprint attributable to its PCS Group and less than 1% of the voting interest in Sprint. Through November 23, 1998, Liberty/Ventures Group accounted for its interest in the PCS Ventures using the equity method of accounting, however, as a result of the PCS Exchange and Liberty/Ventures Group's less than 1% voting interest in Sprint, Liberty/Ventures Group no longer exercises significant influence with respect to its investment in the PCS Ventures. Accordingly, Liberty/Ventures Group accounts for its investment in the Sprint PCS Group Stock as an available-for-sale security. As a result of the PCS Exchange, Liberty/Ventures Group recorded a non-cash gain of $1.9 billion (before deducting deferred income tax expense of $647 million) during the fourth quarter of 1998 based on the difference between the carrying amount of Liberty/Ventures Group's interest in the PCS Ventures and the fair value of the Sprint Securities received. Telewest currently operates and constructs cable television and telephone systems in the UK. Telewest accounted for $134 million, $145 million and $109 million of Liberty/Ventures Group's share of its affiliates' losses during the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 Liberty/Ventures Group indirectly owned 463 million of the issued and outstanding Telewest ordinary shares. The reported closing price on the London Stock Exchange of Telewest ordinary shares was pound sterling1.74 ($2.88) per share at December 31, 1998. (continued) 23 24 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Effective September 1, 1998, Telewest and General Cable PLC ("General Cable") consummated a merger (the "General Cable Merger") in which holders of General Cable received 1.243 new Telewest shares and pound sterling0.65 ($1.11) in cash for each share of General Cable. In addition, holders of American Depository shares of General Cable ("General Cable ADS") (each representing five General Cable shares) received 6.215 new Telewest shares and pound sterling3.25 ($5.53) in cash for each share of General Cable ADS. Based upon Telewest's closing share price of pound sterling0.89 ($1.51) on April 14, 1998, the General Cable Merger was valued at approximately pound sterling649 million ($1.1 billion). The cash portion of the General Cable Merger was financed through an offer to qualifying Telewest shareholders for the purchase of approximately 261 million new Telewest shares at a price of pound sterling0.925 ($1.57) per share (the "Telewest Offer"). Liberty/Ventures Group subscribed to 85 million Telewest ordinary shares at an aggregate cost of pound sterling78 million ($133 million) in connection with the Telewest Offer. In connection with the General Cable Merger, Liberty/Ventures Group converted its entire holdings of Telewest convertible preference shares (133 million shares) into Telewest ordinary shares. As a result of the General Cable Merger, Liberty/Ventures Group's ownership interest in Telewest decreased to 22%. In connection with the increase in Telewest's equity, net of the dilution of Liberty/Ventures Group's interest in Telewest, that resulted from the General Cable Merger, Liberty/Ventures Group recorded a non-cash gain of $60 million (before deducting deferred income tax expense of $21 million) during 1998. In April 1997, Flextech and BBC Worldwide Limited ("BBC Worldwide") formed two separate joint ventures (the "BBC Joint Ventures") and entered into certain related transactions. The consummation of the BBC Joint Ventures and related transactions resulted in, among other things, a reduction of Liberty/Ventures Group's economic ownership interest in Flextech from 46.2% to 36.8%. Liberty/Ventures Group continues to maintain a voting interest in Flextech of approximately 50%. As a result of such dilution, Liberty/Ventures Group recorded a $152 million increase to the carrying amount of Liberty/Ventures Group's investment in Flextech, a $53 million increase to deferred income tax liability, a $66 million increase to combined equity and a $33 million increase to minority interests in equity of attributed subsidiaries. No gain was recognized in the statement of operations due primarily to certain contingent obligations of Liberty/Ventures Group with respect to one of the BBC Joint Ventures (see note 15). Flextech accounted for $21 million and $16 million of Liberty/Ventures Group's share of its affiliates' losses during the years ended December 31, 1998 and 1997, respectively. Based on the pound sterling6.07 ($10.07) per share closing price of the Flextech ordinary shares on the London Stock Exchange, the 58 million Flextech ordinary shares owned by Liberty/Ventures Group had an aggregate market value of pound sterling351 million ($583 million) at December 31, 1998. On October 9, 1997, Liberty/Ventures Group sold a portion of its 51% interest in Cablevision to unaffiliated third parties. In connection with such sale and certain related transactions, Liberty/Ventures Group recognized a gain of $49 million. Cablevision accounted for $23 million and $3 million of Liberty/Ventures Group's share of its affiliates' losses during the years ended December 31, 1998 and 1997, respectively. (continued) 24 25 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements On October 13, 1998, one of the Cablevision shareholders exercised a put right representing a 7.2% interest in Cablevision. Consequently, on December 22, 1998, Liberty/Ventures Group purchased its pro-rata portion of such shareholder's ownership interest for $25 million, $8 million of which was paid at closing and the remaining amount (including accrued interest thereon) will be paid in four equal semi-annual installments. As a result of the put, Liberty/Ventures Group's equity interest in Cablevision increased from 26% to 28%. As of April 29, 1996, Liberty/Ventures Group and The News Corporation Limited ("News Corp.") formed two sports programming ventures. In the U.S., Liberty/Ventures Group and News Corp. formed Fox/Liberty Networks LLC ("Fox Sports") into which Liberty/Ventures Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. Liberty/Ventures Group received a 50% interest in Fox Sports and a distribution of $350 million in cash. No gain or loss was recognized as the cash distribution approximated the carrying amount of the assets contributed. Prior to the first quarter of 1998, Liberty/Ventures Group had no obligation, nor intention, to fund Fox Sports. During 1998, Liberty/Ventures Group made the determination to provide funding to Fox Sports based on specific transactions consummated by Fox Sports. Consequently, Liberty/Ventures Group's share of losses of Fox Sports of $83 million for the year ended December 31, 1998 includes previously unrecognized losses of Fox Sports of approximately $64 million. Losses for Fox Sports were not recognized in prior periods due to the fact that Liberty/Ventures Group's investment in Fox Sports was less than zero. Internationally, News Corp. and Liberty/Ventures Group formed a venture ("Fox Sports International") to operate sports programming services in Latin American and Australia and a variety of new sports services throughout the world except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. Liberty/Ventures Group owns 50% of Fox Sports International with News Corp. owning the other 50%. Fox Sports International accounted for $34 million, $30 million and $21 million of Liberty/Ventures Group's share of its affiliates' losses during the years ended December 31, 1998, 1997 and 1996, respectively. In addition to Telewest, Flextech, Fox Sports International and Cablevision, Liberty/Ventures Group has other less significant investments in affiliates in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other foreign investments in affiliates accounted for $70 million, $70 million and $54 million of Liberty/Ventures Group's share of its affiliates' losses during the years ended December 31, 1998, 1997 and 1996, respectively. (continued) 25 26 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements In connection with certain transactions between one of such foreign affiliates ("MultiThematiques") and certain of its minority shareholders, Liberty/Ventures Group's ownership interest in MultiThematiques decreased from 33% to 30%. In connection with the increase in MultiThematiques' equity, net of the dilution of Liberty/Ventures Group's interest in MultiThematiques, that resulted from such transactions, Liberty/Ventures Group recorded a $4 million increase to combined equity (after deducting a deferred tax liability of $2 million) and an increase to investments in affiliates of $6 million. No gain was recognized in the combined statements of operations and comprehensive earnings due primarily to Liberty/Ventures Group's continued funding obligation to MultiThematiques. TCG accounted for $32 million, $66 million and $51 million of Liberty/Ventures Group's share of its affiliates' losses during the years ended December 31, 1998, 1997 and 1996, respectively. See note 7. The $797 million aggregate excess of Liberty/Ventures Group's aggregate historical cost basis in its affiliates over Liberty/Ventures Group's proportionate share of its affiliates' net assets is being amortized over an estimated useful life of 10 to 20 years. Certain of Liberty/Ventures Group's affiliates are general partnerships and any subsidiary of TCI which is attributed to Liberty/Ventures Group 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. (6) Investment in Time Warner On October 10, 1996, Time Warner and Turner Broadcasting System, Inc. ("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 1.5 Time Warner common shares (as adjusted for a two-for-one stock split) for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 1.6 Time Warner common shares (as adjusted for a two-for-one stock split) for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Liberty/Ventures Group entered into an agreement with the Federal Trade Commission ("FTC") (the "FTC Consent Decree"), pursuant to which, among other things, Liberty/Ventures Group agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. (continued) 26 27 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements In connection with the TBS/Time Warner Merger, Liberty/Ventures Group received approximately 101.2 million shares (as adjusted for a two-for-one stock split) of the TW Exchange Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, Liberty/Ventures Group recognized a pre-tax gain of $1.5 billion in the fourth quarter of 1996. Liberty/Ventures accounts for its investment in Time Warner as an available-for-sale security. On June 24, 1997 Liberty/Ventures Group granted Time Warner an option to acquire the business of Southern Satellite Systems, Inc. ("Southern") and certain of its subsidiaries (together with Southern, the "Southern Business") through a purchase of assets (the "Southern Option"). Liberty/Ventures Group received 12.8 million shares (as adjusted for a two-for-one stock split) of TW Exchange Stock valued at $306 million in consideration for the grant. In September 1997, Time Warner exercised the Southern Option. Pursuant to the Southern Option, Time Warner acquired the Southern Business, effective January 1, 1998, for $213 million in cash. Liberty/Ventures Group recognized a $515 million pre-tax gain in connection with such transactions in the first quarter of 1998. As security for borrowings under one of its credit facilities, Liberty/Ventures Group has pledged a portion of its TW Exchange Stock. At December 31, 1998 such pledged portion had an aggregate fair value of approximately $2.7 billion. (7) Investment in AT&T On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T, was consummated. As a result of such merger, Liberty/Ventures Group received in exchange for all of its interest in TCG, approximately 47 million shares of AT&T Common Stock. Liberty/Ventures Group recognized a $2.3 billion gain (excluding related tax expense of $883 million) on such transaction during the third quarter of 1998 based on the difference between the carrying amount of Liberty/Ventures Group's interest in TCG and the fair value of the AT&T Common Stock received. Liberty/Ventures Group accounts for its equity interest in AT&T as an available-for-sale security. On April 22, 1998, TCG completed a merger transaction with ACC Corp. ("ACC") in which ACC shares were exchanged with shares of TCG in the ratio of .90909 of a share of TCG stock for each share of ACC stock. As a result of such merger transaction, Liberty/Ventures Group's interest in TCG was reduced to approximately 26%. In connection with the increase in TCG's equity, net of the dilution of Liberty/Ventures Group's interest in TCG, that resulted from such merger, Liberty/Ventures Group recorded a non-cash gain of $201 million (before deducting deferred income tax expense of $71 million). (continued) 27 28 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements During the year ended December 31, 1997, TCG issued 6.6 million shares of its Class A common stock for certain acquisitions. The total consideration paid by TCG through the issuance of common stock was approximately $123 million. In addition, effective November 5, 1997, TCG consummated a public offering of 7.3 million shares of its Class A common stock. TCG received net proceeds from its sale of shares pursuant to such offering of $318 million. As a result of the above transactions, Liberty/Ventures Group's ownership interest in TCG was reduced to approximately 28%. Accordingly, as a result of the increase in TCG's equity, net of the dilution of Liberty/Ventures Group's ownership interest in TCG, Liberty/Ventures Group recognized non-cash gains aggregating $112 million (before deducting deferred income tax expense of $43 million). On July 2, 1996, TCG conducted an initial public offering (the "TCG IPO") in which it sold 27 million shares of Class A common stock at $16.00 per share to the public for aggregate net proceeds of approximately $410 million. As a result of the TCG IPO, Liberty/Ventures Group's ownership interest in TCG was reduced to approximately 31%. Accordingly, Liberty/Ventures Group recognized a gain amounting to $13 million (before deducting deferred income tax expense of approximately $5 million). (8) Other Investments Other investments and related receivables are summarized as follows:
Years ended December 31, 1998 1997 amounts in millions Available-for-sale securities, at fair value $ 159 248 Investment in preferred stock, at cost, including premium 371 371 Investment in General Instrument Corporation ("GI") (note 15) 396 -- Other investments, at cost, and related receivables 372 76 ------ ------ $1,298 695 ====== ======
On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of Liberty/Ventures Group, which held non-voting Class C common stock of International Family Entertainment, Inc. ("IFE") ("Class C Stock") and $23 million of IFE 6% convertible secured notes due 2004, convertible into Class C Stock, ("Convertible Notes"), contributed its Class C Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in exchange for a new series of 30 year non-convertible 9% preferred stock of FKW with a stated value of $345 million (the "FKW Preferred Stock"). As a result of the exchange, Liberty Media Group recognized a pre-tax gain of approximately $304 million during the third quarter of 1997. (continued) 28 29 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Management of Liberty/Ventures Group estimates the market value, calculated using a variety of approaches including multiple of cash flow, per subscriber value, a value of comparable public or private businesses or publicly quoted market prices, of all of Liberty/Ventures Group's other investments aggregated $1,743 million and $766 million at December 31, 1998 and December 31, 1997, respectively. No independent appraisals were conducted for those assets. (9) Acquisitions and Dispositions On January 12, 1998, Liberty/Ventures Group acquired from a minority shareholder of United Video Satellite Group, Inc. ("UVSG") 24.8 million shares of UVSG Class A common stock in exchange for 12.7 million shares of TCI Ventures Group Series A Stock and 7.3 million shares of Liberty Group Series A Stock. The aggregate value assigned to the shares issued by TCI was based upon the market value of such shares at the time the transaction was announced. As a result of such transaction Liberty/Ventures Group increased its ownership in the equity of UVSG to approximately 73% and the voting power increased to 93%. In connection with the issuance of common stock in such transaction, Liberty/Ventures Group recorded a $346 million increase to combined equity. Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision") contributed the assets, obligations and operations of its retail C-band satellite business to Superstar/Netlink Group LLC ("SNG") in exchange for an approximate 20% interest in SNG. As a result of such transaction, Liberty/Ventures Group's ownership interest in SNG decreased to approximately 80%. In connection with the increase in SNG's equity, net of the dilution of Liberty/Ventures Group's ownership interest in SNG, that resulted from such transaction, Liberty/Ventures Group recognized a gain of $38 million (before deducting deferred income tax expense of $15 million). Turner Vision's contribution to SNG was accounted for as a purchase and the $61 million excess of the purchase price over the fair value of the net assets acquired was recorded as excess cost and is being amortized over five years. During 1998, TCI Music, Inc. ("TCI Music") issued approximately 382,000 shares of its Series A Common Stock in connection with certain acquisitions. In connection with the issuance of such shares, Liberty/Ventures Group's ownership interest was diluted to 80.7% and Liberty/Ventures Group recorded a $2 million increase to combined equity. No gain was recognized in the combined statements of operations due primarily to Liberty/Ventures Group's contingent obligation to purchase certain shares from shareholders of TCI Music (see note 13). (continued) 29 30 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements On March 1, 1999, UVSG and News Corp. completed a transaction whereby News Corp.'s TV Guide properties were combined with UVSG to create a platform for offering television guide services to consumers and advertising. As part of this combination, a unit of News Corp. received consideration consisting of $800 million in cash and 60 million shares of UVSG's stock, including 22.5 million shares of its Class A common stock and 37.5 million shares of its Class B common stock. In addition, News Corp. elected to purchase approximately 6.5 million additional shares of UVSG Class A common stock for $129 million in order to equalize its ownership with that of Liberty/Ventures Group. As a result of these transactions, and another transaction completed on the same date, News Corp., Liberty/Ventures Group and UVSG's public stockholders own on an economic basis approximately 44%, 44% and 12%, respectively, of UVSG. Following such transactions, News Corp. and Liberty/Ventures Group each have approximately 49% of the voting power of UVSG's outstanding stock. Upon consummation, Liberty/Ventures Group began accounting for its interest in UVSG under the equity method of accounting. On August 24, 1998, Liberty/Ventures Group purchased 100% of the issued and outstanding common stock of Pramer S.A. ("Pramer"), an Argentine programming company, for $32 million in cash and the issuance of notes payable in the amount of $65 million (the "Pramer Notes"). See note 11. The $101 million excess cost over acquired net assets is being amortized over ten years. On November 19, 1998, Liberty/Ventures Group exchanged, in a merger transaction, 0.58 of a share of Liberty Group Series A Stock for each share of Tele-Communications International, Inc. Series A Common Stock not beneficially owned by Liberty/Ventures Group. Such transaction was accounted for as an acquisition of a minority interest. The aggregate value assigned to the shares issued by TCI was based upon the market value of Liberty Group Series A Stock at the time the merger was announced. In connection with the issuance of common stock in such merger transaction, Liberty/Ventures Group recorded a $426 million increase to combined equity. On January 25, 1996, the stockholders of UVSG adopted the Agreement and Plan of Merger dated as of July 10, 1995, as amended, among UVSG, TCI and TCI Merger Sub, Inc. ("UVSG Merger Sub"), pursuant to which UVSG Merger Sub was merged into UVSG, with UVSG as the surviving corporation (the "UVSG Merger"). Liberty/Ventures Group acquired 24.8 million shares of UVSG Class B common stock and 4.2 million shares of UVSG Class A common stock, together representing approximately 39% of the issued and outstanding common stock of UVSG and approximately 85% of the total voting power of UVSG common stock immediately after the UVSG Merger, resulting in UVSG becoming a majority-controlled attributed entity of Liberty/Ventures Group. The UVSG Merger has been accounted for by the purchase method. Accordingly, the results of operations of UVSG have been combined with those of Liberty/Ventures Group since January 25, 1996 and Liberty/Ventures Group recorded UVSG's assets and liabilities at fair value. (continued) 30 31 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (10) At Home Corporation During 1998, @Home completed a public offering (the "@Home Offering") in which 2.9 million shares of @Home common stock were sold for net cash proceeds of approximately $125 million. In connection with the @Home Offering, Liberty/Ventures Group paid $37 million to purchase 800,000 shares of @Home common stock. Additionally, @Home issued 1.2 million shares of common stock in certain acquisitions, along with the assumption of options to purchase @Home's common stock. As a result of these stock issuances, Liberty/Ventures Group's economic interest in @Home decreased to 38.8%, which represents an approximate 70.88% voting interest. As a result of the increase in @Home's equity in connection with such stock issuances, net of the dilution of Liberty/Ventures Group's ownership interest in @Home, Liberty/Ventures Group recognized a gain of $51 million. In April 1997, @Home issued 240,000 shares of convertible preferred stock, resulting in cash proceeds of $48 million, less issuance costs. On July 11, 1997, @Home completed its initial public offering (the "@Home IPO"), in which 10.4 million shares of @Home common stock were sold for net cash proceeds of approximately $100 million. As a result of the @Home IPO, Liberty/Ventures Group's economic interest in @Home decreased from 43% to 39%. In connection with the increase in @Home's equity, net of the dilution of Liberty/Ventures Group's ownership interest in @Home, Liberty/Ventures Group recognized a gain of $60 million during the third quarter of 1997. @Home has entered into exclusive distribution agreements with certain cable operators. In connection with the distribution agreements, @Home has issued warrants to such cable operators to purchase 21.2 million shares of @Home's Series A common stock. Of these warrants, warrants to purchase 11.2 million shares were exercisable as of December 31, 1998. During the year ended December 31, 1998, @Home recorded non-cash charges of $50 million to operations based on the fair value of 1 million shares which were underlying warrants which became exercisable during the period. Such charges are included in "cost of distribution agreements" in the accompanying combined statements of operations. @Home may issue additional stock, or warrants in connection with its efforts to expand its distribution of the @Home service to other cable operators. The exercise of warrants or stock issued by @Home will reduce Liberty/Ventures Group's equity interest and voting power in @Home. Pursuant to a shareholders' agreement among certain shareholders of @Home, under certain circumstances, Liberty/Ventures Group could be required to sell a portion of its common stock of @Home to such shareholders. (continued) 31 32 "LIBERTY/VENTURED GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (11) Debt Debt is summarized as follows:
Weighted average December 31, interest ------------------------ rate 1998 1997 ---- ---- ---- amounts in millions Bank credit facilities (a) 6.1% $2,029 390 Convertible Subordinated Debentures (b) 4.0% 229 -- 4-1/2% Convertible Subordinated Debentures 4.5% 345 345 Other 7.4% 103 22 ------ ----- $2,706 757 ====== ===
(a) At December 31, 1998, Liberty/Ventures had approximately $1 billion in unused lines of credit. (b) On December 28, 1998, @Home issued $437 million of Convertible Subordinated Debentures in a private offering within the United States to qualified institutional investors. The issue price of each $1,000 debenture was $524.64 (52.464% of principal amount at maturity), or approximately $229 million. Issuance costs were approximately $7 million, resulting in net proceeds to @Home of approximately $222 million. The issuance costs were recorded as other assets and are being amortized by charges to interest expense ratably over the term of the debentures. Each debenture is convertible at the option of the holder at any time prior to maturity, unless redeemed or otherwise purchased, into 6.55 shares of @Home's common stock. The bank credit facilities of Liberty/Ventures Group generally contain restrictive covenants which require, among other things, the maintenance of certain financial ratios, and include limitations on indebtedness, liens and encumbrances, acquisitions, dispositions, guarantees and dividends. Additionally, Liberty/Ventures Group pays fees ranging from .15% to .375% per annum on the average unborrowed portions of the total amounts available for borrowings under bank credit facilities. 32 33 "LIBERTY/VENTURES GROUP" (a Combination of certain assets, as defined in note 1) Notes to Combined Financial Statements As collateral for borrowings under one of Liberty/Ventures Group's credit facilities, the banks lend against certain assets designated by Liberty/Ventures Group (the "Designated Assets"). The components of the Designated Assets may be changed from time to time. The aggregate market value of the Designated Assets, as determined by certain criteria in the revolving credit agreement, must at all times exceed an amount equal to three times the total outstanding borrowings under the facility. The Designated Assets at December 31, 1998 were Liberty/Ventures Group's holdings in Discovery Communications, Inc., QVC and the FKW Preferred Stock. The carrying amount of the Designated Assets as of December 31, 1998 was $617 million. Recourse to the banks for payment of Liberty/Ventures Group's obligations under this facility is limited solely to the Designated Assets. Also, as security for borrowings under one of its credit facilities, Liberty/Ventures Group has pledged a portion of its TW Exchange Stock. See note 6. Certain of Liberty/Ventures Group's bank credit facilities have credit agreements which provide for a three month interest reserve to be held by an administrative agent. At December 31, 1998 and 1997, $17 million and $5 million, respectively, were held in the interest reserve and are included in restricted cash in the accompanying combined balance sheets. Liberty/Ventures Group's attributed subsidiary in Puerto Rico (the "Puerto Rico Subsidiary") has a reducing revolving bank facility which is unsecured and provides for maximum borrowing commitments of $100 million (the "Puerto Rico Bank Facility"). On September 21, 1998, Hurricane Georges struck Puerto Rico and caused considerable property damage to the area in general, including the Puerto Rico Subsidiary's cable television systems. On September 27, 1998, the Puerto Rico Subsidiary submitted a property damage claim to its insurance carrier for approximately $15 million which represents the estimated replacement costs of its damaged property. In addition to property damage caused by Hurricane Georges, the Puerto Rico subsidiary suffered a loss in revenue from its pre-hurricane customers. The loss of revenue from September 21, 1998 to December 31, 1998 has been estimated at $7 million. The estimated loss of revenue exceeded its business interruption insurance by $4 million. Such uncovered losses could cause the Puerto Rico Subsidiary to be in violation of certain financial covenants of the Puerto Rico Bank Facility in the fourth quarter of 1998 and the first quarter of 1999. Violations of certain financial covenants will prevent the Puerto Rico Subsidiary from borrowing any unused borrowing commitments and could result in the acceleration of amounts due under the Puerto Rico Bank Facility. See note 15. The U.S. dollar equivalent of the annual maturities of Liberty/Ventures Group's debt for each of the next five years are as follows: 1999: $578 million; 2000: $491 million; 2001: $70 million; 2002: $78 million and 2003: $710 million. With the exception of the 4-1/2% Convertible Subordinated Debentures, which had a fair value of $373 million at December 31, 1998, Liberty/Ventures Group believes that the carrying value of Liberty/Ventures Group's debt approximated its fair value at December 31, 1998. (continued) 33 34 "LIBERTY/VENTURES GROUP" (a Combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (12) Income Taxes TCI files a consolidated federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which TCI owns less than 80% each file a separate tax return. TCI and such subsidiaries calculate their respective tax liabilities on a separate return basis. Income tax expense for Liberty/Ventures Group is based upon those items in the consolidated tax calculations of TCI applicable to Liberty/Ventures Group. Intergroup tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) and alternative minimum taxes to Liberty/Ventures Group in relation to its amount of taxable earnings or losses. Such amounts are reflected as borrowings from or loans to related parties. A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI and certain 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, Liberty Media Group and TCI Ventures Group were responsible to TCI for their 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 Liberty Media Group and TCI Ventures Group to the extent that the income tax attributes generated by Liberty Media Group and TCI Ventures Group and their attributed subsidiaries were utilized by TCI to reduce its consolidated income tax liabilities (computed as if TCI were not liable for the alternative minimum tax). In the combined financial statements of Liberty/Ventures Group, the tax liabilities and benefits of such entities so determined have been charged or credited to an intercompany account between TCI and Liberty/Ventures Group. 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) 34 35 "LIBERTY/VENTURES GROUP" (a Combination of certain assets, as defined in note 1) Notes to Combined 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 Group. Effective for periods on and after the Effective Date, through the AT&T/TCI Merger, federal income taxes were 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 was made such that each Group was 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 was inventoried and tracked for ultimate credit to or charge against each Group. Similarly, in each taxable period that TCI paid alternative minimum tax, the federal income tax benefits of each Group, computed as if such Group were subject to regular tax, was inventoried and tracked for payment to or payment by each Group in years that TCI utilized the alternative minimum tax credit associated with such taxable period. The Group generating the utilized tax benefits received a cash payment only if, and when, the unutilized taxable losses of the other Group were actually utilized. If the unutilized taxable losses expired without ever being utilized, the Group generating the unutilized tax benefits never received payment for such benefits. Pursuant to the New Tax Sharing Agreement, state and local income taxes were calculated on a separate return basis for each Group (applying provisions of state and local tax law and related regulations as if the Group was a separate unitary or combined group for tax purposes), and TCI's combined or unitary tax liability was allocated among the Groups based upon such separate calculation. (continued) 35 36 "LIBERTY/VENTURES GROUP" (a Combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Notwithstanding the foregoing, items of income, gain, loss, deduction or credit resulting from certain specified transactions that were consummated after the Effective Date pursuant to a letter of intent or agreement that was entered into prior to the Effective Date were shared and allocated pursuant to the terms of the Old Tax Sharing Agreement, as amended. Income tax benefit (expense) consists of:
Current Deferred Total ---------- --------- -------- amounts in millions Year ended December 31, 1998: State and local income tax expense, including intergroup tax allocation $ (2) (200) (202) Federal income tax expense, including intergroup tax allocation (1) (1,190) (1,191) Foreign income tax expense (1) (3) (4) ------- ------- ------- $ (4) (1,393) (1,397) ======= ======= ======= Year ended December 31, 1997: State and local income tax expense, including intergroup tax allocation $ (3) (32) (35) Federal income tax benefit, including intergroup tax allocation 158 12 170 Foreign income tax benefit (expense) (9) 4 (5) ------- ------- ------- $ 146 (16) 130 ======= ======= ======= Year ended December 31, 1996: State and local income tax expense, including intergroup tax allocation $ (3) (92) (95) Federal income tax benefit (expense), including intergroup tax allocation 29 (371) (342) Foreign income tax expense (12) (8) (20) ------- ------- ------- $ 14 (471) (457) ======= ======= =======
Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:
Years ended December 31, ---------------------------------- 1998 1997 1996 -------- ------- ----- amounts in millions Computed expected tax benefit (expense) $(1,244) 189 (439) Dividends excluded for income tax purposes 16 8 2 Minority interest of attributed subsidiaries 33 3 -- Amortization not deductible for income tax purposes (21) (10) (10) State and local income taxes, net of federal income taxes (132) (23) (60) Recognition of difference in income tax basis of investments in attributed subsidiaries (1) (10) 67 Effect of foreign tax rate differential on earnings of attributed foreign subsidiary -- 1 1 Increase in valuation allowance (44) (26) (24) Gain on sale of attributed subsidiary's stock 18 21 -- Effect of deconsolidations on deferred tax expense -- (11) -- Other, net (22) (12) 6 ------- ------- ------- $(1,397) 130 (457) ======= ======= =======
(continued) 36 37 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
December 31, ----------------- 1998 1997 ------ -------- amounts in millions Deferred tax assets: Net operating and capital loss carryforwards $ 188 237 Future deductible amount attributable to accrued stock compensation and deferred compensation 215 58 Recognized gain on sale of assets 147 -- Other future deductible amounts due principally to non-deductible accruals 16 26 ------ ------ Deferred tax assets 566 321 ------ ------ Less valuation allowance 139 95 ------ ------ Net deferred tax assets 427 226 ------ ------ Deferred tax liabilities: Property and equipment, due principally to differences in depreciation 41 17 Investments in affiliates, due principally to losses of affiliates recognized for income tax purposes in excess of losses recognized for financial statement purposes 4,825 1,153 Other, net 19 13 ------ ------ Deferred tax liabilities 4,885 1,183 ------ ------ Net deferred tax liabilities $4,458 957 ====== ======
The valuation allowance relates principally to deferred tax assets arising from net operating loss carryforwards of @Home and TCI Music. At December 31, 1998, Liberty/Ventures Group had net operating and capital loss carryforwards for income tax purposes aggregating approximately $560 million which, if not utilized to reduce taxable income in future periods, will begin to expire at various dates beginning in the year 2003. Certain subsidiaries of Liberty/Ventures Group had additional net operating loss carryforwards for income tax purposes aggregating $106 million and these net operating losses are subject to certain rules limiting their usage. For purposes of these combined financial statements, Liberty/Ventures Group has already received benefit for approximately $75 million of the net operating loss carryforwards disclosed above. Liberty/Ventures Group is responsible to TCI to the extent this amount of net operating loss carryforwards is utilized by TCI in future periods. (continued) 37 38 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (13) Combined Equity Stock Repurchase and Issuances In conjunction with a stock repurchase program or similar transaction, TCI may elect to sell put options on its own common stock. Proceeds from any sales of puts with respect to TCI Ventures Group Stock and Liberty Group Stock are reflected by Liberty/Ventures Group as an increase to combined equity, and an amount equal to the maximum redemption amount under unexpired put options with respect to TCI Ventures Group Stock and Liberty Group Stock is reflected as an "obligation to redeem common stock" in the accompanying combined balance sheets. During the year ended December 31, 1998, pursuant to a stock repurchase program, 239,450 shares of TCI Ventures Group Stock and 766,783 shares of Liberty Group Stock were repurchased at an aggregate cost of approximately $30 million. Such amount is reflected as a decrease to combined equity in the accompanying combined financial statements. During the year ended December 31, 1997, pursuant to a stock repurchase program, Liberty/Ventures Group repurchased 916,500 shares of Liberty Group Stock and 338,196 shares of TCI Ventures Group Stock in open market transactions and 219,937 shares of Liberty Group Stock from the spouse of an officer and director of TCI at an aggregate cost of $22 million. Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a wholly-owned TCI subsidiary attributed to TCI Group. TCI exchanged 47.2 million shares of TCI Group Series A Stock for shares of Kearns-Tribune Corporation which held 17.9 million shares of TCI Group Stock and 10.1 million shares of Liberty Group Stock. Liberty/Ventures Group purchased from TCI Group the 10.1 million shares of Liberty Group Stock that were acquired in such transaction for $168 million. During the third quarter of 1997, Liberty/Ventures Group commenced a tender offer (the "Liberty Tender Offer") to purchase up to an aggregate of 22.5 million shares of Liberty Group Stock at a price of $20 per share through October 3, 1997. During the fourth quarter of 1997, Liberty/Ventures Group repurchased 21.7 million shares of Liberty Group Series A Stock and 82,074 shares of Liberty Group Series B Stock at an aggregate cost of approximately $435 million pursuant to the Liberty Tender Offer. All of the above described purchases are reflected as a reduction of combined equity in the accompanying combined financial statements. (continued) 38 39 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements During the fourth quarter of 1997, TCI entered into a Total Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the Equity Swap Facility, TCI had the right to direct the counterparty (the "Counterparty") to use the Equity Swap Facility to purchase shares ("Equity Swap Shares") of TCI Group Series A Stock and TCI Ventures Group Series A Stock with an aggregate purchase price of up to $300 million. TCI had the right, but not the obligation, to purchase Equity Swap Shares through the September 30, 2000 termination date of the Equity Swap Facility. During such period, TCI was to settle periodically any increase or decrease in the market value of the Equity Swap Shares. If the market value of the Equity Swap Shares exceeded the Counterparty's cost, Equity Swap Shares with a fair value equal to the difference between the market value and cost were segregated from the other Equity Swap Shares. If the market value of Equity Swap Shares was less than the Counterparty's cost, TCI, at its option, settled such difference with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or, subject to certain conditions, with cash or letters of credit. In addition, TCI was required to periodically pay the Counterparty a fee equal to a LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares. Due to TCI's ability to issue shares to settle periodic price fluctuation and fees under the Equity Swap Facility, TCI recorded all amounts received or paid under this arrangement as increases or decreases, respectively, to equity. As of December 31, 1998, the Equity Swap Facility had acquired 5 million shares of TCI Group Series A Stock and 1 million shares of TCI Ventures Group Series A Stock at an aggregate cost that was approximately $135 million less than the fair value of such Equity Swap Shares at December 31, 1998. The costs and benefits associated with the TCI Ventures Group Series A Stock held by the Equity Swap Facility were attributed to Liberty/Ventures Group. From February 10, 1999 to March 5, 1999, TCI terminated all transactions under the Equity Swap Facility and the related swap agreement. (continued) 39 40 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Stock Options and Stock Appreciation Rights Liberty/Ventures Group records stock compensation expense relating to restricted stock awards, options and/or stock appreciation rights on certain TCI common stock (collectively, "Awards") granted by TCI to certain TCI employees and/or directors who are involved with Liberty/Ventures Group. Estimated compensation relating to stock appreciation rights ("SARs") has been recorded through December 31, 1998, and is subject to future adjustment based upon vesting and market value, and ultimately, on the final determination of market value when such rights are exercised. As allowed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), Liberty/Ventures Group continues to account for stock based compensation pursuant to Accounting Principles Board Opinion No. 25, which Liberty/Ventures Group estimates that compensation expense would not be materially different under Statement 123. The estimated compensation adjustment with respect to TCI SARs resulted in increases (decreases) to Liberty/Ventures Group's share of TCI's stock compensation liability of $460 million, $235 million and $(9 million) for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, for the years ended December 31, 1998, 1997 and 1996, Liberty/Ventures Group made cash payments relating to its share of TCI's stock compensation obligations of $58 million, $64 million and less than $1 million, respectively. The payable or receivable arising from the compensation related to the Awards is included in the amount due to related parties. Transactions with Officers and Directors On January 5, 1998, TCI announced that a settlement (the "Magness Settlement") had been reached in the litigation brought against it and other parties in connection with the administration of the Estate of Bob Magness (the "Magness Estate"), the late founder and former Chairman of the Board of TCI. On February 9, 1998, in connection with the Magness Settlement, TCI entered into a call agreement (the "Malone Call Agreement") with Dr. John C. Malone, and Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the Malones granted to TCI the right to acquire any shares of TCI stock which are entitled to cast more than one vote per share (the "High-Voting Shares") owned by the Malones, which currently consist of an aggregate of approximately 60 million High-Voting shares upon Dr. Malone's death or upon a contemplated sale of the High-Voting Shares (other than a minimal amount) to third persons. In either such event, TCI has the right to acquire the shares at a maximum price equal to the then relevant market price of shares of Series A Stock plus a ten percent premium. The Malones also agreed that if TCI were ever to be sold to another entity, then the maximum premium that the Malones would receive on their High-Voting Shares would be no greater than a ten percent premium over the price paid for the relevant shares of Series A Stock. TCI paid $150 million to the Malones in consideration of them entering into the Malone Call Agreement. (continued) 40 41 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Also on February 9, 1998, in connection with the Magness Settlement, certain members of the Magness family, individually and in certain cases, on behalf of the Estate of Betsy Magness (the first wife of Bob Magness) and the Magness Estate (collectively, the "Magness Family") also entered into a call agreement with TCI (with substantially the same terms as the one entered into by the Malones, including a call on the shares owned by the Magness Family upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness Family's aggregate of approximately 49 million High-Voting Shares. The Magness Family was paid $124 million by TCI in consideration of them entering into the Magness Call Agreement. Additionally, on February 9, 1998, the Magness Family entered into a stockholders' agreement with the Malones and TCI under which (i) the Magness Family and the Malones agreed to consult with each other in connection with matters to be brought to the vote of TCI's stockholders, subject to the proviso that if they cannot mutually agree on how to vote the shares, Dr. Malone has an irrevocable proxy to vote the High-Voting Shares owned by the Magness Family, (ii) the Magness Family may designate a nominee for the Board of TCI and Dr. Malone has agreed to vote his High Voting Shares for such nominee and (iii) certain "tag along rights" have been created in favor of the Magness Family and certain "drag along rights" have been created in favor of the Malones. The aggregate amount paid by TCI pursuant to the Malone Call Agreement and Magness Call Agreement (collectively, the "Call Payments") was allocated to each of the Groups. Liberty/Ventures Group's share of the Call Payments of $140 million was paid during the first quarter of 1998 and is reflected as a reduction of combined equity. Transactions with TCI and Other Related Parties Certain TCI corporate general and administrative costs are charged to Liberty/Ventures Group at rates set at the beginning of the year based on projected utilization for that year. During the years ended December 31, 1998, 1997 and 1996 Liberty/Ventures Group was allocated $17 million, $13 million and $11 million, respectively, in corporate general and administrative costs by TCI Group. Certain subsidiaries attributed to Liberty/Ventures Group produce and/or distribute sports and other programming and other services to cable distribution operators (including TCI Group) and others. Charges to TCI Group are based upon customary rates charged to others. During 1998 and 1997, entities attributed to Liberty/Ventures Group made marketing support payments to entities attributed to TCI Group. Charges by TCI Group for such arrangements for the years ended December 31, 1998 and 1997 aggregated $5 million and $19 million, respectively. HSN pays a commission to TCI Group for merchandise sales to customers who are customers of TCI Group's cable systems. Aggregate commissions and charges paid to TCI Group were $7 million for the year ended December 31, 1996. (continued) 41 42 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements A subsidiary that was a member of Liberty/Ventures Group, leases certain equipment under a capital lease. During 1997, such equipment was subleased to TCI Group under an operating lease. In January 1998, TCI Group paid $7 million to Liberty/Ventures Group in exchange for Liberty/Ventures Group's assignment of its ownership interest in such attributed subsidiary to TCI Group. 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 TCI Group (including capital lease obligations aggregating $176 million) has been reflected as an increase to combined equity. The Puerto Rico Subsidiary purchases programming services from TCI Group. The charges, which approximate TCI Group's cost and are based on the aggregate number of subscribers served by the Puerto Rico Subsidiary, aggregated $6 million, $6 million and $4 million during the years ended December 31, 1998, 1997 and 1996, respectively. In 1996, a subsidiary attributed to Liberty/Ventures Group (i) issued preferred stock in connection with a previous acquisition, which is convertible at the option of the holders into 1,084,056 of TCI Group Series A Common Stock beginning in April 1999 or sooner in the event of a change in control of TCI and (ii) acquired an option contract from TCI Group in exchange for a $14 million increase in the intercompany amount due to TCI Group. Such option contract provided Liberty/Ventures Group with the right to acquire 1,084,056 shares of TCI Group Series A Stock at a price equivalent to the fair value at the time of exercise less $14.625 per share. During September 1998, TCI Group assigned its obligation under the option contract to Liberty/Ventures Group. As a result of such assignment, Liberty/Ventures Group recorded a $16 million reduction to the intercompany amount due to TCI Group and a corresponding increase to combined equity. In July 1998, Liberty/Ventures Group entered into an equity swap transaction with a commercial bank, which provides Liberty/Ventures Group with the right but not the obligation to acquire 1,084,056 shares of TCI Group Series A Stock for approximately $45 million on or before April 19, 1999. In the event Liberty/Ventures Group does not exercise its right to acquire such shares, any difference between the counterparty's cost and the market value of the shares on the settlement date will be settled in cash or shares of Liberty/Ventures Group Series A Stock at Liberty/Ventures Group's option. Such shares could be used to satisfy the exchange requirements of the aforementioned preferred stock. Cablevision purchases programming services from certain affiliates. The related charges generally are based upon the number of Cablevision's subscribers that receive the respective services. During the year ended December 31, 1997, such charges aggregated $12 million. Additionally, certain of Cablevision's general and administrative functions are provided by affiliates. The related charges, which generally are based upon the respective affiliate's cost of providing such functions, aggregated $2 million during the year ended December 31, 1997. The above-described programming and general and administrative charges are included in operating costs in the accompanying combined statements of operations and comprehensive earnings. (continued) 42 43 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Prior to July 1997, Liberty/Ventures Group's other investments included a 49.9% partnership interest in QE+ Ltd. ("QE+"), a limited partnership which distributed "STARZ!," a first-run movie premium programming service launched in 1994. Entities attributed to TCI Group held the remaining 50.1% partnership interest. During July 1997, Liberty/Ventures Group, TCI Group, and the 10% minority holder of Encore Media Corporation ("EMC"), an attributed subsidiary of Liberty/Ventures Group, entered into a series of transactions pursuant to which the businesses of "Encore," a movie premium programming service, and STARZ! were contributed to Encore Media Group. Upon completion of the transaction, Liberty/Ventures Group owned 80% of Encore Media Group and TCI Group owned the remaining 20%. In connection with these transactions, the 10% minority interest in EMC was exchanged for approximately 2.4 million shares of Liberty Group Series A Stock, which was accounted for as an acquisition of a minority interest. Liberty/Ventures Group received its 80% ownership interest in Encore Media Group in exchange for (i) the contribution of its 49.9% interest in QE+, (ii) the contribution of EMC, (iii) the issuance of a $307 million note payable to TCI Group (the "EMG Promissory Note"), (iv) the cancellation and forgiveness of amounts due for certain services provided to QE+ equal to 4% of the gross revenue of QE+ ("STARZ Content Fees") and (v) the termination of an option to increase Liberty/Ventures Group's ownership interest in QE+. TCI Group received the remaining 20% interest in Encore Media Group and the aforementioned consideration from Liberty/Ventures Group in exchange for the contribution of TCI Group's 50.1% ownership interest in QE+ and certain capital contributions made by TCI Group to QE+. In addition, TCI Group entered into a 25 year affiliation agreement with Encore Media Group (the "EMG Affiliation Agreement") pursuant to which TCI Group will pay monthly fixed amounts in exchange for unlimited access to all of the existing Encore and STARZ! services. Upon formation of Encore Media Group, the operations of STARZ! are included in the combined financial results of Liberty/Ventures Group. The EMG Promissory Note is included in amounts due to related parties. Prior to the formation of Encore Media Group, STARZ Content Fees were included in revenue from related parties. Effective December 31, 1997, Liberty/Ventures Group and TCI Group agreed to amend the above transactions. Pursuant to the amendment, the above described series of transactions were rescinded, retroactive to July 1, 1997. Such rescission was given effect as of December 31, 1997 for financial reporting purposes. Simultaneously, Liberty/Ventures Group and TCI Group entered into a new agreement whereby the EMG Affiliation Agreement was amended to permanently reduce the monthly fixed amounts for the life of the contract. TCI Group's 20% ownership interest in Encore Media Group was eliminated and the EMG Promissory Note was reduced by $32 million. The amounts to be paid to Encore Media Group pursuant to the EMG Affiliation Agreement were reduced to amounts which reflect current market prices. (continued) 43 44 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Due to the related party nature of the above-described transactions, the $133 million excess of the consideration paid over the carryover basis of the assets transferred (including a deferred tax asset of $98 million) was reflected as a decrease to combined equity. Subsequent to the amendment, 100% of the operations of Encore Media Group are included in the combined financial results of Liberty/Ventures Group. Effective July 11, 1997, pursuant to an Agreement and Plan of Merger, dated as of February 6, 1997, as amended (the "DMX Merger Agreement"), by and among TCI, TCI Music, a wholly-owned subsidiary of TCI, a wholly-owned subsidiary of TCI Music ("DMX Merger Sub") and DMX, Inc. ("DMX"), Merger Sub was merged with and into DMX, with DMX as the surviving corporation (the "DMX Merger"). As a result of the DMX Merger, stockholders of DMX became stockholders of TCI Music. In connection with the DMX Merger, TCI and TCI Music entered into an agreement pursuant to which, effective as of the closing of the DMX Merger: (i) TCI Music issued to TCI (as designee of certain of its indirect subsidiaries), 62.5 million shares of Series B Common Stock, $.01 par value per share, of TCI Music ("TCI Music Series B Common Stock") and a promissory note in the amount of $40 million (the "TCI Music Note"), (ii) until December 31, 2006, certain subsidiaries of TCI transferred to TCI Music the right to receive all revenue from sales of DMX music services to their residential and commercial subscribers, net of an amount equal to 10% of revenue from such sales to residential subscribers and net of the revenue otherwise payable to DMX as license fees for DMX music services under affiliation agreements currently in effect, (iii) TCI contributed to TCI Music certain commercial digital DMX tuners that were not in service as of the effective date of the DMX Merger, and (iv) TCI granted to each stockholder who became a stockholder of TCI Music pursuant to the DMX Merger, one right (a "Right") with respect to each whole share of Series A Common Stock, $.01 par value per share, of TCI Music ("TCI Music Series A Common Stock" and together with the TCI Music Series B Common Stock, the "TCI Music Common Stock") acquired by such stockholder in the DMX Merger pursuant to the terms of a Rights Agreement among TCI, TCI Music and the rights agent (the "Rights Agreement"). Upon consummation of the DMX Merger, each outstanding share of DMX Common Stock was converted into the right to receive (i) one-quarter of a share of TCI Music Series A Common Stock, (ii) one Right with respect to each whole share of TCI Music Series A Common Stock and (iii) cash in lieu of the issuance of fractional shares of TCI Music Series A Common Stock and Rights. Each Right entitled the holder to require TCI to purchase from such holder one share of TCI Music Series A Common Stock for $8.00 per share, subject to reduction by the aggregate amount per share of any dividend and certain other distributions, if any, made by TCI Music to its stockholders, and, payable at the election of TCI, in cash, a number of shares of TCI Group Series A Stock, having an equivalent value or a combination thereof, if during the one-year period beginning on the effective date of the DMX Merger, the price of TCI Music Series A Common Stock did not equal or exceed $8.00 per share for a period of at least 20 consecutive trading days. (continued) 44 45 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Subsequently, TCI Music and TCI entered into an Amended and Restated Contribution Agreement to be effective as of July 11, 1997 which provides, among other things, for TCI to deliver, or cause certain of its subsidiaries to deliver to TCI Music fixed monthly payments (subject to inflation and other adjustments) through 2017. Effective with the DMX Merger, TCI beneficially owned approximately 45.7% of the outstanding shares of TCI Music Series A Common Stock and 100% of the outstanding shares of TCI Music Series B Common Stock, which represented 89.6% of the equity and 98.7% of the voting power of TCI Music. Simultaneously with the DMX Merger, Liberty/Ventures Group acquired the TCI-owned TCI Music Common Stock by agreeing to reimburse TCI for any amounts required to be paid by TCI pursuant to TCI's contingent obligation under the Rights Agreement to purchase up to 15 million shares (7 million of which are owned by Liberty/Ventures Group) of TCI Music Series A Common Stock and issuing an $80 million promissory note (the "Music Note") to TCI. Liberty/Ventures Group had recorded its contingent obligation to purchase such shares under the Rights Agreement as a component of minority interest in equity of attributed subsidiaries in the accompanying combined financial statements. The Music Note may be reduced by the payment of cash or the issuance by TCI of shares of Liberty/Ventures Group Stock for the benefit of entities attributed to TCI Group. Additionally, Liberty/Ventures Group may elect to pay $50 million of the Music Note by delivery of a Stock Appreciation Rights Agreement that will give TCI Group the right to receive 20% of the appreciation in value of Liberty/Ventures Group's investment in TCI Music, to be determined at July 11, 2002. TCI Music was included in the combined financial results of Liberty/Ventures Group as of the date of the DMX Merger. Due to the related party nature of the transaction, the $86 million excess of the consideration paid over the carryover basis of the TCI Music Common Stock acquired by Liberty/Ventures Group from TCI was reflected as a decrease in combined equity. The Music Note is included in amounts due to related parties. In December 1997, TCI Music issued convertible preferred stock and common stock in connection with two acquisitions. After giving effect to such issuances and assuming the conversion of the TCI Music convertible preferred stock, Liberty/Ventures Group, at December 31, 1997, owned TCI Music securities representing 78% of TCI Music's common stock and 97% of the voting power attributable to such TCI Music common stock. In connection with the issuance of such common shares, Liberty/Ventures Group recorded a $19 million increase to combined equity. No gain was recognized in the statements of operations and comprehensive earnings due primarily to Liberty/Ventures Group's contingent obligation under the Rights Agreement. Prior to the July 1998 expiration of the Rights, Liberty/Ventures Group was notified of the tender of 4.9 million shares and associated Rights. On August 27, 1998, Liberty/Ventures Group paid $39 million to satisfy TCI's obligation under the Rights Agreement. (continued) 45 46 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements During the third quarter of 1997, Liberty/Ventures Group sold certain assets (the "SUMMITrak Assets") to CSG Systems, Inc. ("CSG") for cash consideration of $106 million, plus five-year warrants to purchase up to 1.5 million shares of CSG common stock at $24 per share (the "CSG Warrants") and $12 million in cash, once certain numbers of TCI affiliated customers are being processed on a CSG billing system. In connection with the sale of the SUMMITrak Assets, TCI Group committed to purchase billing services from CSG through 2012. In light of such commitment, Liberty/Ventures Group has reflected the $30 million excess (after deducting deferred income taxes of $17 million) of the cash received over the book value of the SUMMITrak Assets as an increase to combined equity. During the fourth quarter of 1997, Liberty/Ventures Group's remaining assets in TCI SUMMITrak of Texas, Inc. and TCI SUMMITrak L.L.C. were transferred to TCI Group in exchange for a $19 million reduction of the intercompany amount owed by Liberty/Ventures Group to TCI Group. Such transfer was accounted for at historical cost due to the related party nature of the transaction. Due to Related Parties The components of "Due to related parties" are as follows:
Years ended December 31, 1998 1997 ---------------------- amounts in millions Note receivable from TCI Group $-- (88) Notes payable to TCI Group, including accrued interest 141 378 Intercompany account 556 240 ---- ---- $697 530 ==== ====
Amounts outstanding under the note receivable from TCI Group were repaid in their entirety during the third quarter of 1998. Amounts outstanding at December 31, 1998 under notes payable to TCI Group bear interest at varying rates. During the second quarter of 1998, TCI issued 153,183 shares of Liberty Group Series B Stock valued at $5 million to an individual who is an officer and director of TCI for the benefit of entities attributed to TCI Group, accordingly, the Music Note was reduced by such amount. TCI Group has provided a revolving loan facility (the "Ventures Intergroup Credit Facility") to Liberty/Ventures Group for a five-year period commencing on September 10, 1997. Borrowings under the Ventures Intergroup Credit Facility are included in notes payable to TCI Group in the table above. Such facility permits aggregate outstanding borrowings at any one time of up to $500 million (subject to reduction as provided below), which borrowings bear interest at a rate per annum equal to The Bank of New York's prime rate (as in effect from time to time) plus 1% per annum, payable quarterly. A commitment fee equal to 3/8% per annum of the average unborrowed availability under the Ventures Intergroup Credit Facility is payable by Liberty/Ventures Group to TCI Group on a quarterly basis. (continued) 46 47 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The non-interest bearing intercompany account includes certain income tax and stock compensation allocations that are to be settled at some future date. All other amounts included in the intercompany account are to be settled within thirty days following notification. (14) Other Comprehensive Earnings Accumulated other comprehensive earnings included in the Liberty/Ventures Group's combined balance sheets and statements of combined equity reflect the aggregate of foreign currency translation adjustments and unrealized holding gains and losses on securities classified as available-for-sale. The change in the components of accumulated other comprehensive earnings, net of taxes, is summarized as follows:
Foreign Unrealized Accumulated currency gains other translation (losses) on comprehensive adjustments securities earnings ----------- ---------- -------- amounts in millions Balance at January 1, 1996 $ (10) 332 322 Other comprehensive earnings (loss) 35 (316) (281) ------ ------ ------ Balance at December 31, 1996 25 16 41 Other comprehensive earnings (loss) (22) 749 727 ------ ------ ------ Balance at December 31, 1997 3 765 768 Other comprehensive earnings 3 2,947 2,950 ------ ------ ------ Balance at December 31, 1998 $ 6 3,712 3,718 ====== ====== ======
(continued) 47 48 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The components of other comprehensive earnings are reflected in the Liberty/Ventures Group's combined statements of operations, net of taxes and reclassifications adjustments for gains realized in net earnings (loss). The following table summarizes the tax effects and reclassification adjustments related to each component of other comprehensive earnings.
Tax Before-tax (expense) Net-of-tax amount benefit amount -------- --------- ---------- amounts in millions Year ended December 31, 1998: Foreign currency translation adjustments $ 4 (1) 3 ------- ------- ------- Unrealized gains on securities: Unrealized holding gains arising during period 4,851 (1,904) 2,947 ------- ------- ------- Other comprehensive earnings $ 4,855 (1,905) 2,950 ======= ======= ======= Year ended December 31, 1997: Foreign currency translation adjustments $ (31) 9 (22) ------- ------- ------- Unrealized gains on securities: Unrealized holding gains arising during period 1,235 (486) 749 ------- ------- ------- Other comprehensive earnings $ 1,204 (477) 727 ======= ======= ======= Year ended December 31, 1996: Foreign currency translation adjustments $ 54 (19) 35 ------- ------- ------- Unrealized gains on securities: Unrealized holding gains arising during period 75 (27) 48 Less: reclassification adjustment for gains realized in net earnings (568) 204 (364) ------- ------- ------- Net unrealized losses (493) 177 (316) ------- ------- ------- Other comprehensive loss $ (439) 158 (281) ======= ======= =======
(continued) 48 49 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (15) Commitments and Contingencies Encore Media Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at December 31, 1998, these agreements require minimum payments aggregating approximately $808 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable 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. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. Flextech has undertaken to finance the working capital requirements of a joint venture, (the "Principal Joint Venture") formed with BBC Worldwide and is obligated to provide the Principal Joint Venture with a primary credit facility of pound sterling 88 million ($150 million) and subject to certain restrictions, a standby credit facility of pound sterling 30 million ($51 million). As of December 31, 1998, the Principal Joint Venture had borrowed pound sterling 16 million ($27 million) under the primary credit facility. If Flextech defaults in its funding obligation to the Principal Joint Venture and fails to cure within 42 days after receipt of notice from BBC Worldwide, BBC Worldwide is entitled, within the following 90 days, to require that TINTA assume all of Flextech's funding obligations to the Principal Joint Venture. Liberty/Ventures Group has guaranteed various loans, notes payable, letters of credit and other obligations (the "Guaranteed Obligations") of certain affiliates. At December 31, 1998, the Guaranteed Obligations aggregated approximately $243 million. Currently, Liberty/Ventures Group is not certain of the likelihood of being required to perform under such guarantees. Liberty/Ventures Group leases business offices, has entered into pole rental and transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounts to $98 million, $84 million and $102 million for the years ended December 31, 1998, 1997 and 1996, respectively. A summary of future minimum lease payments under noncancellable operating and capital leases as of December 31, 1998 follows:
Years ending December 31: Operating Capital ---------- ------- amounts in millions 1999 $ 71 48 2000 62 43 2001 52 36 2002 49 31 2003 42 31 Thereafter 141 63 ----- 252 Less amounts representing interest 62 ---- Capital lease obligations $190 ====
(continued) 49 50 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements It is expected that in the normal course of business, leases that expire generally will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 1999. On July 17, 1998, Liberty/Ventures Group acquired 21.4 million shares of restricted stock of GI in exchange for (i) certain of the assets of NDTC's set-top authorization business, (ii) the license of certain related software to GI, (iii) a $50 million promissory note from Liberty/Ventures Group to GI and (iv) a nine year revenue guarantee from Liberty/Ventures Group in favor of GI. In connection therewith, NDTC also entered into a service agreement pursuant to which it will provide certain postcontract services to GI's set-top authorization business. The 21.4 million shares of GI common stock are, in addition to other transfer restrictions, restricted as to their sale by NDTC for a three year period, and represent approximately 13% of the outstanding common stock of GI at December 31, 1998. Liberty/Ventures Group recorded its investment in such shares at fair value which included a discount attributable to the above-described liquidity restriction. Liberty/Ventures Group carries its investment in such shares at the lower of cost or net realizable value. The $346 million excess of the fair value of GI common stock received over (i) the book value of certain assets transferred from NDTC to GI, and (ii) the $42 million present value of the promissory note due from Liberty/Ventures Group to GI, has been deferred by Liberty/Ventures Group in the accompanying December 31, 1998 combined balance sheet. A portion of such excess equal to the $160 million present value of the annual amounts specified by the revenue guarantee will be amortized to revenue over nine years in proportion to such annual guaranteed amounts. The remaining $186 million excess will be amortized to revenue on a straight-line basis over the nine-year period that NDTC is required to perform postcontract services. On September 21, 1998, Hurricane Georges struck Puerto Rico and caused considerable property damage to the area in general, including the Puerto Rico Subsidiary's cable television systems. The Puerto Rico Subsidiary's cable television systems represent $45 million of Liberty/Ventures Group's revenue for the year ended December 31, 1998. The Puerto Rico Subsidiary has property and business interruption insurance aggregating $15 million that is subject to a deductible of $1 million. The Puerto Rico Subsidiary has submitted a property damage claim to its insurance carrier for approximately $15 million which represents the estimated replacement cost of its damaged property. As a result of the damage caused by Hurricane Georges, the Puerto Rico Subsidiary, at December 31, 1998, recorded an impairment to reduce the net book value of the damaged property and equipment by $8 million and recorded a receivable in the amount of $12 million as insurance coverage for property damages. The $12 million in insurance coverage for property damages were fully collected prior to December 31, 1998. As of December 31, 1998, approximately 82% of the Puerto Rico Subsidiary's pre-hurricane basic customers were receiving cable television services. Although there can be no assurance, the Puerto Rico Subsidiary estimates that it will regain 100% of its pre-hurricane customer base by June 30, 1999. The loss of revenue from September 21, 1998 through December 31, 1998 has been estimated at $7 million. In addition, the estimated loss of revenue for the first quarter of 1999 is approximately $3 million. The Puerto Rico Subsidiary's business interruption insurance will cover the first $3 million in lost revenue. The $3 million in business interruption coverage was fully collected prior to December 31, 1998. (continued) 50 51 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The Puerto Rico Subsidiary has also claimed coverage for business interruption under a secondary insurance carrier. Such policy, which covers the Puerto Rico Subsidiary's parent company's subsidiaries, carries a deductible of $2.5 million. This insurance claim is subject to approval by such insurance carrier and accordingly, no assurance can be given that amounts claimed will be paid in their entirety. However, in the event such claims are collected the overall impact in lost revenues for the Puerto Rico Subsidiary as a result of Hurricane Georges will not exceed $2.5 million. Liberty/Ventures Group has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Liberty/Ventures Group 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 combined financial statements. (16) Year 2000 During 1998, TCI continued its enterprise-wide, comprehensive efforts to assess and remediate its computer systems and related software and equipment to ensure such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. TCI's year 2000 remediation efforts include an assessment of Liberty/Ventures Group's most critical systems, equipment, and facilities. TCI also continued its efforts to verify the year 2000 readiness of Liberty/Ventures Group's significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess such partners and affiliates' year 2000 status. TCI has a year 2000 Program Management Office (the "PMO") to organize and manage its year 2000 remediation efforts. The PMO is responsible for overseeing, coordinating and reporting on Liberty/Ventures Group's year 2000 remediation efforts. During 1998, TCI continued its survey of significant third-party vendors and suppliers whose systems, services or products are important to Liberty/Ventures' operations. The year 2000 readiness of such providers is critical to continued provision of Liberty/Ventures Group's programming services. Year 2000 expenses and capital expenditures incurred during the year ended December 31, 1998 were not material. In addition to the survey process described above, management of Liberty/Ventures Group has identified its most critical supplier/vendor relationships and has instituted a verification process to determine the vendor's year 2000 readiness. Such verification includes, as deemed necessary, reviewing vendors' test and other data and engaging in regular conferences with vendors' year 2000 teams. Liberty/Ventures Group is also requiring testing to validate the year 2000 compliance of certain critical products and services. (continued) 51 52 "LIBERTY/VENTURES GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Significant market value is associated with Liberty/Ventures Group's investments in certain public and private corporations, partnerships and other businesses. Accordingly, Liberty/Ventures Group is monitoring the public disclosure of such publicly-held business entities to determine their year 2000 readiness. In addition, Liberty/Ventures Group has surveyed and monitored the year 2000 status of certain privately-held business entities in which Liberty/Ventures Group has significant investments. The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. There can be no assurance that Liberty/Ventures Group's systems or the systems of other companies on which Liberty/Ventures Group relies will be converted in time or that any such failure to convert by Liberty/Ventures Group or other companies will not have a material adverse effect on its financial position, results of operations or cash flows. 52 EX-99.1 5 TELE-COMMUNICATIONS INC. FINANCIAL RESULTS 1 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. Targeted Stock The Company, through its subsidiaries and affiliates, is principally engaged in the construction, acquisition, ownership, and operation of cable television systems and the provision of satellite-delivered video entertainment, information and home shopping programming services to various video distribution media, principally cable television systems. The Company also has investments in cable and telecommunications operations and television programming in certain international markets as well as investments in companies and joint ventures involved in developing and providing programming for new television and telecommunications technologies. The Company's assets and operations were previously included in three separate groups, each of which was tracked separately by public equity securities. These groups were known as the Liberty Media Group, the TCI Ventures Group and the TCI Group. The Liberty Media Group was intended to reflect the separate performance of TCI's assets which produce and distribute programming services. For additional information, see note 1 to the accompanying consolidated financial statements of the Company. The TCI Ventures Group was intended to reflect the separate performance of TCI's principal international assets and businesses and substantially all of TCI's non-cable and non-programming assets. For additional information, see note 1 to the accompanying consolidated financial statements of the Company. The TCI Group was 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 comprised primarily of TCI's domestic cable and communications business. For additional information, see note 1 to the accompanying consolidated financial statements of the Company. The TCI Group was tracked separately through the TCI Group Series A Stock and the TCI Group Series B Stock. The Liberty Media Group was tracked separately through the Liberty Group Series A Stock and Liberty Group Series B Stock. The TCI Ventures Group was tracked separately through the TCI Ventures Group Series A Stock and TCI Ventures Group Series B Stock. The TCI Group Series A Stock, TCI Ventures Group Series A Stock and the Liberty Group Series A Stock are sometimes collectively referred to herein as the "Series A Stock," and the TCI Group Series B Stock, TCI Ventures Group Series B Stock and Liberty Group Series B Stock are sometimes collectively referred to herein as the "Series B Stock." 1 2 Merger and Restructuring On March 9, 1999, AT&T acquired TCI in the AT&T Merger in which Italy Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into TCI, and TCI thereby became a wholly-owned subsidiary of AT&T. As a result of the AT&T Merger, (i) each share of TCI Group Series A Stock was converted into 0.7757 of a share of AT&T Common Stock, (ii) each share of TCI Group Series B Stock was converted into 0.8533 of a share of AT&T Common Stock, (iii) each share of Liberty Group Series A Stock was converted into one share of a newly created class of AT&T common stock designated as the AT&T Liberty Class A Tracking Stock, (iv) each share of Liberty Group Series B Stock was converted into one share of a newly created class of AT&T common stock designated as the AT&T Liberty Class B Tracking Stock, (v) each share of TCI Ventures Group Series A Stock was converted into 0.52 of a share of AT&T Liberty Class A Tracking Stock, (vi) each share of TCI Ventures Group Series B Stock was converted into 0.52 of a share of AT&T Liberty Class B Tracking Stock, (vii) each share of TCI's Convertible Preferred Stock, Series C-TCI Group was converted into 103.059502 shares of AT&T Common Stock, (viii) each share of TCI's Convertible Preferred Stock Series C-Liberty Media Group was converted into 56.25 shares of AT&T Liberty Class A Tracking Stock, (ix) each share of TCI's Redeemable Convertible TCI Group Preferred Stock, Series G was converted into 0.923083 shares of AT&T Common Stock and (x) each share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H was converted into 0.590625 of a share of AT&T Liberty Class A Tracking Stock. Following the AT&T Merger, each share of TCI's Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock ("Class B Preferred Stock") continues to be outstanding as the Class B 6% Preferred Stock with the same rights and preferences such stock had prior to the AT&T Merger. In general, the holders of shares of AT&T Liberty Class A Tracking Stock and the holders of shares of AT&T Liberty Class B Tracking Stock will vote together as a single class with the holders of shares of AT&T Common Stock on all matters presented to such stockholders, with the holders being entitled to one-tenth (1/10th) of a vote for each share of AT&T Liberty Class A Tracking Stock held, 1 vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote per share of AT&T Common Stock held. 2 3 The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are intended to reflect the separate performance of the businesses and assets attributed to "Liberty/Ventures Group," which following the AT&T Merger, is comprised of the businesses and assets attributed to Liberty Media Group and TCI Ventures Group at the time of the AT&T Merger. Pursuant to, and subject to the terms and conditions set forth in, the Agreement and Plan of Restructuring and Merger, dated as of June 23, 1998 (the "Merger Agreement"), immediately prior to the AT&T Merger, certain assets previously attributed to TCI Ventures Group (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and Teleport Communications Group, Inc. ("TCG"), the stock of At Home Corporation ("@Home") attributed to TCI Ventures Group, the assets and business of the National Digital Television Center, Inc. ("NDTC") and TCI Ventures Group's equity interest in Western Tele-Communications, Inc.("WTCI")) were transferred to TCI Group in exchange for approximately $5.5 billion in cash. Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty/Ventures Group and AT&T, Liberty/Ventures Group became entitled to the benefit of approximately $2.0 billion of net operating loss carryforwards attributable to all entities included in TCI's consolidated federal income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service and are subject to limitations on usage which may affect the ultimate amount utilized. See note 19 to the accompanying consolidated financial statements of the Company. Additionally, certain warrants previously attributed to TCI Group were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. Certain agreements entered into at the time of the AT&T Merger provide, among other things, for preferred vendor status to Liberty/Ventures Group for digital basic distribution on AT&T's systems of new programming services created by Liberty/Ventures Group and for a renewal of existing affiliation agreements. The transfer of certain other immaterial assets was also effected. Pursuant to amended corporate governance documents for the entities included in Liberty/Ventures Group and certain agreements among AT&T and TCI, the business of Liberty/Ventures Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T Merger. AT&T will initially designate one third of the directors of such entities and its rights as the sole shareholder of the common stock of such entities following the AT&T Merger will, in accordance with Delaware law, be limited to actions which will require shareholder approval. Therefore, management has concluded that TCI does not have a controlling financial interest (as that term is used in Statement of Financial Accounting Standards No. 94) in the entities comprising the Liberty/Ventures Group following the AT&T Merger, and will account for its investment in such entities under the equity method. 3 4 Accordingly, effective with the AT&T Merger, the results of operations of the entities attributed to Liberty/Ventures Group (exclusive of @Home, NDTC and WTCI which were transferred to TCI Group immediately prior to the AT&T Merger) will no longer be consolidated in the TCI consolidated financial statements. The following table presents certain combined operating information of Liberty/Ventures Group (inclusive of the operating information of @Home, NDTC and WTCI) for the indicated periods:
Year ended December 31, ----------------------------------------------- 1998 1997 1996 ----------- ------------ ----------- amounts in millions Revenue: Unaffiliated parties $ 1,301 1,104 1,136 TCI Group 258 195 117 Net sales from electronic retailing services -- -- 984 ----------- ------------ ----------- 1,559 1,299 2,237 ----------- ------------ ----------- Cost of sales, operating costs and expenses: Cost of sales -- -- 605 Operating 882 682 750 Selling, general and administrative 427 348 563 Charges from related parties 28 75 63 Cost of distribution agreements 50 -- -- Stock compensation 518 296 10 Depreciation and amortization 243 196 210 ----------- ------------ ----------- 2,148 1,597 2,201 ----------- ------------ ----------- Operating income (loss) (589) (298) 36 Other income (expense): Interest expense (116) (57) (68) Interest expense to related parties (10) (18) -- Dividend and interest income 100 57 39 Interest income from related parties -- 6 14 Share of losses of affiliates, net (1,034) (850) (372) Minority interests in losses of attributed subsidiaries 102 25 26 Gains on dispositions, net 4,738 420 1,558 Gains on issuance of equity by affiliates and subsidiaries 357 172 13 Other, net 6 2 9 ----------- ------------ ----------- 4,143 (243) 1,219 ----------- ------------ ----------- Earnings (loss) before income taxes 3,554 (541) 1,255 Income tax benefit (expense) (1,397) 130 (457) ----------- ------------ ----------- Net earnings (loss) $ 2,157 (411) 798 =========== ============ ===========
If the transfer of @Home, NDTC and WTCI from Liberty/Ventures Group to TCI Group had occurred on January 1, 1998, TCI Group's revenue, operating cash flow (as defined by the Company) and operating loss would have increased (decreased) by $182 million, $7 million and ($159 million), respectively. 4 5 Pursuant to a proposed final judgment (the "Final Judgment") agreed to by TCI, AT&T and the United States Department of Justice (the "DOJ") on December 30, 1998, Liberty/Ventures Group prior to the AT&T Merger transferred all of the equity securities of Sprint Corporation ("Sprint") beneficially owned by the Liberty/Ventures Group (the "Sprint Securities") to a trust with an independent trustee (the "Trustee"), pursuant to a trust agreement approved by the DOJ (the "Trust Agreement"). The Final Judgment, if entered by the United States District Court for the District of Columbia, would require the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities held by the trust and beneficially owned by Liberty/Ventures Group sufficient to cause Liberty/Ventures Group to own beneficially no more than 10% of the outstanding Series 1 PCS Stock of Sprint on a fully diluted basis (assuming the issuance of all shares of Series 1 PCS Stock of Sprint ultimately issuable in respect of the applicable securities of Sprint upon the exercise, conversion or other issuance thereof in accordance with the terms of such securities) on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty/Ventures Group. The Trust Agreement grants the Trustee the sole right to sell the Sprint Securities and provides that all decisions regarding such divestiture will be made by the Trustee without discussion or consultation with AT&T or the entities in the Liberty/Ventures Group; however, the Final Judgment would provide that the Trustee shall consult with the board of directors of the Liberty/Ventures Group entity that owns Sprint Securities regarding such divestiture (other than certain directors appointed by AT&T following the AT&T Merger and any director, officer or shareholder that owns more than 0.10% of the outstanding AT&T Common Stock). The Trustee has the power and authority to accomplish such divestiture only in a manner reasonably calculated to maximize the value of the Sprint Securities beneficially owned by Liberty/Ventures Group. The Final Judgment would provide that the Trustee vote the Sprint Securities beneficially owned by Liberty/Ventures Group in the same proportion as other holders of Sprint's PCS stock so long as such securities are held by the trust. The Final Judgment also would prohibit the acquisition by Liberty/Ventures Group of additional Sprint Securities (other than in connection with the exercise or conversion, as applicable, of certain Sprint Securities) without the prior written consent of the DOJ. Immediately prior to the AT&T Merger, TCI restructured its ownership of certain of its subsidiaries. This restructuring included merging TCI's cable subsidiary, TCIC, into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of TCIC have been assumed by TCI, including TCIC's public debt. In connection with TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred Stock, Series A was converted into 2.119 shares of TCI Group Series A Stock, and such shares of TCI Group Series A Stock were subsequently converted into AT&T Common Stock in connection with the AT&T Merger. All other public securities issued by subsidiaries of TCIC (other than TCI Pacific Communications, Inc. ("Pacific")) otherwise remained unaffected. Furthermore, as part of the restructuring, (i) certain asset transfers were made between TCI and its subsidiaries, (ii) 123,896 shares of the Company's Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock"), which were held by subsidiaries of TCI, were converted into 185,428,946 shares of TCI Group Series A Stock (which in turn were converted into 143,837,233 shares of AT&T Common Stock in the AT&T Merger and continue to be held by subsidiaries of TCI), (iii) the remaining 154,411 shares of Series F Preferred Stock which were formerly held by subsidiaries of TCI were distributed to TCI through a series of liquidations and canceled, and (iv) 125,728,816 shares of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock, 6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each formerly held by subsidiaries of TCI, were distributed to TCI through a series of liquidations and canceled. 5 6 After the AT&T Merger, under the terms of the 5% Class A Senior Cumulative Exchangeable Preferred Stock of Pacific (the "Exchangeable Preferred Stock"), each share of that preferred stock is exchangeable, from and after August 1, 2001, for approximately 4.225 shares of AT&T Common Stock, subject to certain anti-dilution adjustments. Additionally, after the AT&T Merger, Pacific may elect to make any dividend, redemption or liquidation payment on the Exchangeable Preferred Stock in cash, by delivery of shares of AT&T Common Stock or by a combination of the foregoing forms of consideration. Magness Settlement On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group Series A Stock (which shares are entitled to one vote per share) to the Estate of Bob Magness (the "Magness Estate"), the late founder and former Chairman of the Board of TCI in exchange (the "Exchange") for an equal number of shares of TCI Group Series B Stock (which shares are entitled to ten votes per share) owned by the Magness Estate, (b) the Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock received in the Exchange, together with approximately 1.5 million shares of TCI Group Series A Stock that the Magness Estate previously owned (collectively, the "Option Shares"), to two investment banking firms (the "Investment Bankers") for approximately $530 million (the "Sale Price") and (c) TCI entered into an agreement with the Investment Bankers whereby TCI would have the option, but not the obligation, to purchase the Option Shares at any time on or before June 16, 1999 (the "Option Period"). The preceding transactions are referred to collectively as the "June 16 Stock Transaction". During the Option Period, the Company and the Investment Bankers would settle quarterly any increase or decrease in the market value of the Option Shares. If the market value of the Option Shares should exceed the Investment Bankers' cost, Option Shares with a fair value equal to the difference between the market value and cost would be segregated from the other Option Shares in an account at the Investment Bankers. If the market value of the Option Shares should be less than the Investment Bankers' cost, the Company, at its option, would settle such difference with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or, subject to certain conditions, with cash or letters of credit. In addition, the Company would be required to pay the Investment Bankers a quarterly fee equal to the London Interbank Offered Rate ("LIBOR") plus 1% on the Sale Price, as adjusted for payments made by the Company pursuant to any quarterly settlement with the Investment Bankers. Due to the Company's ability to settle quarterly price fluctuations and fees with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock, the Company records all amounts received or paid under this arrangement as increases or decreases, respectively, to equity. During the fourth quarter of 1997, the Company repurchased 4 million shares of TCI Group Series A Stock from one of the Investment Bankers for an aggregate cash purchase price of $66 million. Additionally, as a result of the Exchange Offers and certain open market transactions that were completed to obtain the desired weighting of TCI Group Series A Stock and TCI Ventures Group Series A Stock, the Investment Bankers disposed of 4,210,308 shares of TCI Group Series A Stock and acquired 23,407,118 shares of TCI Ventures Group Series A Stock during the last half of 1997. As a result of the foregoing transactions and certain transactions related to the January 5, 1998 settlement of litigation involving the Magness Estate, as described below, the Option Shares were comprised of 6,201,042 shares of TCI Group Series A Stock and 11,740,610 shares of TCI Ventures Group Series A Stock at December 31, 1998. At December 31, 1998, the market value of the Option Shares exceeded the Investment Bankers' cost by $421 million. 6 7 Pursuant to a certain letter agreement, dated June 16, 1997, between Dr. Malone, TCI's Chairman and Chief Executive Officer, and the Magness Estate, Dr. Malone agreed to waive certain rights of first refusal with respect to shares of TCI Group Series B Stock beneficially owned by the Magness Estate. Such rights of first refusal arise from a letter agreement, dated June 17, 1988, among Bob Magness, Kearns-Tribune Corporation and Dr. Malone, pursuant to which Dr. Malone was granted a right of first refusal to acquire any shares of TCI Group Series B Stock which the other parties proposed to sell. As a result of Dr. Malone's rights under such June 17, 1988 letter agreement, such waiver was necessary in order for the Magness Estate to consummate the Exchange and the Sale. In consideration for such waiver, TCI granted Dr. Malone the right (the "Malone Right") to acquire from time to time until June 30, 1999, from TCI up to 30,545,864 shares of the TCI Group Series B Stock acquired by TCI from the Magness Estate pursuant to the Exchange. Such acquisition may be made in exchange for either, or any combination of, shares of TCI Group Series A Stock owned by Dr. Malone (exchanged on a one for one basis), or cash in an amount equal to the average closing sale price of the TCI Group Series B Stock for the five trading days preceding the acquisition. In connection with certain legal proceedings relative to the probate of the Magness Estate, one or more of Gary Magness and Kim Magness, Bob Magness' sons, Sharon Magness, Bob Magness' surviving second wife and the original personal representatives of the Magness Estate advanced various claims, causes of action, demands, complaints and requests against one or more of the others. In addition, Kim Magness and Gary Magness, in a Complaint And Request To Void Sale Of TCI Stock, And For Damages And Surcharge, filed on October 29, 1997 (the "Voiding Action"), advanced various claims relating to the June 16 Stock Transaction against TCI, Dr. Malone and the original personal representatives of the Magness Estate. Among other matters, the Voiding Action challenged the June 16 Stock Transaction on various fiduciary bases and requested rescission of such transaction and damages. Pursuant to an agreement effective as of January 5, 1998, TCI, Gary Magness, Kim Magness, Sharon Magness, the Magness Estate, the Estate of Betsy Magness (the first wife of Bob Magness) and Dr. Malone agreed to settle their respective claims against each other relating to the Magness Estate and the June 16 Stock Transaction, in each case without any of those parties admitting any of the claims or allegations against that party (the "Magness Settlement"). In connection with the Magness Settlement, portions of the Exchange and Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A Stock and 11,666,506 shares of TCI Ventures Group Series A Stock were returned to TCI as authorized but unissued shares, (ii) the Magness Estate returned to the Investment Bankers the portion of the Sale Price attributable to such returned shares and (iii) the Magness Estate paid $11 million to TCI representing a reimbursement of the Exchange fees incurred by TCI from June 16, 1997 through February 9, 1998 with respect to such returned shares. TCI then issued to the Magness Estate 10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares of TCI Ventures Group Series B Stock. In addition, as part of the Magness Settlement, TCI issued 1,339,415 shares of TCI Group Series B Stock to the Estate of Betsy Magness in exchange for an equal number of shares of TCI Group Series A Stock and issued 1,531,834 shares of TCI Ventures Group Series B Stock for an equal number of shares of TCI Ventures Group Series A Stock. 7 8 On February 9, 1998, in connection with the Magness Settlement, TCI entered into a call agreement (the "Malone Call Agreement") with Dr. Malone and Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the Malones granted to TCI the right to acquire any shares of TCI stock which are entitled to cast more than one vote per share (the "High-Voting Shares") owned by the Malones, which at December 31, 1998 consisted of an aggregate of approximately 69 million High-Voting Shares upon Dr. Malone's death or upon a contemplated sale of the High-Voting Shares (other than a minimal amount) to third persons. In either such event, TCI has the right to acquire the shares at a maximum price equal to the then relevant market price of shares of "low-voting" Series A Stock plus a ten percent premium. The Malones also agreed that if TCI were ever to be sold to another entity, then the maximum premium that the Malones would receive on their High-Voting Shares would be no greater than a ten percent premium over the price paid for the relevant shares of Series A Stock. TCI paid $150 million to the Malones in consideration of their entering into the Malone Call Agreement. Also on February 9, 1998, in connection with the Magness Settlement, certain members of the Magness family, individually and in certain cases, on behalf of the Estate of Betsy Magness and the Magness Estate (collectively, the "Magness Family") also entered into a call agreement with TCI (with substantially the same terms as the one entered into by the Malones, including a call on the shares owned by the Magness Family upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness Family's, which at December 31, 1998 consisted of an aggregate of approximately 55 million High-Voting Shares. The Magness Family was paid $124 million by TCI in consideration of their entering into the Magness Call Agreement. 8 9 Additionally, on February 9, 1998, the Magness Family entered into a Shareholders' Agreement (the "Shareholders' Agreement") with the Malones and TCI under which (i) the Magness Family and the Malones agree to consult with each other in connection with matters to be brought to the vote of TCI's stockholders, subject to the proviso that if they cannot mutually agree on how to vote the shares, Dr. Malone has an irrevocable proxy to vote the High-Voting Shares owned by the Magness Family, (ii) the Magness Family may designate a nominee for the Board and Dr. Malone has agreed to vote his High-Voting Shares for such nominee and (iii) certain "tag along rights" have been created in favor of the Magness Family and certain "drag along rights" have been created in favor of the Malones. In addition, the Malone Right granted by TCI to Dr. Malone to acquire 30,545,864 shares of TCI Group Series B Stock was reduced to an option to acquire 14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms of the Shareholders' Agreement, the Magness Family has the right to participate in the reduced Malone Right on a proportionate basis with respect to 12,406,238 shares of the 14,511,570 shares subject to the Malone Right. On June 24, 1998, Dr. Malone delivered notice to TCI exercising his right to purchase (subject to the Magness Family proportionate right) up to 14,511,570 shares of TCI Group Series B Stock at a per share price of $35.5875 pursuant to the Malone Right. In addition, a representative of the Magness Family advised Dr. Malone that the Magness Family would participate in such purchase up to the Magness Family's proportionate right. On October 14, 1998, 8,718,770 shares of TCI Group Series B Stock were issued to Dr. Malone upon payment of cash consideration totaling $310 million. On October 16, 1998, 5,792,800 shares of TCI Group Series B Stock were issued to the Magness Family upon payment of cash consideration totaling $206 million. In connection with the acquisition of the TCI Group Series B Stock by Dr. Malone, TCI executed certain waivers to the Malone Call Agreement and TCI and the Magness Family executed a waiver to the Shareholders' Agreement to, among other things, permit (subject to certain limitations) the pledge of TCI Group Series B Stock owned by Dr. Malone as collateral to the lenders who provided the funds for his purchase of shares of TCI Group Series B Stock. In connection with the AT&T Merger, Liberty Media Corporation ("Liberty") became entitled to exercise TCI's rights under each Call Agreement and the Shareholders' Agreement with respect to the AT&T Liberty Class B Tracking Stock acquired by the Malones and the Magness Family as a result of the AT&T Merger and the Malones and the Magness Family agreed that the Shareholders' Agreement would continue to apply to the AT&T Liberty Class B Tracking Stock. On February 1, 1999, the Company began to terminate the transactions under the agreements with the Investment Bankers described above, and as of March 5, 1999, such transactions were terminated. In connection with the termination of such transactions the Company received an aggregate cash payment of $509 million. Inflation Inflation has not had a significant impact on TCI's results of operations during the three-year period ended December 31, 1998. 9 10 Accounting Standards Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). The Company has reclassified its prior period consolidated balance sheet and consolidated statements of operations to conform to the requirements of SFAS 130. SFAS 130 requires that all items which are components of comprehensive earnings or losses be reported in a financial statement in the period in which they are recognized. The Company has included cumulative foreign currency translation adjustments and unrealized holding gains and losses on available-for-sale securities in other comprehensive earnings that are recorded directly in stockholders' equity. Pursuant to SFAS 130, these items are reflected, net of related tax effects, as components of comprehensive earnings in the Company's consolidated statements of operations and comprehensive earnings, and are included in accumulated other comprehensive earnings in the Company's consolidated balance sheets and statements of stockholders' equity. During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133"), which is effective for all fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities by requiring that all derivative instruments be reported as assets or liabilities and measured at their fair values. Under SFAS 133, changes in the fair values of derivative instruments are recognized immediately in earnings unless those instruments qualify as hedges of the (1) fair values of existing assets, liabilities, or firm commitments, (2) variability of cash flows of forecasted transactions, or (3) foreign currency exposures of net investments in foreign operations. Although management of the Company has not completed its assessment of the impact of SFAS 133 on its consolidated results of operations and financial position, management currently estimates that the impact of SFAS 133 will not be material. Year 2000 During 1998, the Company continued its enterprise-wide, comprehensive efforts to assess and remediate its computer systems and related software and equipment to ensure such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. The Company's year 2000 remediation efforts include an assessment of its most critical systems, such as customer service and billing systems, headends and other cable plant systems that support the Company's programming services, business support operations, and other equipment and facilities. The Company also continued its efforts to verify the year 2000 readiness of its significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess such partners and affiliates' year 2000 status. The Company has a year 2000 Program Management Office (the "PMO") to organize and manage its year 2000 remediation efforts. The PMO is responsible for overseeing, coordinating and reporting on the Company's year 2000 remediation efforts. At December 31, 1998, it was comprised of a 119-member, full-time staff, accountable to executive management of the Company. 10 11 The PMO has defined a four-phase approach to determining the year 2000 readiness of the Company's systems, software and equipment. Such approach is intended to provide a detailed method for tracking the evaluation, repair and testing of the Company's critical systems, software and equipment. Phase 1, Assessment, involves the inventory of all critical systems, software and equipment and the identification of any year 2000 issues. Phase 1 also includes the preparation of the workplans needed for remediation. Phase 2, Remediation, involves repairing, upgrading and/or replacing any non-compliant critical equipment and systems. Phase 3, Testing, involves testing the Company's critical systems, software, and equipment for year 2000 readiness, or in certain cases, relying on test results provided to the Company. Phase 4, Implementation, involves placing compliant systems, software and equipment into production or service. At December 31, 1998, TCI's overall progress by phase was as follows:
Percentage of year 2000 Expected Completion Projects Date - All year 2000 Phase Completed by Phase* Projects ----- ------------------- -------------------- Phase 1-Assessment 69% April 1999 Phase 2-Remediation 28% June 1999 Phase 3-Testing 16% July 1999 Phase 4-Implementation 11% September 1999
- ------------- *The percentages set forth above were calculated by dividing the number of year 2000 projects that have completed a given phase by the total number of year 2000 projects. The completion dates set forth above are based on the Company's current expectations. However, due to the uncertainties inherent in year 2000 remediation, no assurances can be given as to whether such projects will be completed on such dates. The Company is completing an inventory of critical systems with embedded technologies that impact its operations and is currently determining the correct remediation approach. The embedded technologies assessments are expected to be complete by April of 1999. During 1998, the Company continued its survey of significant third-party vendors and suppliers whose systems, services or products are important to the Company's operations (e.g., suppliers of addressable controllers and set-top devices, and the provider of the Company's billing services). The year 2000 readiness of such providers is critical to continued provision of the Company's cable service. The Company has received information that critical systems, services or products supplied to the Company by third parties are either year 2000 ready or are expected to be year 2000 ready by mid-1999. In addition to the survey process described above, management of the Company has identified its most critical supplier/vendor relationships and has instituted a verification process to determine the vendor's year 2000 readiness. Such verification includes, as deemed necessary, reviewing vendors' test and other data and engaging in regular conferences with vendors' year 2000 teams. The Company is also requiring testing to validate the year 2000 compliance of certain critical products and services. 11 12 Significant market value is associated with the Company's investments in certain public and private corporations, partnerships and other businesses. Accordingly, the Company is monitoring the public disclosure of such publicly-held business entities to determine their year 2000 readiness, including Cablevision Systems Corporation ("CSC"), Time Warner, Inc. ("Time Warner"), and AT&T. In addition, the Company has surveyed and monitored the year 2000 status of certain privately-held business entities in which the Company has significant investments. For updated information related to such companies' year 2000 programs, please refer to the most recent periodic filings with the Securities and Exchange Commission of CSC, Time Warner and AT&T. Year 2000 expenses and capital expenditures incurred during the year ended December 31, 1998 were $11 million and $2 million, respectively. Management of the Company currently estimates the remaining costs to be not less than $113 million, bringing the total estimated cost associated with the Company's year 2000 remediation efforts to be not less than $126 million (including $33 million for replacement of noncompliant information technology ("IT") Systems). Also included in this estimate is $14 million in future payments to be made pursuant to unfulfilled executory contracts or commitments with vendors for year 2000 remediation services. Although no assurances can be given, management currently expects that (i) cash flow from operations will fund the costs associated with year 2000 compliance and (ii) the total projected cost associated with the Company's year 2000 program will not be material to the Company's financial position, results of operations or cash flows. The Company is a widely distributed enterprise in which allocation of certain resources, including IT support is decentralized. Accordingly, the Company does not consolidate an IT budget. Therefore, total estimated year 2000 costs as a percentage of an IT budget are not available. There are currently no planned IT projects being deferred due to year 2000 costs. The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. Management believes that its year 2000 program will significantly reduce the Company's risks associated with the changeover to the year 2000 and has implemented certain contingency plans to minimize the effect of any potential year 2000 related disruptions. The risks and the uncertainties discussed below and the associated contingency plans relate to systems, software, equipment, and services that the Company has deemed critical in regard to customer service, business operations, financial impact or safety. The failure of addressable controllers contained in the cable system headends could disrupt the delivery of premium services to customers and could necessitate crediting customers for failure to receive such premium services. In this unlikely event, management expects that it will identify and transmit the lowest cost programming tier. Unless other contingency plans are developed with the programmers, premium and adult content channels would not likely be transmitted until the addressable controller had been repaired. Customer service networks and/or automated voice response systems failure could prevent access to customer account information, hamper installation scheduling and disable the processing of pay-per-view requests. The Company plans to have its customer service representatives answer telephone calls from customers in the event of outages and expects to retrieve needed customer information manually from the billing service provider. 12 13 A failure of the services provided by billing systems service providers could result in a loss of customer records which could disrupt the ability to bill customers for a protracted period. The Company plans to prepare electronic backup records of its customer billing information prior to the year 2000 to allow for data recovery. In addition, the Company continues to monitor the year 2000 readiness of its key customer-billing suppliers. Advertising revenue could be adversely affected by the failure of certain equipment which could impede or prevent the insertion of advertising spots in the Company's programming. The Company anticipates that it can minimize such effect by manually resetting the dates each day until the equipment is repaired. The Company owns investments in numerous cable programming operators and other businesses. The market value of the Company's investment in these entities could be adversely impacted by material failures of such entities to address year 2000 remediation issues (including supplier and vendor issues) related to their programming services and businesses. Further, due to tax and strategic considerations, the Company has a limited ability to dispose of these investments if year 2000 issues develop. Therefore, as a contingency plan, the Company has undertaken an extensive effort to verify and in certain cases assist in the year 2000 remediation efforts of companies in which it has significant investments. Security and fire protection systems failure could leave facilities vulnerable to intrusion and fire. The Company expects to return such systems to normal functioning by turning the power off and then on again ("power off/on"). The Company also plans to have additional security staff on site and plans to implement a backup plan for communicating with local fire and police departments. Also, certain personal computers interface with and control elevators, escalators, wireless systems, public access systems and certain telephony systems. In the event such computers cease operating, conducting a power off/on is expected to resume normal functioning. If a power off/on does not resume normal functioning, management expects to resolve the problem by resetting the computer to a pre-designated date which precedes the year 2000. In the event that the local public utility cannot supply power, the Company expects to supply power for a limited time to the Company's cable headends, the NDTC and office sites through backup generators. The financial impact of any or all of the above worst-case scenarios has not been and cannot be estimated by the Company due to the numerous uncertainties and variables associated with such scenarios. If critical systems related to the Company's cable TV and programming services are not successfully remediated, the Company could face claims of breach of contract from customers of the NDTC, from parties to cable system sale or exchange agreements, from certain programming providers and from other cable TV businesses that rely on the Company's programming services. The Company has not determined the possible losses from any such claims of breach of contract. 13 14 SUMMARY OF OPERATIONS Summarized operating data with respect to TCI is presented below for the indicated periods:
Years ended December 31, --------------------------------------------- 1998 1997 1996 ----------- ---------- ---------- amounts in millions Revenue $ 7,351 7,570 8,022 Operating expenses (2,997) (2,995) (3,677) Selling, general and administrative expenses (1,642) (1,600) (2,069) Year 2000 costs (11) -- -- AT&T merger costs (14) -- -- Stock compensation (866) (488) 13 Reserve for loss arising from contingent obligation (90) -- -- Cost of distribution agreements (50) -- -- Impairment of assets (5) (15) -- Restructuring charges -- -- (41) Depreciation (1,121) (1,077) (1,093) Amortization (614) (546) (523) ----------- ---------- ---------- Operating income (loss) (59) 849 632 Interest expense (1,061) (1,160) (1,096) Interest and dividend income 122 88 64 Share of losses of affiliates, net (1,384) (930) (450) Loss on early extinguishment of debt (60) (39) (71) Minority interests in earnings of consolidated subsidiaries, net (88) (154) (56) Gains on issuance of equity interests by subsidiaries 89 60 -- Gains on issuance of stock by equity investees 268 112 12 Gains on disposition of assets, net 5,760 401 1,593 Other, net (49) (22) (65) ----------- ---------- ---------- Earnings (loss) before income taxes 3,538 (795) 563 Income tax benefit (expense) (1,595) 234 (271) ----------- --------- ---------- Net earnings (loss) $ 1,943 (561) 292 =========== ========= ==========
The Company's domestic cable and communications businesses and assets were attributed to TCI Group, and the Company's programming businesses and assets were attributed to Liberty Media Group. The Company's principal international businesses and assets and the Company's remaining non-cable and non-programming domestic businesses and assets were included in TCI Ventures Group. 14 15 Acquisitions and Dispositions The Company has completed a number of acquisitions and dispositions during the three years ended December 31, 1998 which have affected the comparability of operating results between periods. The acquisitions and dispositions which had a significant impact on the Company's operating results are discussed below. On March 4, 1998, the Company contributed to CSC certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 48.9 million newly issued CSC Class A common shares (the "CSC Transaction"). For additional information concerning the CSC Transaction, see note 6 to the accompanying consolidated financial statements. In addition to the CSC Transaction, the Company also completed, during 1998, eight transactions whereby TCI contributed cable television systems serving in the aggregate approximately 1,924,000 customers to eight separate joint ventures (collectively, the "1998 Joint Ventures") in exchange for non-controlling ownership interests in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998 Joint Ventures of debt owed by the Company to external parties aggregating $323 million and intercompany debt owed to the Company aggregating $2,374 million. The CSC Transaction and the formation of the 1998 Joint Ventures are collectively referred to herein as the "1998 Contribution Transactions." During the year ended December 31, 1998, the Company's revenue and operating cash flow (defined by the Company as operating income before depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger costs and stock compensation) included $622 million and $278 million, respectively, from the cable television systems included in the 1998 Contribution Transactions. In addition to the 1998 Contribution Transactions, the Company, as of December 31, 1998, has signed agreements or letters of intent to contribute within the next twelve months, certain cable television systems (the "Pending Contribution Cable Systems") serving approximately 1.2 million basic customers to joint ventures in which the Company will retain non-controlling ownership interests (the "Pending Contribution Transactions"). Following the completion of the Pending Contribution Transactions, the Company will no longer consolidate the Pending Contribution Cable Systems. Accordingly it is anticipated that the completion of the Pending Contribution Transactions, as currently contemplated, will result in aggregate estimated reductions (based on 1998 amounts) to the Company's debt, annual revenue and annual operating cash flow of $1.5 billion, $500 million and $200 million, respectively. No assurance can be given that any of the Pending Contribution Transactions will be consummated. Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King Communications Inc. ("Silver King") acquired Home Shopping Network, Inc. ("HSN") by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. As a result of the HSN Merger, HSN is no longer included in the consolidated financial results of the Company. Subsequent to the HSN Merger, Silver King was renamed HSN, Inc. ("HSNI"). Revenue and expenses related to HSNI are included under the captions "Net sales from electronic retailing services" and "cost of sales from electronic retailing services", respectively, in the accompanying consolidated Statement of Operations and Comprehensive Earnings for the year ended December 31, 1996. For additional information on the HSN Merger, see note 6 to the accompanying consolidated financial statements of the Company. 15 16 On July 31, 1996, the Company acquired an entity from Viacom, Inc. that owned cable television assets valued at $2.326 billion at the acquisition date. Upon consummation of such acquisition (the "Viacom Acquisition"), the acquired entity was renamed TCI Pacific Communications, Inc. For additional information concerning the Viacom Acquisition, see note 10 to the accompanying consolidated financial statements of the Company. Through December 4, 1996, the Company had an investment in Primestar Partners L.P. ("Primestar"). Primestar provided programming and marketing support to each of its cable partners, including the Company, who provided satellite television service to their customers. On December 4, 1996, TCI distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations subsequent to December 4, 1996 are not consolidated with those of the Company. For additional information on the Satellite Spin-Off, see note 11 to the accompanying consolidated financial statements. The Company has also completed certain other acquisitions and dispositions during the three years ended December 31, 1998. See note 10 to the accompanying consolidated financial statements of the Company. The timing and magnitude of such acquisitions and dispositions may also affect the comparability of financial results between periods. Consequently, the historical amounts included in the accompanying consolidated financial statements are not comparable year to year. The following table presents adjustments to remove the effects of the aforementioned acquisitions and dispositions from selected operating items.
Effect of acquisitions Historical and dispositions As adjusted ---------- ---------------- ----------- Year ended December 31, 1998: amounts in millions Revenue $ 7,351 (1,499) 5,852 Operating expenses $ (2,997) 644 (2,353) Selling, general and administrative expenses $ (1,642) 336 (1,306) Year ended December 31, 1997: Revenue $ 7,570 (1,962) 5,608 Operating expenses $ (2,995) 816 (2,179) Selling, general and administrative expenses $ (1,600) 402 (1,198) Year ended December 31, 1996: Revenue $ 8,022 (2,422) 5,600 Operating expenses $ (3,677) 1,231 (2,446) Selling, general and administrative expenses $ (2,069) 708 (1,361)
16 17 Revenue and Expenses The Company's revenue decreased $219 million or 3% and $452 million or 6% for the years ended December 31, 1998 and 1997, respectively, as compared to the prior year. Exclusive of the effects of acquisitions and dispositions, revenue increased $244 million or 4% and $8 million or less than 1% during 1998 and 1997, respectively. Exclusive of the effects of acquisitions and dispositions, revenue from domestic cable operations increased 2% during 1998 as compared to 1997. Revenue from domestic cable customers accounted for this 2% increase, primarily due to the net effect of a 5% increase in basic revenue, an increase in revenue from digital products and a 10% decrease in premium revenue. The Company experienced a 5% increase in its average basic rate, an increase of less than 1% in the number of average basic customers, a 5% decrease in its average rate for traditional premium services and a 5% decrease in the number of average traditional premium subscriptions. Additionally, the December 31, 1997 termination of an agreement pursuant to which the Company provided fulfillment services to a third party resulted in a 1% decrease, and advertising sales and other revenue accounted for a 1% increase, in revenue from domestic cable operations. A significant portion of the increase in advertising sales is attributable to arrangements with programming suppliers that may not continue at current levels in future periods. Exclusive of the effects of acquisitions and dispositions, revenue from domestic cable operations increased 6% during 1997 as compared to 1996. Revenue from domestic cable customers accounted for 3% of the 1997 increase in revenue from domestic cable operations, primarily as a result of the net effect of a 7% increase in basic revenue and a 4% decrease in premium revenue. The Company experienced a 9% increase in its average basic rate, a 1% decrease in the number of average basic customers, a 7% increase in its average premium rate and an 11% decrease in the number of average premium subscriptions. Advertising sales and other revenue accounted for the remaining 3% increase in revenue from domestic cable operations. Exclusive of the effects of acquisitions and dispositions, revenue from programming services increased 15% and 29% for the years ended December 31, 1998 and 1997, respectively, as compared to the prior year. The increases related primarily to higher revenue from the distribution of "Encore" premium movie services to cable operators, including TCI Group, and higher revenue from TV Guide, Inc. (formerly United Video Satellite Group, Inc. ("UVSG")). Additionally, Netlink International had increased revenue during 1998 compared to the same period in 1997, primarily due to increased rates as a result of increased copyright fees. Operating expenses increased $2 million or less than 1% and decreased $682 million or 19% for the years ended December 31, 1998 and 1997, respectively, as compared to the prior year. Exclusive of the effects of acquisitions and dispositions, operating expenses increased $174 million or 8% and decreased $267 million or 11% during 1998 and 1997, respectively. Exclusive of the effects of acquisitions and dispositions, operating expenses from domestic cable operations increased 5% during each of 1998 and 1997, respectively, as compared to the prior year. Such changes relate primarily to higher programming and labor costs, which in 1998 were partially offset by reductions attributable to higher capitalized labor and overhead resulting primarily from increased installation and construction activities. It is anticipated that the Company's programming costs will increase in future periods. 17 18 Exclusive of the effects of acquisitions and dispositions, operating expenses from programming operations increased 73% and 85% during 1998 and 1997, respectively, as compared to the prior year. The increases relate primarily to higher costs to acquire programming content from suppliers due primarily to an increase in first run movie content as a percent of Encore's total movie content in both 1998 and 1997. Such first run movies are generally obtained at higher costs than movies which are not first run. Other miscellaneous increases include higher music rights costs and higher copyright fees. Selling, general and administrative expenses increased $42 million or 3% and decreased $469 million or 23% for the years ended December 31, 1998 and 1997, respectively, as compared to the prior year. Exclusive of the effects of acquisitions and dispositions, the expenses increased $108 million or 9% and decreased $163 million or 12% during 1998 and 1997, respectively. Exclusive of the effects of acquisitions and dispositions, selling, general and administrative expenses from domestic cable operations increased 12% and decreased 6% during 1998 and 1997, respectively, as compared to the prior year. The 1998 increase is due primarily to general increases in expenses relating to the launch of digital products and other initiatives, which increases were partially offset by an increase in marketing incentives received from programming suppliers. The majority of such marketing incentives are associated with the Company's launch of digital services and accordingly may not continue at current levels in the future periods. The 1997 decrease is due primarily to lower marketing costs due primarily to launch and other incentives from programming suppliers, a reduction in salaries and related payroll expenses due to work force reductions in the fourth quarter of 1996, and other reductions in general and administrative expenses in 1997. Exclusive of the effects of acquisitions and dispositions, selling, general and administrative expenses from programming operations increased 3% and less than 1% during 1998 and 1997, respectively, as compared to the prior year. The increase relates primarily to higher contract labor, marketing and marketing support costs. Year 2000 costs include fees and other expenses incurred directly in connection with TCI's comprehensive efforts to review and correct computer systems, equipment and related software to ensure readiness for the year 2000. See detailed discussion above. AT&T merger costs include investment advisory, legal and accounting fees, and other incremental pre-closing costs directly related to the AT&T Merger. See note 2 to the accompanying consolidated financial statements of the Company. The Company records stock compensation relating to restricted stock awards, options and/or stock appreciation rights granted by the Company to certain employees and directors. The amount of expense associated with stock compensation is based on the vesting of the related stock options and stock appreciation rights and the market price of the underlying common stock as of the date of the accompanying consolidated financial statements. The estimated compensation liability relating to stock appreciation rights has been recorded as of December 31, 1998, and is subject to future adjustment based upon vesting and market values and, ultimately, on the final determination of market values when such rights are exercised. During the fourth quarter of 1998, the Company recorded a $90 million charge to provide for the estimated losses that are expected to result from the Company's obligation under a certain contribution agreement. See note 20 to the accompanying consolidated financial statements of the Company. 18 19 During 1998, @Home issued performance-based warrants to certain cable operators to purchase up to 10.3 million shares of @Home Series A common stock at an exercise price of $10.50 per share. Warrants to purchase approximately 920,000 shares of @Home's Series A common stock became exercisable in 1998. @Home recorded non-cash charges to operations of $50 million for the fair value of these warrants. Such charges are included in cost of distribution agreements in the accompanying consolidated statements of operations and comprehensive earnings of the Company. In the event the performance milestones are met with respect to the remaining unexercisable performance based warrants, @Home will record non-cash charges to operations in future periods based on the difference between the then fair market value of @Home's Series A common stock and the exercise price of $10.50 per share. During the fourth quarter of 1996, the Company restructured certain of its operating and accounting functions. In connection with such restructuring, the Company recognized a charge of $41 million related primarily to work force reductions. As of December 31, 1998, all of such charges had been paid. Depreciation expense increased $44 million or 4% and decreased $16 million or 1% for the years ended December 31, 1998 and 1997, respectively, as compared to the prior year. The 1998 increase represents the net effect of (i) increases attributable to acquisitions, capital expenditures and differences in the composition of TCI's depreciable property and equipment and (ii) decreases attributable to the 1998 Contribution Transactions and other dispositions. The 1997 decrease represents the net effect of a decrease due to the Satellite Spin-off and another disposition that more than offset increases attributable to acquisitions and capital expenditures. Amortization expense increased $68 million or 12% and $23 million or 4% for the years ended December 31, 1998 and 1997, respectively, as compared to the prior year. Such increases are primarily attributable to the net effects of acquisitions and dispositions and the amortization of certain intangible assets arising from certain distribution agreements entered into in 1997 and 1998 by @Home. See note 18 to the accompanying consolidated financial statements of the Company. Due to the effects of purchase accounting, the Company anticipates that its depreciation and amortization expenses will increase significantly following the AT&T Merger. Other Income and Expenses The Company's interest expense decreased $99 million or 9% from 1997 to 1998 and increased $64 million or 6% from 1996 to 1997. The decrease in 1998 is primarily the result of debt reductions attributable to the 1998 Contribution Transactions and a lower effective borrowing rate as compared to the prior year. The increase in 1997 is primarily the result of higher average debt balances, as a result of the Viacom Acquisition on July 31, 1996. The Company's weighted average interest rate on borrowings was 7.32%, 7.71% and 7.75% during 1998, 1997 and 1996, respectively. 19 20 Interest and dividend income increased $34 million or 39% and $24 million or 38% during 1998 and 1997, respectively, as compared to the prior year. The 1998 increase is attributable to (i) higher dividend income due primarily to dividends received on AT&T Common Stock that was acquired in July 1998 and dividends received on preferred stock of Fox Kids Worldwide, Inc. ("FKW Preferred Stock") that was acquired in August 1997, and (ii) increased interest income due primarily to increases in the Company's cash and restricted cash balances and other interest-earning assets. Subsequent to the AT&T Merger, any dividends received on AT&T Common Stock ($31 million during 1998) will not be recognized as income, but instead will be recorded as increases to the Company's additional paid-in capital. The 1997 increase is attributable to (i) higher dividend income due to dividends received on a series of Time Warner, Inc. common stock with limited voting rights that was acquired in October 1996 and dividends received on FKW Preferred Stock that was acquired in August 1997, and (ii) increased interest income due to higher balances of interest-earning assets in 1997, as compared to 1996. See notes 5, 7, 8 and 10 to the accompanying consolidated financial statements of the Company. TCI's investments in affiliates are comprised of limited partnerships and other entities that are primarily engaged in the domestic cable television business or other communications services businesses. TCI's share of earnings (losses) of affiliates were ($1,384 million), ($930 million) and ($450 million) in 1998, 1997 and 1996, respectively. Of these earnings (losses), ($352 million), ($90 million) and ($79 million), respectively, relate to the Company's domestic cable operations, ($67 million), ($12 million) and $8 million, respectively, relate to the Company's programming operations and ($965 million), ($828 million) and ($379 million), respectively, relate to the Company's other businesses. The majority of the 1998 increase in the Company's share of losses of its domestic cable affiliates is attributable to the Company's share of losses of CSC, which was partially offset by the Company's share of 1998 gains recognized by two affiliates on the sale of certain assets. The 1997 increase is primarily due to the Company's share of losses of a 49%-owned cable television partnership that was acquired by the Company in July 1996. The 1998 increase in the Company's share of losses of its programming affiliates is primarily attributable to an $83 million increase in the Company's share of Fox/Liberty Networks' ("Fox Sports") losses, offset in part by a $33 million increase in the Company's share of the earnings of QVC, Inc. ("QVC"). Prior to the first quarter of 1998, the Company had no obligation, nor intention, to fund Fox Sports. During 1998, the Company made the determination to provide funding to Fox Sports based on specific transactions consummated by Fox Sports. Consequently, the Company's share of losses of Fox Sports for 1998 includes previously unrecognized losses of Fox Sports of approximately $64 million. Losses for Fox Sports were not recognized in prior periods due to the fact that the Company's investment in Fox Sports was less than zero. The 1997 change in the Company's share of earnings (losses) of its programming affiliates is attributable to a $30 million decrease in the Company's share of Discovery's earnings, offset in part by a $7 million increase in the Company's share of QVC's earnings. 20 21 The Company's share of losses of its other affiliates is primarily comprised of the Company's share of the losses of the PCS Ventures and various foreign affiliates. During the years ended December 31, 1998, 1997 and 1996, the Company's share of the PCS Ventures' losses was $629 million, $493 million and $167 million, respectively. During the years ended December 31, 1998, 1997 and 1996, the Company's share of losses from its foreign affiliates was $282 million, $264 million and $184 million, respectively. The increases in the losses of the PCS Ventures are primarily attributable to increases in (i) selling, general and administrative costs associated with Sprint Spectrum Holding Company L.P.'s ("Sprint Spectrum") efforts to increase its customer base, (ii) depreciation expense resulting from capital expenditures made to expand its PCS network and (iii) interest expense associated with higher amounts of outstanding debt. As a result of a November 1998 transaction, the Company no longer accounts for its investment in the PCS Ventures under the equity method. See notes 2, 6 and 9 to the accompanying consolidated financial statements of the Company. In connection with certain repurchases of notes payable, TCI recognized losses on early extinguishment of debt of $60 million, $39 million and $62 million during the years ended December 31, 1998, 1997 and 1996, respectively. Such losses related to prepayment penalties amounting to $52 million, $33 million and $60 million for the years ended December 31, 1998, 1997 and 1996, respectively, and the retirement of deferred loan costs. Also, during the year ended December 31, 1996, certain TCI subsidiaries terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion and refinanced certain other bank credit facilities. In connection with such termination and refinancings, TCI recognized a loss on early extinguishment of debt of $9 million related to the retirement of deferred loan costs. Minority interests in earnings of consolidated subsidiaries aggregated $88 million, $154 million and $56 million for the years ended December 31, 1998, 1997 and 1996, respectively. Such amounts include dividends on preferred securities of the Company's subsidiaries of $191 million, $180 million and $86 million, respectively, offset in part by the minority interests share of the losses of @Home and certain other majority-owned subsidiaries of the Company. During the years ended December 31, 1998 and 1997, the minority interests' share of @Home's net losses was approximately $89 million and $34 million, respectively. See notes 6, 10 and 18 to the accompanying consolidated financial statements of the Company. Gains on issuance of equity interests by subsidiaries were $89 million and $60 million during the years ended December 31, 1998 and 1997, respectively. The gains relate to the 1998 and 1997 public offering of securities by the Company's @Home subsidiary and the February 1998 equity issuance by the Company's then subsidiary, Superstar/Netlink Group LLC. See note 18 to the accompanying consolidated financial statements of the Company. Gains on issuance of stock by equity investees were $268 million, $112 million and $12 million during the years ended December 31, 1998, 1997 and 1996, respectively. The gains relate to the dilution of the Company's interest in various equity method investments. See notes 6, 8 and 18 to the accompanying consolidated financial statements of the Company. 21 22 Gains on disposition of assets of $5,760 million during 1998 include (i) a $2.3 billion gain (excluding related deferred income tax expense of $883 million) attributable to the June 23, 1998 consummation of a merger in which TCG was acquired by AT&T, (ii) a $1.9 billion gain (excluding related deferred income tax expense of $647 million) attributable to the November 23, 1998 exchange of the Company's interest in the PCS Ventures, and (iii) an aggregate gain of $898 million gain attributable to the March 4, 1998 contribution of cable television systems to CSC and certain other of the 1998 Contribution Transactions. See notes 6, 7, 8, 9 and 10 to the accompanying consolidated financial statements of the Company. Net Earnings (Loss) As a result of the above-described fluctuations in the Company's results of operations, (i) TCI's net earnings (before preferred stock dividend requirements) of $1,943 million for the year ended December 31, 1998 changed by $2,504 million, as compared to TCI's net loss (before preferred stock dividend requirements) of $561 million for the year ended December 31, 1997, and (ii) TCI's net loss (before preferred stock dividend requirements) of $561 million for the year ended December 31, 1997 changed by $853 million, as compared to TCI's net earnings (before preferred stock dividend requirements) of $292 million for the year ended December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES As described in greater detail in note 2 to the accompanying consolidated financial statements of the Company, on March 9, 1999, TCI was acquired by AT&T in a merger and TCI thereby became a wholly-owned subsidiary of AT&T. The AT&T Merger also resulted in the deconsolidation of the businesses and assets attributed to the Liberty/Ventures Group (exclusive of @Home, NDTC and WTCI which were transferred to TCI Group immediately prior to the AT&T Merger) at the time of the AT&T Merger. Pursuant to the Merger Agreement, immediately prior to the AT&T Merger, certain assets previously attributed to TCI Ventures Group (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and TCG, the stock of @Home attributed to TCI Ventures Group, the assets and business of NDTC and TCI Ventures Group's equity interest in WTCI) were transferred to TCI Group in exchange for approximately $5.5 billion in cash. Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty/Ventures Group and AT&T, Liberty/Ventures Group became entitled to the benefit of approximately $2.0 billion of net operating loss carryforwards attributable to all entities included in TCI's consolidated federal income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service and are subject to limitations on usage which may affect the ultimate amount utilized. See note 19 to the accompanying consolidated financial statements of the Company. Additionally, certain warrants previously attributed to TCI Group were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. TCI funded the $5.5 billion payment to Liberty/Ventures Group through borrowings from AT&T. Such borrowings are evidenced by a note payable to AT&T in the amount of $5.5 billion (the "AT&T Note"). The AT&T Note accrues interest at LIBOR, plus 15 basis points, and is due and payable on demand on or before March 9, 2004. 22 23 Immediately prior to the AT&T Merger, TCI restructured its ownership of certain of its subsidiaries. This restructuring included merging TCI's cable subsidiary, TCIC, into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of TCIC have been assumed by TCI, including TCIC's public debt. In connection with TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred Stock, Series A, was converted into 2.119 shares of TCI Group Series A Stock, and such shares of TCI Group Series A Stock were subsequently converted into AT&T Common Stock in connection with the AT&T Merger. All other public securities issued by subsidiaries of TCIC (other than Pacific) otherwise remained unaffected. Furthermore, as part of the restructuring, (i) certain asset transfers were made between TCI and its subsidiaries, (ii) 123,896 shares of Series F Preferred Stock, which were held by subsidiaries of TCI, were converted into 185,428,946 shares of TCI Group Series A Stock (which in turn were converted into 143,837,233 shares of AT&T Common Stock in the AT&T Merger and continue to be held by subsidiaries of TCI), (iii) the remaining 154,411 shares of Series F Preferred Stock which were formerly held by subsidiaries of TCI were distributed to TCI through a series of liquidations and canceled, and (iv) 125,728,816 shares of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock, 6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each formerly held by subsidiaries of TCI, were distributed to TCI through a series of liquidations and canceled. After the AT&T Merger, under the terms of the Exchangeable Preferred Stock of Pacific, each share of that preferred stock is exchangeable, from and after August 1, 2001, for approximately 4.225 shares of AT&T Common Stock, subject to certain anti-dilution adjustments. Additionally, after the AT&T Merger, Pacific may elect to make any dividend, redemption or liquidation payment on the Exchangeable Preferred Stock in cash, by delivery of shares of AT&T Common Stock or by a combination of the foregoing forms of consideration. As a result of the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger, Liberty/Ventures Group's liquidity sources (including the $5.5 billion payment from TCI) will be used towards the liquidity requirements of Liberty/Ventures Group and will not represent a source of liquidity to TCI. Conversely, TCI anticipates that Liberty/Ventures Group will not require funds from TCI to satisfy the Liberty/Ventures Group's liquidity requirements. At December 31, 1998, the Company had approximately $3.7 billion of availability in unused lines of credit (excluding amounts related to lines of credit which provide availability to support commercial paper). At December 31, 1998, $999 million of such unused lines of credit related to Liberty/Ventures Group (inclusive of @Home, NDTC and WTCI). Following the AT&T Merger, it is anticipated that such unused lines of credit of Liberty/Ventures Group will not represent a source of liquidity to the Company. It is anticipated that TCI's remaining lines of credit will be terminated in the first half of 1999 and, accordingly, will no longer provide a source of liquidity for the Company (exclusive of @Home, NDTC and WTCI). To the extent that funds generated by the Company's operating activities are not sufficient to meet its liquidity needs, the Company anticipates that it would obtain additional financing from AT&T or external sources. No assurance can be given that any such additional financing could be obtained on terms acceptable to the Company. At December 31, 1998, the Company held cash and cash equivalents of $419 million which were held entirely by @Home. The cash balances of @Home are intended to be applied towards the liquidity needs of @Home, accordingly @Home's cash balances will not be made available to TCI. TCI's restricted cash is primarily comprised of proceeds received in connection with certain asset dispositions. Such proceeds, which aggregated $162 million and $34 million December 31, 1998 and 1997, respectively, are designated to be reinvested in certain identified assets for income tax purposes. 23 24 During the years ended December 31, 1998, 1997 and 1996 the Company had "operating cash flow" (as defined by the Company as operating income before depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger costs and stock compensation) of $2,712 million, $2,975 million and $2,276 million, respectively. 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. The Company's operating activities provided cash of $1,223 million, $1,710 million and $1,278 million during the years ended December 31, 1998, 1997 and 1996, respectively. Net cash provided by operating activities generally reflects net cash from operations of TCI available for TCI's liquidity needs after taking into consideration the aforementioned additional substantial costs of doing business not reflected in operating cash flow. Following the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger, Liberty/Ventures Group's cash flows will no longer be included in the Company's consolidated statements of cash flows. Liberty/Ventures Group's operating activities provided cash of $66 million, $172 million and $245 million during the years ended December 31, 1998, 1997 and 1996, respectively (inclusive of the operating activities of @Home, NDTC and WTCI). Cash used by the Company's investing activities aggregated $637 million, $1,156 million and $2,508 million during the years ended December 31, 1998, 1997 and 1996, respectively. Cash used by Liberty/Ventures Group's investing activities aggregated $1,234 million, $497 million and $770 million during the years ended December 31, 1998, 1997 and 1996, respectively (inclusive of the investing activities of @Home, NDTC and WTCI). Following the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger, Liberty/Ventures Group's cash flows (exclusive of the cash flows of @Home, NDTC and WTCI) will no longer be included in the Company's consolidated statements of cash flows. The amount of capital expended by TCI for property and equipment was $1,917 million, $709 million and $2,055 million during 1998, 1997 and 1996, respectively. Such expenditures primarily relate to TCI's cable distribution systems. TCI estimates that it will expend approximately $5 billion over the next two years to expand the capacity of its cable distribution systems to allow for the provision of two-way service offerings. No assurance can be given that actual capital costs will not exceed such estimated capital costs. Additionally, the foregoing estimate does not include customer specific capital costs required to deliver local telephony services. TCI cannot reasonably estimate such costs since such costs are dependent upon the extent of customer increases and the average per-unit-cost to install customer premise equipment. As described below, TCI is obligated to purchase a significant number of digital set-top devices over the next three years. 24 25 On March 4, 1998, the Company contributed to CSC certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 48.9 million newly issued CSC Class A common shares. CSC also assumed and repaid approximately $574 million of debt owed by TCI to external parties and $95 million of debt owed to the Company. The Company has also entered into letters of intent with CSC which provide for the Company to acquire a cable system in Michigan and an additional 4% 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 the Company's debt. The ability of the Company to sell or increase its investment in CSC is subject to certain restrictions and limitations set forth in a stockholders agreement with CSC. At December 31, 1998, the Company owned 49,982,572 shares of CSC Class A common stock, which had a closing market price of $50.13 per share on such date. Such shares represented an approximate 33.0% equity interest in CSC's total outstanding shares and an approximate 9% voting interest in CSC in all matters except for (i) the election of directors, in which case the Company effectively has the right to designate two of CSC's directors, and (ii) any increase in authorized shares, in which case the Company has agreed to vote its interest in proportion with the public holders of CSC Class A common shares. For additional information concerning the CSC Transaction, see note 6 to the accompanying consolidated financial statements of the Company. In addition to the CSC Transaction, the Company also completed, during 1998, eight transactions whereby TCI contributed cable television systems serving in the aggregate approximately 1,924,000 customers to the 1998 Joint Ventures in exchange for non-controlling ownership interests in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998 Joint Ventures of debt owed by the Company to external parties aggregating $323 million and intercompany debt owed to the Company aggregating $2,374 million. The Company has agreed to take certain steps to support compliance by certain of the 1998 Joint Ventures with their payment obligations under certain debt instruments, up to an aggregate contingent commitment of $980 million. In light of such contingent commitments, the Company has deferred any gains on the formation of such 1998 Joint Ventures. During the year ended December 31, 1998, the Company's revenue and operating cash flow (defined by the Company as operating income before depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger costs and stock compensation) included $622 million and $278 million, respectively, from the cable television systems included in the 1998 Contribution Transactions. In addition to the 1998 Contribution Transactions, the Company, as of December 31, 1998, has signed agreements or letters of intent to contribute within the next twelve months, the Pending Contribution Cable Systems serving approximately 1.2 million basic customers to joint ventures in which the Company will retain non-controlling ownership interests. Following the completion of the Pending Contribution Transactions, the Company will no longer consolidate the Pending Contribution Cable Systems. Accordingly it is anticipated that the completion of the Pending Contribution Transactions, as currently contemplated, will result in aggregate estimated reductions (based on 1998 amounts) to the Company's debt, annual revenue and annual operating income of $1.5 billion, $500 million and $200 million, respectively. No assurance can be given that any of the Pending Contribution Transactions will be consummated 25 26 During the year ended December 31, 1998, the Company contributed cash to various equity affiliates of the Liberty/Ventures Group and participated in other transactions with respect to such Liberty/Ventures Group equity affiliates. Following the AT&T Merger, transactions between Liberty/Ventures Group and its equity affiliates will no longer be reflected in the Company's consolidated financial statements. For additional information concerning the historical effects on liquidity and capital resources of transactions involving the Liberty/Ventures Group's equity affiliates, see notes 6, 9 and 10 to the accompanying consolidated financial statements of the Company. On November 19, 1998, the Company exchanged, in a merger transaction, 0.58 of a share of Liberty Group Series A Stock for each share of the issued and outstanding Series A Common Stock of its then majority-owned subsidiary, Tele-Communications International, Inc. ("TINTA"), not beneficially owned by the Company. Such transaction was accounted for as an acquisition of a minority interest. The aggregate value assigned to the 10,086,594 shares of Liberty Group Series A stock issued by TCI was based upon the market value of Liberty Group Series A Stock at the time the merger was announced. TINTA is attributed to the Liberty/Ventures Group. On January 19, 1999, @Home entered into a merger agreement with Excite, Inc. ("Excite"), a global internet media company that offers consumers and advertisers comprehensive internet navigation services with extensive personalization capabilities. Under the terms of the merger agreement, @Home will issue approximately 55 million shares of its common stock for all of the outstanding common stock of Excite based on an exchange ratio of 1.041902 shares of @Home's common stock for each share of Excite's common stock. @Home may issue up to approximately 15 million additional shares of common stock in connection with the assumption of obligations under Excite's stock option and employer stock purchase plans and outstanding warrants. @Home will account for the transaction as a purchase. @Home's preliminary estimate of the total purchase consideration is approximately $7 billion, based on the fair value at the time of announcement of the merger, of common stock to be issued and stock option, stock purchase plan and warrant obligations assumed, plus estimated transaction costs. As a result of the proposed merger, the Company's economic interest in @Home would decrease from 39% to 27%. The merger is subject to several conditions, including approval by both companies' stockholders and the expiration of applicable waiting periods under certain antitrust laws. TCI Ventures Group's investment in @Home was transferred to TCI Group in connection with the AT&T Merger. During the year ended December 31, 1998, pursuant to a stock repurchase program, 66,041 shares of TCI Group Series A Stock, 145,450 shares of TCI Ventures Group Series A Stock, 94,000 shares of TCI Ventures Group Series B Stock and 766,783 shares of Liberty Group Series A Stock were repurchased at an aggregate cost of $31 million. As security for borrowings under one of Liberty/Ventures Group's credit facilities, Liberty/Ventures Group has pledged a portion of its shares of Time Warner common stock with limited voting rights. At December 31, 1998 such pledged portion had an aggregate fair value of approximately $2.7 billion. As collateral for borrowings under another one of Liberty/Ventures Group's credit facilities the banks lend against certain assets designated by Liberty/Ventures Group (the "Designated Assets"). The carrying amount of the Designated Assets at December 31, 1998 was $617 million. Following the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger, Liberty/Ventures Group's assets and liabilities (exclusive of @Home, NDTC, and WTCI) will not be included in the Company's consolidated financial statements. 26 27 On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T, was consummated. As a result of such merger, the Company received in exchange for all of its interest in TCG, approximately 47 million shares of AT&T Common Stock. Such AT&T Common Stock was transferred from TCI Ventures Group to TCI Group in connection with the AT&T Merger. Following the AT&T Merger, TCI will treat its investment in AT&T Common Stock as an investment in its parent. Accordingly, the fair value of TCI's investment in AT&T Common Stock will be reflected as a reduction of TCI's equity, and any dividends received on such AT&T Common Stock will be recorded as an increase to TCI's additional paid-in capital. During 1998, TCI recognized dividends of $31 million on its investment in AT&T Common Stock. In connection with the Magness Settlement TCI paid $274 million during 1998 pursuant to certain call agreements. Additionally, on February 1, 1999, the Company began to terminate the transactions under the agreements with the Investment Bankers described above, and as of March 5, 1999, such transactions were terminated. In connection with the termination of such transactions the Company received an aggregate cash payment of $509 million. For additional information see note 17 to the accompanying consolidated financial statements of the Company. During the fourth quarter of 1997, TCI entered into a total return equity swap facility (the "Equity Swap Facility"). Pursuant to the Equity Swap Facility, TCI would have the right to direct the counterparty (the "Counterparty") to use the Equity Swap Facility to purchase Equity Swap Shares of TCI Group Series A Stock and TCI Ventures Group Series A Stock with an aggregate purchase price of up to $300 million. TCI would have the right, but not the obligation, to purchase Equity Swap Shares through the September 30, 2000 termination date of the Equity Swap Facility. During such period, TCI would settle periodically any increase or decrease in the market value of the Equity Swap Shares. If the market value of the Equity Swap Shares should exceed the Counterparty's cost, Equity Swap Shares with a fair value equal to the difference between the market value and cost would be segregated from the other Equity Swap Shares. If the market value of the Equity Swap Shares should be less than the Counterparty's cost, TCI, at its option, would settle such difference with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or, subject to certain conditions, with cash or letters of credit. In addition, TCI would be required to periodically pay the Counterparty a fee equal to a LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares. Due to TCI's ability to issue shares to settle periodic price fluctuations and fees under the Equity Swap Facility, TCI records all amounts received or paid under this arrangement as increases or decreases, respectively, to equity. As of December 31, 1998, the Equity Swap Facility had acquired 4,935,780 shares of TCI Group Series A Stock and 1,171,800 shares of TCI Ventures Group Series A Stock at an aggregate cost that was approximately $135 million less than the fair value of such Equity Swap Shares at December 31, 1998. From February 10, 1999 to March 5, 1999, the Company terminated all transactions under the Equity Swap Facility and the related swap agreement. In connection with the termination of such transactions the Company received an aggregate cash payment of $170 million. The Company's programming and other business segments have investments in certain entities which will require significant additional capital in order to develop their respective businesses and assets, to fund future operating losses and to fund future growth. In certain cases, the Company has contractual commitments pursuant to which (subject to certain conditions) it may be required to make significant additional capital contributions to the entities in which it has investments. The majority of such investments are included in Liberty/Ventures Group. Following the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger, any capital contributions or fundings to such entities will be made using Liberty/Ventures Group's liquidity sources. 27 28 Many of the Company's subsidiaries operate in industries, primarily the telecommunications industry and the internet services industry, which have experienced and are expected to continue to experience (i) rapid and significant changes in technology, (ii) ongoing improvements in the capacity and quality of such services, (iii) frequent and new product and service introductions, and (iv) enhancements and changes in end-user requirements and preferences. The degree to which these changes will affect such entities and the ability of such entities to compete in their respective businesses cannot be predicted. If markets fail to develop, develop more slowly than expected, or become highly competitive, the Company's operating results and financial condition may be materially adversely affected. TCI is committed to purchase billing services from an unaffiliated third party pursuant to three successive five year agreements. Pursuant to such arrangement, TCI is obligated at December 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. Prior to the AT&T Merger, transactions between TCI Group and Liberty/Ventures Group were eliminated in TCI's consolidated financial statements. Following the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger, Liberty/Ventures Group's results of operations (exclusive of the results of operations of @Home, NDTC and WTCI) will no longer be included in the consolidated operating income of TCI. In this regard, TCI has agreed to make fixed monthly payments to an entity attributed to Liberty/Ventures Group pursuant to an affiliation agreement. The fixed annual commitments increase annually from $220 million in 1998 to $315 million in 2003, and will increase with inflation through 2022. In addition, pursuant to certain agreements between TCI and an entity attributed to Liberty/Ventures Group, TCI is obligated at December 31, 1998 to make minimum revenue payments through 2017 and minimum license fee payments through 2007 aggregating approximately $405 million to such attributed entity. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $415 million at December 31, 1998, of which $391 million relates to amounts guaranteed by entities attributed to Liberty/Ventures Group. Following the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger, notes payable and other obligations guaranteed by entities attributed to Liberty/Ventures Group (exclusive of @Home, NDTC and WTCI) will no longer be included with those of TCI. As described in note 10 to the accompanying consolidated financial statements, the Company also has provided certain credit enhancements with respect to the 1998 Joint Ventures. The Company also has guaranteed the performance of certain affiliates and other parties with respect to such parties' contractual and other obligations. Although there can be no assurance, management of the Company 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 the Company. Subsequent to December 31, 1998, a subsidiary of the Company agreed to enter into a contribution agreement (the "Contribution Agreement") with certain shareholders of Primestar pursuant to which the Company would, to the extent it is relieved of $166 million of contingent liabilities currently owed to certain creditors of Primestar and its subsidiaries, contribute up to $166 million to Primestar to the extent necessary to satisfy liabilities of Primestar. During the fourth quarter of 1998, the Company recorded a $90 million charge to provide for the estimated losses that are expected to result from the Contribution Agreement. The Company's obligation under the Contribution Agreement will expire in 2001. 28 29 Liberty/Ventures Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017 and has made certain financial commitments related to the acquisition of programming. Based on customer levels at December 31, 1998, these agreements require minimum payments aggregating approximately $808 million. Following the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger such rights fee obligations will no longer be included with TCI's financial commitments. However, TCI Group's guarantee of $320 million of such rights fee obligations of Liberty/Ventures Group will continue to be included with TCI's contingent obligations. The amount of the total obligation under these license agreements is not currently estimable 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. Nevertheless, it is anticipated that the required payments under these obligations will be significant. In addition, an entity attributed to Liberty/Ventures Group has guaranteed the obligation of an affiliate to pay fees for the license to exhibit certain films through 2000. If such entity were to fail to fulfill its obligations under the guarantee, the beneficiaries have the right to demand an aggregate payment from such entity of approximately $26 million. TCI is a party to affiliation agreements with programming suppliers. Pursuant to certain of such agreements, TCI is committed to carry such suppliers' programming on its cable systems. Additionally, certain of such agreements provide for penalties and charges in the event the programming is not carried or not delivered to a contractually specific number of customers. Effective as of December 16, 1997, NDTC, on behalf of TCIC and other cable operators that may be designated from time to time by NDTC ("Approved Purchasers"), entered into an agreement (the "Digital Terminal Purchase Agreement") with General Instrument Corporation ("GI") to purchase advanced digital set-top devices. The hardware and software incorporated into these devices are 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 set-top device. Through December 31, 1998, approximately 1.6 million set-top devices had been purchased pursuant to this commitment. GI agreed to provide NDTC and its Approved Purchasers the most favorable prices, terms and conditions made available by GI to any customer purchasing advanced digital set-top devices. In connection with NDTC's purchase commitment, GI agreed to grant warrants to purchase its common stock proportional to the number of devices ordered by each organization, which as of the effective date of the Digital Terminal Purchase Agreement, would have represented at least a 10% equity interest in GI (on a fully diluted basis). Such warrants vest as annual purchase commitments are met. On December 31, 1998, the Company vested in 4,928,000 warrants pursuant to such arrangements, which were recorded at their fair value of $64 million on such date. Vested warrants are accounted for as available-for-sale securities in the Company's consolidated financial statements. NDTC has the right to terminate the Digital Terminal Purchase Agreement if, among other reasons, GI fails to meet a material milestone designated in the Digital Terminal Purchase Agreement with respect to the development, testing and delivery of advanced digital set-top devices. In connection with the AT&T Merger, the above described warrants were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. To the extent that such warrants do not vest because TCI fails to meet its purchase commitments, TCI is required to repay a proportional amount of such cash to Liberty/Ventures Group. 29 30 The Company leases business offices, has entered into converter lease agreements, pole rental agreements, transponder lease agreements and uses certain equipment under lease arrangements. For additional information on the Company's future minimum lease payments under noncancellable operating losses, see note 20 to the accompanying consolidated financial statements of the Company. 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 may enter into interest rate exchange agreements ("Interest Rate Swaps") pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") and receives variable interest rates and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates. During 1998, 1997 and 1996, the Company's net payments pursuant to the Fixed Rate Agreements were less than $1 million, $7 million and $14 million, respectively; and the Company's net receipts (payments) pursuant to the Variable Rate Agreements were $10 million, (less than $1 million) and $15 million, respectively. At December 31, 1998, all of the Company's Fixed Rate Agreements had expired. At December 31, 1998, the Company would be entitled to receive $63 million upon termination of the Variable Rate Agreements. In addition to the Variable Rate Agreements, the Company entered into fixed Interest Rate Swaps pursuant to which it pays a variable rate based on LIBOR (5.5% at December 31, 1998) and receives a variable rate based on Constant Maturity Treasury Index ("CMT") (4.9% at December 31, 1998) on a notional amount of $400 million through September 2000; and pays a variable rate based on LIBOR (5.4% at December 31, 1998) and receives a variable rate based on CMT (5.0% at December 31, 1998) on notional amounts of $95 million through February 2000. During the years ended December 31, 1998 and 1997, the Company's net payments (receipts) pursuant to such agreements were $2 million and (less than $1 million), respectively. At December 31, 1998, the Company would be required to pay an estimated $4 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, as of December 31, 1998, the Company does not anticipate material near-term losses in future earnings, fair values or cash flows resulting from derivative financial instruments. See note 12 to the accompanying consolidated financial statements of the Company for additional information regarding Interest Rate Swaps. 30 31 At December 31, 1998, after considering the net effect of the aforementioned Interest Rate Swaps, the Company had $8.0 billion (or 57%) of fixed rate debt and $6.1 billion (or 43%) of variable-rate debt. At December 31, 1998, Liberty/Ventures Group (inclusive of @Home, NDTC and WTCI) had $2.0 billion of variable rate debt and $700 million of fixed rate debt. Following the deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger, Liberty/Ventures Group's debt (exclusive of @Home, NDTC and WTCI) will no longer be included in TCI's debt. TCI's interest rate exposure was primarily to changes in LIBOR rates. The aggregate hypothetical decrease in the fair value of TCI's fixed rate debt and interest rate swaps as of December 31, 1998 that would have resulted from a hypothetical adverse change of 10% in the related LIBOR rates is estimated to be $504 million. The aggregate hypothetical loss in earnings and cash flows on an annual basis on TCI's variable rate debt and interest rate swaps as of December 31, 1998 that would have resulted from a hypothetical adverse change of 10% in the related LIBOR rates, sustained for one year, is estimated to be $26 million. Approximately twenty-five percent of the cable television franchises held by TCI, involving approximately 4.6 million basic customers, expire within five years. In connection with a renewal of a franchise, the franchising authority may require the cable operator to comply with different and more stringent conditions than those originally imposed, subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996 and other applicable federal, state and local law. Such provisions establish an orderly process for franchise renewal which protects cable operators against unfair denials of renewals when the operator's past performance and proposal for future performance meet established standards. TCI believes that its cable television systems generally have been operated in a manner which satisfies such standards and allows for the renewal of such franchises; however, there can be no assurance that the franchises for such systems will be successfully renewed as they expire. During 1998, TCI has continued to experience a competitive impact from medium power and high power direct broadcast satellite ("DBS") operators that use high frequencies to transmit signals that can be received by home satellite dishes ("HSDs") much smaller in size than traditional HSDs. DBS operators have the right to distribute substantially all of the significant cable television programming services currently carried by cable television systems. The DBS industry has grown rapidly over the last several years and now serves approximately 9 million subscribers nationwide. Recently announced mergers could strengthen the surviving DBS companies. TCI is unable to predict what effect such competition will have on TCI's financial position. Financial Statements and Supplementary Data. The consolidated financial statements of Tele-Communications, Inc. are filed under this Item, beginning on Page II-38. The financial statement schedules required by Regulation S-X are filed under Item 14 of this Annual Report on Form 10-K. 31 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. In view of the AT&T Merger, described in detail under Item 1, Business - - General Development of Business, it has been determined that it will be more efficient and effective for the Company to have its independent auditing function performed by AT&T's external auditors, PricewaterhouseCoopers LLP. For that reason, the Company has notified KPMG LLP that the Company will no longer retain that firm as its independent auditor, effective upon the completion of the audits of the Company's financial statements for the fiscal year ended December 31, 1998 and for the two-month period ended February 28, 1999. The Company retained PricewaterhouseCoopers, LLP effective as of March 9, 1999 for the audit of the Company's financial statements for the period ending December 31, 1999. The Company maintains high regard for KPMG LLP and is grateful for the work it has performed over the years. During the Company's two most recent fiscal years ended December 31, 1998 and December 31, 1997, the reports of KPMG LLP on the Company's financial statements contained no adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years ended December 31, 1998 and December 31, 1997, and interim periods thereafter: (1) No disagreements with KPMG LLP have occurred on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its reports on the Company's financial statements. (2) No reportable events involving KPMG LLP have occurred that must be disclosed under Item 304(a)(1)(v) of Regulation S-K. (3) The Company has not consulted with PricewaterhouseCoopers LLP on items that concerned the application of accounting principles to a specific transaction, either completed or proposed, or on the type of audit opinion that might be rendered on the Company's financial statements. The Company requested, and KPMG LLP has furnished, a letter addressed to the Securities and Exchange Commission (the "Commission") stating that KPMG LLP agrees with the statements set forth in the second paragraph above and in numbered paragraphs (1) and (2) above. A copy of the letter from KPMG LLP to the Commission is filed as Exhibit 16.1 to this Form 10-K. 32 33 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Tele-Communications, Inc.: We have audited the accompanying consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and comprehensive earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tele-Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Denver, Colorado March 9, 1999 33 34 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997
1998 1997 --------- -------- amounts in millions Assets Cash and cash equivalents $ 419 244 Restricted cash (note 5) 185 40 Trade and other receivables, net 593 529 Prepaid program rights 146 104 Committed program rights 117 115 Investments in affiliates, accounted for under the equity method, and related receivables (notes 6 and 17) 4,765 3,063 Investment in Time Warner, Inc. ("Time Warner") (note 7) 7,118 3,555 Investment in AT&T Corp. ("AT&T") (note 8) 3,556 -- Investment in Sprint Corporation ("Sprint") (notes 2 and 9) 2,446 -- Property and equipment, at cost: Land 63 96 Distribution systems 10,107 10,784 Support equipment and buildings 1,769 1,558 --------- --------- 11,939 12,438 Less accumulated depreciation 4,786 4,759 --------- --------- 7,153 7,679 --------- --------- Franchise costs 14,658 17,910 Less accumulated amortization 2,590 2,763 --------- --------- 12,068 15,147 --------- --------- Other assets, net of accumulated amortization (note 18) 3,285 2,001 --------- --------- $ 41,851 32,477 ========= =========
(continued) 34 35 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Balance Sheets, continued December 31, 1998 and 1997
1998 1997 -------- -------- amounts in millions Liabilities and Stockholders' Equity Accounts payable $ 229 169 Accrued interest 253 258 Accrued programming expense 471 399 Other accrued expenses 1,128 997 Deferred option premium (note 7) -- 306 Debt (note 12) 14,052 15,250 Deferred income taxes (note 19) 9,749 6,104 Other liabilities 1,819 664 -------- -------- Total liabilities 27,701 24,147 -------- -------- Minority interests in equity of consolidated subsidiaries 1,460 1,664 Redeemable securities: Preferred stock (note 13) 300 655 Common stock (note 3) 22 5 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Preferred Securities") holding solely subordinated debt securities of TCI Communications, Inc. ("TCIC") (note 14) 1,500 1,500 Stockholders' equity (note 15): Series Preferred Stock, $.01 par value -- -- Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value -- -- Common stock, $1 par value: Series A TCI Group. Authorized 1,750,000,000 shares; issued 610,748,188 shares in 1998 and 605,616,143 shares in 1997 611 606 Series B TCI Group. Authorized 150,000,000 shares; issued 73,929,229 shares in 1998 and 78,203,044 shares in 1997 74 78 Series A Liberty Media Group. Authorized 750,000,000 shares; issued 367,890,546 shares in 1998 and 344,962,521 shares in 1997 368 345 Series B Liberty Media Group. Authorized 75,000,000 shares; issued 35,198,156 shares in 1998 and 35,180,385 shares in 1997 35 35 Series A TCI Ventures Group. Authorized 750,000,000 shares; issued 377,253,230 shares in 1998 and 377,386,032 shares in 1997 377 377 Series B TCI Ventures Group. Authorized 75,000,000 shares; issued 45,750,534 shares in 1998 and 32,532,800 shares in 1997 46 33 Additional paid-in capital 5,987 5,063 Accumulated other comprehensive earnings, net of taxes (notes 1 and 16) 3,749 772 Retained earnings (accumulated deficit) 1,124 (812) -------- -------- 12,371 6,497 Treasury stock and common stock held by subsidiaries, at cost (note 15) (1,503) (1,991) -------- -------- Total stockholders' equity 10,868 4,506 -------- -------- Commitments and contingencies (notes 2, 6, 10, 20 and 21) $ 41,851 32,477 ======== ========
See accompanying notes to consolidated financial statements. 35 36 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Earnings Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 -------- -------- -------- amounts in millions, except per share amounts Revenue: Communications and programming services $ 7,351 7,570 7,038 Net sales from electronic retailing services -- -- 984 -------- -------- -------- 7,351 7,570 8,022 -------- -------- -------- Operating costs and expenses: Operating 2,997 2,995 3,072 Cost of sales from electronic retailing services -- -- 605 Selling, general and administrative 1,642 1,600 2,069 Year 2000 costs (note 21) 11 -- -- AT&T merger costs (note 2) 14 -- -- Stock compensation 866 488 (13) Reserve for loss arising from contingent obligation (note 20) 90 -- -- Cost of distribution agreements (note 18) 50 -- -- Impairment of assets 5 15 -- Restructuring charges -- -- 41 Depreciation 1,121 1,077 1,093 Amortization 614 546 523 -------- -------- -------- 7,410 6,721 7,390 -------- -------- -------- Operating income (loss) (59) 849 632 Other income (expense): Interest expense (1,061) (1,160) (1,096) Interest and dividend income 122 88 64 Share of losses of affiliates, net (note 6) (1,384) (930) (450) Loss on early extinguishment of debt (note 12) (60) (39) (71) Minority interests in earnings of consolidated subsidiaries, net (note 14) (88) (154) (56) Gains on issuance of equity interests by subsidiaries (notes 10 and 18) 89 60 -- Gains on issuance of stock by equity investees (notes 6, 8 and 18) 268 112 12 Gains on disposition of assets, net (notes 6, 7 8, 9 and 10) 5,760 401 1,593 Other, net (49) (22) (65) -------- -------- -------- 3,597 (1,644) (69) -------- -------- -------- Earnings (loss) before income taxes 3,538 (795) 563 Income tax benefit (expense) (note 19) (1,595) 234 (271) -------- -------- -------- Net earnings (loss) 1,943 (561) 292 Dividend requirements on preferred stocks (24) (42) (35) -------- -------- -------- Net earnings (loss) attributable to common stockholders $ 1,919 (603) 257 ======== ======== ========
(continued) 36 37 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Earnings, continued Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 -------- -------- -------- amounts in millions, except per share amounts Net earnings (loss) attributable to common stockholders: TCI Group Series A and Series B common stock $ (240) (537) (799) Liberty Media Group Series A and Series B common stock 156 125 1,056 TCI Ventures Group Series A and Series B common stock 2,003 (191) -- -------- -------- -------- $ 1,919 (603) 257 ======== ======== ======== Basic earnings (loss) attributable to common stockholders per common share (note 4): TCI Group Series A and Series B common stock $ (.46) (.85) (1.20) ======== ======== ======== Liberty Media Group Series A and Series B common stock $ .43 .34 2.82 ======== ======== ======== TCI Ventures Group Series A and Series B common stock $ 4.75 (.47) -- ======== ======== ======== Diluted earnings (loss) attributable to common stockholders per common and potential common share (note 4): TCI Group Series A and Series B common stock $ (.49) (.85) (1.20) ======== ======== ======== Liberty Media Group Series A and Series B common stock $ .39 .31 2.58 ======== ======== ======== TCI Ventures Group Series A and Series B common stock $ 4.44 (.47) -- ======== ======== ======== Net earnings (loss) $ 1,943 (561) 292 -------- -------- -------- Other comprehensive earnings, net of taxes (note 16): Foreign currency translation adjustments 2 (22) 35 Unrealized gains on securities: Unrealized holding gains arising during period 2,977 753 41 Less: reclassification adjustment for gains included in net earnings (2) -- (364) -------- -------- -------- Other comprehensive earnings 2,977 731 (288) -------- -------- -------- Comprehensive earnings $ 4,920 170 4 ======== ======== ========
See accompanying notes to consolidated financial statements. 37 38 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Years ended December 31, 1998, 1997 and 1996
Common Stock ---------------------------------------- Class B TCI Group Liberty Media Group Preferred ------------------- ------------------- Stock Series A Series B Series A Series B --------- -------- -------- -------- -------- amounts in millions Balance at January 1, 1996 $ -- 672 85 337 32 Net earnings -- -- -- -- -- Issuance of common stock for acquisition -- 11 -- 6 -- Issuance of common stock upon conversion of notes -- 2 -- 2 -- Issuance of common stock upon conversion of preferred stock -- 1 -- -- -- Exchange of cost investment for TCI Group and Liberty Media Group common stock -- (6) -- (3) -- Contribution of common stock to subsidiary -- 16 -- -- -- Spin-off of TCI Satellite Entertainment, Inc. -- -- -- -- -- Accreted dividends on all classes of preferred stock -- -- -- -- -- Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- Payment of preferred stock dividends -- -- -- -- -- Foreign currency translation adjustments, net of taxes (note 16) -- -- -- -- -- Unrealized gains on securities, net of taxes and reclassification adjustment (note 16) -- -- -- -- -- --------- -------- -------- -------- -------- Balance at December 31, 1996 $ -- 696 85 342 32 ========= ======== ======== ======== ======== Treasury stock and Accumulated common other Retained stock Additional comprehensive earnings held by Total paid-in earnings, (accumulated subsidiaries, stockholders' capital net of taxes deficit) at cost equity ---------- ------------- ------------ ------------- ------------- amounts in millions 3,863 329 (543) (314) 4,461 Net earnings -- -- 292 -- 292 Issuance of common stock for acquisition 248 -- -- -- 265 Issuance of common stock upon conversion of notes (2) -- -- -- 2 Issuance of common stock upon conversion of preferred stock 15 -- -- -- 16 Exchange of cost investment for TCI Group and Liberty Media Group common stock (121) -- -- -- (130) Contribution of common stock to subsidiary (16) -- -- -- -- Spin-off of TCI Satellite Entertainment, Inc. (405) -- -- -- (405) Accreted dividends on all classes of preferred stock (35) -- -- -- (35) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements 10 -- -- -- 10 Payment of preferred stock dividends (10) -- -- -- (10) Foreign currency translation adjustments, net of taxes (note 16) -- 35 -- -- 35 Unrealized gains on securities, net of taxes and reclassification adjustment (note 16) -- (323) -- -- (323) ---------- ------------- ------------ ------------- ------------- Balance at December 31, 1996 3,547 41 (251) (314) 4,178 ========== ============= ============ ============= =============
(continued) 38 39 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity, continued Years ended December 31, 1998, 1997 and 1996
Common Stock ---------------------------------------------------------------------- Class B TCI Group Liberty Media Group TCI Ventures Group Preferred ---------------------- -------------------- ----------------------- Stock Series A Series B Series A Series B Series A Series B --------- ---------- --------- --------- -------- -------- -------- amounts in millions Balance at December 31, 1996 $ -- 696 85 342 32 -- -- Net loss -- -- -- -- -- -- -- Issuance of TCI Ventures Group common stock in exchange for TCI Group common stock (note 1) -- (189) (16) -- -- 377 33 Costs associated with TCI Ventures Exchange -- -- -- -- -- -- -- Exchange of common stock with an officer/director (note 17) -- -- 7 -- 3 -- -- Issuance of common stock for acquisitions and investment -- 63 2 2 -- -- -- Issuance of Series A TCI Group common stock in exchange for Series B TCI Group common stock (the "Exchange") (note 17) -- 31 -- -- -- -- -- Recognition of fees related to the Exchange (note 17) -- -- -- -- -- -- -- Repurchase of common stock -- -- -- -- -- -- -- Cancellation of common stock -- -- -- -- -- -- -- Reclassification to redeemable securities of redemption amount of common stock subject to put obligation -- -- -- -- -- -- -- Gain from issuance of equity by subsidiary and equity investee, net of taxes -- -- -- -- -- -- -- Issuance of common stock upon exercise of stock options -- -- -- -- -- -- -- Issuance of restricted stock granted pursuant to stock incentive plan -- 1 -- -- -- -- -- Issuance of common stock upon conversion of notes and preferred stock -- 3 -- 1 -- -- -- Issuance of common stock to Tele-Communications, Inc. Employee Stock Purchase Plan -- 1 -- -- -- -- -- Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- Payment of preferred stock dividends -- -- -- -- -- -- -- Foreign currency translation adjustments, net of taxes (note 16) -- -- -- -- -- -- -- Unrealized gains on securities, net of taxes and reclassification adjustment (note 16) -- -- -- -- -- -- -- ----- --------- --------- -------- --------- ---------- --------- Balance at December 31, 1997 $ -- 606 78 345 35 377 33 ===== ========= ========= ======== ========= ========== ========= Treasury stock and Accumulated common other Retained stock held Additional comprehensive earnings by Total paid-in earnings, (accumulated subsidiaries, stockholders' capital net of taxes deficit) at cost equity ---------- ------------- ------------ ------------- -------------- amounts in millions Balance at December 31, 1996 3,547 41 (251) (314) 4,178 Net loss Issuance of TCI Ventures Group -- -- (561) -- (561) common stock in exchange for TCI Group common stock (note 1) Costs associated with TCI Ventures (205) -- -- -- -- Exchange Exchange of common stock with an (7) -- -- -- (7) officer/director (note 17) Issuance of common stock for 160 -- -- (170) -- acquisitions and investment Issuance of Series A TCI Group 1,058 -- -- (484) 641 common stock in exchange for Series B TCI Group common stock (the "Exchange") (note 17) 481 -- -- (512) -- Recognition of fees related to the Exchange (note 17) (11) -- -- -- (11) Repurchase of common stock -- -- -- -- (529) Cancellation of common stock (18) -- -- (529) -- Reclassification to redeemable securities of redemption amount of common stock subject to put obligation (4) -- -- 18 (4) Gain from issuance of equity by subsidiary and equity investee, net of taxes 86 -- -- -- 86 Issuance of common stock upon exercise of stock options 4 -- -- -- 4 Issuance of restricted stock granted pursuant to stock incentive plan 3 -- -- -- 4 Issuance of common stock upon conversion of notes and preferred stock 3 -- -- -- 7 Issuance of common stock to Tele-Communications, Inc. Employee Stock Purchase Plan 8 -- -- -- 9 Accreted dividends on all classes of preferred stock (42) -- -- -- (42) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements 10 -- -- -- 10 Payment of preferred stock dividends (10) -- -- -- (10) Foreign currency translation adjustments, net of taxes (note 16) -- (22) -- -- (22) Unrealized gains on securities, net of taxes and reclassification adjustment (note 16) -- 753 -- -- 753 ---------- ----------- ------------ --------- ---------- Balance at December 31, 1997 5,063 772 (812) (1,991) 4,506 ========== =========== ============ ========= ==========
39 40 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity, continued Years ended December 31, 1998, 1997 and 1996
Common Stock ------------------------------------------------------------------- Class B TCI Group Liberty Media Group TCI Ventures Group Preferred --------------------- -------------------- --------------------- Stock Series A Series B Series A Series B Series A Series B --------- -------- -------- -------- -------- -------- -------- amounts in millions Balance at December 31, 1997 $ -- 606 78 345 35 377 33 Net earnings -- -- -- -- -- -- -- Exchange of common stock in connection with the Magness Settlement (note 17) -- -- 11 -- -- -- 13 Issuance of common stock in connection with settlement of litigation -- 1 1 -- -- -- -- Reclassification to redeemable securities of redemption amount of common stock subject to put obligation -- -- -- -- -- -- -- Premium received in connection with put obligation -- -- -- -- -- -- -- Issuance of common stock for acquisitions (note 10) -- 1 -- 7 -- 13 -- Repurchase of common stock to be held in treasury (note 15) -- -- -- -- -- -- -- Repurchase and retirement of common stock (note 15) -- -- -- -- -- -- -- Retirement of common stock held in treasury -- (12) (16) -- -- (13) -- Gain from issuance of equity by subsidiary and equity investee, net of taxes (note 6) -- -- -- -- -- -- -- Issuance of common stock upon conversion of notes and preferred stock (notes 12 and 13) -- 15 -- 6 -- -- -- Payments for call agreements (note 17) -- -- -- -- -- -- -- Issuance of common stock upon exercise of Malone Right (note 17) -- -- -- -- -- -- -- Issuance of common stock to acquire minority interest of subsidiary -- -- -- 10 -- -- -- Issuance of common stock upon exercise of stock options -- -- -- -- -- -- -- Recognition of fees related to the Equity Swap Facility and the Exchange (notes 15 and 17) -- -- -- -- -- -- -- Reimbursement of fees related to Exchange (note 17) -- -- -- -- -- -- -- Recognition of stock compensation related to restricted stock awards -- -- -- -- -- -- -- Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- Payment of preferred stock dividends -- -- -- -- -- -- -- Foreign currency translation adjustments, net of taxes (note 16) -- -- -- -- -- -- -- Unrealized gains on securities, net of taxes and reclassification adjustment (note 16) -- -- -- -- -- -- -- ------- ------- ------- ------ ------ -------- --------- Balance at December 31, 1998 $ -- 611 74 368 35 377 46 ======= ======= ======= ====== ====== ======== ========= Treasury stock and Accumulated common other Retained stock held Additional comprehensive earnings by Total paid-in earnings, (accumulated subsidiaries, stockholders' capital net of taxes deficit) at cost equity ---------- ------------ ------------ ------------- ------------- amounts in millions Balance at December 31, 1997 5,063 772 (812) (1,991) 4,506 Net earnings -- -- 1,943 -- 1,943 Exchange of common stock in connection with the Magness Settlement (note 17) 509 -- -- (533) -- Issuance of common stock in connection with settlement of litigation 48 -- -- (3) 47 Reclassification to redeemable securities of redemption amount of common stock subject to put obligation (17) -- -- -- (17) Premium received in connection with put obligation 3 -- -- -- 3 Issuance of common stock for acquisitions (note 10) 353 -- -- -- 374 Repurchase of common stock to be held in treasury (note 15) -- -- -- (20) (20) Repurchase and retirement of common stock (note 15) (11) -- -- -- (11) Retirement of common stock held in treasury (760) -- -- 801 -- Gain from issuance of equity by subsidiary and equity investee, net of taxes (note 6) 70 -- -- -- 70 Issuance of common stock upon conversion of notes and preferred stock (notes 12 and 13) 331 -- -- -- 352 Payments for call agreements (note 17) (274) -- -- -- (274) Issuance of common stock upon exercise of Malone Right (note 17) 273 -- -- 243 516 Issuance of common stock to acquire minority interest of subsidiary 416 -- -- -- 426 Issuance of common stock upon exercise of stock options 10 -- -- -- 10 Recognition of fees related to the Equity Swap Facility and the Exchange (notes 15 and 17) (31) -- -- -- (31) Reimbursement of fees related to Exchange (note 17) 11 -- -- -- 11 Recognition of stock compensation related to restricted stock awards 11 -- -- -- 11 Accreted dividends on all classes of preferred stock (13) -- (12) -- (25) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements 5 -- 5 -- 10 Payment of preferred stock dividends (10) -- -- -- (10) Foreign currency translation adjustments, net of taxes (note 16) -- 2 -- -- 2 Unrealized gains on securities, net of taxes and reclassification adjustment (note 16) -- 2,975 -- -- 2,975 ---------- ---------- ------------ --------- ----------- Balance at December 31, 1998 5,987 3,749 1,124 (1,503) 10,868 ========== ========== ============ ========= ===========
See accompanying notes to consolidated financial statements. 40 41 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 -------- -------- -------- amounts in millions (see note 5) Cash flows from operating activities: Net earnings (loss) $ 1,943 (561) 292 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 1,735 1,623 1,616 Stock compensation 866 488 (13) Payments of obligation relating to stock compensation (187) (132) (3) Share of losses of affiliates, net 1,384 930 450 Loss on early extinguishment of debt 60 39 71 Minority interests in earnings of consolidated subsidiaries, net 88 154 56 Restructuring charges -- -- 41 Payments of restructuring charges (9) (24) (8) Reserve for loss arising from contingent obligation 90 -- -- Gains on issuance of equity interests by subsidiaries (89) (60) -- Gains on issuance of stock by equity investees (268) (112) (12) Gains on disposition of assets, net (5,760) (401) (1,593) Deferred income tax expense (benefit) 1,461 (275) 233 Cost of distribution agreements 50 -- -- Other noncash charges 10 25 11 Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (183) (53) (115) Change in inventories -- -- (8) Change in prepaids (44) (77) (23) Change in other accruals and payables 76 146 283 -------- -------- -------- Net cash provided by operating activities 1,223 1,710 1,278 -------- -------- -------- Cash flows from investing activities: Cash paid for acquisitions (459) (323) (664) Capital expended for property and equipment (1,917) (709) (2,055) Investments in and loans to affiliates (1,503) (636) (778) Collections of loans to affiliates 2,497 133 647 Proceeds from disposition of assets 889 541 341 Change in restricted cash (145) (1) (39) Cash received in exchanges 45 18 66 Other investing activities (44) (179) (26) -------- -------- -------- Net cash used in investing activities (637) (1,156) (2,508) -------- -------- -------- Cash flows from financing activities: Borrowings of debt 5,553 2,513 8,163 Repayments of debt (5,978) (3,036) (7,969) Prepayment penalties (52) (33) (60) Repurchase of common stock to be held in treasury (20) (529) -- Repurchase and retirement of common stock (11) -- -- Repurchase of subsidiary common stock (24) (42) -- Payment of preferred stock dividends (27) (42) (35) Payment of dividends on subsidiary preferred stock and Trust Preferred Securities (189) (179) (95) Payments for call agreements (274) -- -- Proceeds from issuance of common stock 516 5 -- Proceeds from issuance of subsidiary common stock and preferred stock 94 148 223 Proceeds from issuance of Trust Preferred Securities -- 490 971 Contributions by minority stockholders of subsidiaries -- 6 319 Other financing activities 1 (16) -- -------- -------- -------- Net cash provided (used) by financing activities (411) (715) 1,517 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 175 (161) 287 Cash and cash equivalents at beginning of year 244 405 118 -------- -------- -------- Cash and cash equivalents at end of year $ 419 244 405 ======== ======== ========
See accompanying notes to consolidated financial statements. 41 42 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (1) Basis of Presentation Nature of Business Tele-Communications, Inc. ("TCI" or the "Company"), through its subsidiaries and affiliates, is principally engaged in the construction, acquisition, ownership, and operation of domestic cable television systems and the provision of satellite-delivered video entertainment, information and home shopping programming services to various video distribution media, principally cable television systems. The Company also has investments in cable and telecommunications operations and television programming in certain international markets as well as investments in companies and joint ventures involved in developing and providing programming for new television and telecommunications technologies. Principles of Consolidation The accompanying consolidated financial statements include the accounts of TCI and those of all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Preferred stock of TCI which is owned by subsidiaries of TCI eliminates in consolidation. Common stock of the Company held by subsidiaries is treated similar to treasury stock in consolidation. Targeted Stock The Company's assets and operations were previously included in three separate groups, each of which was tracked separately by public equity securities. These groups were known as the "Liberty Media Group", the "TCI Ventures Group" and the "TCI Group". The Liberty Media Group was intended to reflect the separate performance of TCI's assets which produce and distribute programming services. The TCI Ventures Group was intended to reflect the separate performance of TCI's principal international assets and businesses and substantially all of TCI's non-cable and non-programming assets. The TCI Group was 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 comprised primarily of TCI's domestic cable and communications business. (continued) 42 43 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The TCI Group was tracked separately through the Tele-Communications, Inc. Series A TCI Group Common Stock (the "TCI Group Series A Stock") and Series B TCI Group Common Stock (the "TCI Group Series B Stock," and together with the TCI Group Series A Stock, the "TCI Group Stock"). The Liberty Media Group was tracked through the Tele-Communications, Inc. Series A Liberty Media Group Common Stock ("Liberty Group Series A Stock") and 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"). The TCI Ventures Group was tracked separately through the Tele-Communications, Inc. Series A TCI Ventures Group Common Stock ("TCI Ventures Group Series A Stock") and 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"). On August 5, 1995, the shareholders of TCI authorized the Board of Directors of TCI (the "Board") to issue the Liberty Group Stock. Additionally, the shareholders of TCI approved the redesignation of the previously authorized Class A and Class B common stock into TCI Group Series A Stock and TCI Group Series B Stock, respectively. On August 10, 1995, TCI distributed, in the form of a dividend, 2.25 shares of Liberty Group Stock for each four shares of TCI Group Stock owned (the "Liberty Distribution"). In August 1997, TCI commenced offers (the "Exchange Offers") to exchange shares of TCI Ventures Group Series A Stock and TCI Ventures Group Series B Stock for up to 188,661,300 shares of TCI Group Series A Stock and up to 16,266,400 shares of TCI Group Series B Stock, respectively. The exchange ratio for the Exchange Offers was two shares of the applicable series of TCI Ventures Group Stock for each share of the corresponding series of TCI Group Stock properly tendered up to the indicated maximum numbers. Upon the September 10, 1997 consummation of the Exchange Offers, 188,661,300 shares of TCI Group Series A Stock and 16,266,400 shares of TCI Group Series B Stock were exchanged for 377,322,600 shares of TCI Ventures Group Series A Stock and 32,532,800 shares of TCI Ventures Group Series B Stock (the "TCI Ventures Exchange"). Each of the separate series of Tele-Communications, Inc. common stock was converted to a series of common stock of AT&T Corporation ("AT&T") upon the March 9, 1999 merger of the Company into AT&T. See note 2. Collectively, the TCI Group, the Liberty Media Group and the TCI Ventures Group are referred to as the "Groups" and individually, may be referred to herein as a "Group." The TCI Group Series A Stock, TCI Ventures Group Series A Stock and the Liberty Group Series A Stock are sometimes collectively referred to herein as the "Series A Stock," and the TCI Group Series B Stock, TCI Ventures Group Series B Stock and Liberty Group Series B Stock are sometimes collectively referred to herein as the "Series B Stock." (continued) 43 44 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Notwithstanding the attribution of assets and liabilities, equity and items of income and expense among TCI Group, Liberty Media Group and TCI Ventures Group, each such Group in the capital structure of TCI, which encompassed the TCI Group Stock, Liberty Group Stock and TCI Ventures Group Stock, did not affect the ownership or the respective legal title to such assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each were responsible for their respective liabilities. Holders of TCI Group Stock, Liberty Group Stock and TCI Ventures Group Stock were common stockholders of TCI and were subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. Accounting Standards Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). The Company has reclassified its prior period consolidated balance sheet and consolidated statements of operations and comprehensive earnings to conform to the requirements of SFAS 130. SFAS 130 requires that all items which are components of comprehensive earnings or losses be reported in a financial statement in the period in which they are recognized. The Company has included cumulative foreign currency translation adjustments and unrealized holding gains and losses on available-for-sale securities in other comprehensive earnings that are recorded directly in stockholders' equity. Pursuant to SFAS 130, these items are reflected, net of related tax effects, as components of comprehensive earnings in the Company's consolidated statements of operations and comprehensive earnings, and are included in accumulated other comprehensive earnings in the Company's consolidated balance sheets and statements of stockholders' equity. During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133"), which is effective for all fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities by requiring that all derivative instruments be reported as assets or liabilities and measured at their fair values. Under SFAS 133, changes in the fair values of derivative instruments are recognized immediately in earnings unless those instruments qualify as hedges of the (1) fair values of existing assets, liabilities, or firm commitments, (2) variability of cash flows of forecasted transactions, or (3) foreign currency exposures of net investments in foreign operations. Although management of the Company has not completed its assessment of the impact of SFAS 133 on its consolidated results of operations and financial position, management currently estimates that the impact of SFAS 133 will not be material. (continued) 44 45 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) Merger with AT&T On March 9, 1999, AT&T acquired TCI in a merger (the "AT&T Merger") in which Italy Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into TCI, and TCI thereby became a wholly-owned subsidiary of AT&T. As a result of the AT&T Merger, (i) each share of TCI Group Series A Stock was converted into 0.7757 of a share of common stock, par value $1.00 per share, of AT&T ("AT&T Common Stock"), (ii) each share of TCI Group Series B Stock was converted into 0.8533 of a share of AT&T Common Stock, (iii) each share of Liberty Group Series A Stock was converted into one share of a newly created class of AT&T common stock designated as the Class A Liberty Media Group Common Stock, par value $1.00 per share (the "AT&T Liberty Class A Tracking Stock"), (iv) each share of Liberty Group Series B Stock was converted into one share of a newly created class of AT&T common stock designated as the Class B Liberty Media Group Common Stock, par value $1.00 per share (the "AT&T Liberty Class B Tracking Stock" and together with the AT&T Liberty Class A Tracking Stock, the "AT&T Liberty Tracking Stock"), (v) each share of TCI Ventures Group Series A Stock was converted into 0.52 of a share of AT&T Liberty Class A Tracking Stock, (vi) each share of TCI Ventures Group Series B Stock was converted into 0.52 of a share of AT&T Liberty Class B Tracking Stock, (vii) each share of TCI's Convertible Preferred Stock, Series C-TCI Group (the "Series C-TCI Group Preferred Stock") was converted into 103.059502 shares of AT&T Common Stock, (viii) each share of TCI's Convertible Preferred Stock Series C-Liberty Media Group (the "Series C-Liberty Media Group Preferred Stock") was converted into 56.25 shares of AT&T Liberty Class A Tracking Stock, (ix) each share of TCI's Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G Preferred Stock") was converted into 0.923083 shares of AT&T Common Stock and (x) each share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H ("Series H Preferred Stock") was converted into 0.590625 of a share of AT&T Liberty Class A Tracking Stock. Following the AT&T Merger, each share of TCI's Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock ("Class B Preferred Stock") continues to be outstanding as the Class B Preferred Stock of TCI with the same rights and preferences such stock had prior to the AT&T Merger. In general, the holders of shares of AT&T Liberty Class A Tracking Stock and the holders of shares of AT&T Liberty Class B Tracking Stock will vote together as a single class with the holders of shares of AT&T Common Stock on all matters presented to such stockholders, with the holders being entitled to one-tenth (1/10th) of a vote for each share of AT&T Liberty Class A Tracking Stock held, 1 vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote per share of AT&T Common Stock held. (continued) 45 46 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are intended to reflect the separate performance of the businesses and assets attributed to "Liberty/Ventures Group," which following the AT&T Merger, is comprised of the businesses and assets attributed to Liberty Media Group and TCI Ventures Group at the time of the AT&T Merger. Pursuant to, and subject to the terms and conditions set forth in, the Agreement and Plan of Restructuring and Merger, dated as of June 23, 1998 (the "Merger Agreement"), immediately prior to the AT&T Merger, certain assets previously attributed to TCI Ventures Group (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and Teleport Communications Group, Inc. ("TCG"), the stock of At Home Corporation ("@Home") attributed to TCI Ventures Group, the assets and business of the National Digital Television Center, Inc. ("NDTC") and TCI Ventures Group's equity interest in Western Tele-Communications, Inc.) were transferred to TCI Group in exchange for approximately $5.5 billion in cash. Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty/Ventures Group and AT&T, Liberty/Ventures Group became entitled to the benefit of approximately $2.0 billion of net operating loss carryforwards attributable to all entities included in TCI's consolidated federal income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service and are subject to limitations on usage which may affect the ultimate amount utilized. See note 19 to the accompanying consolidated financial statements of the Company. Additionally, certain warrants previously attributed to TCI Group were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. Certain agreements entered into at the time of the AT&T Merger provide, among other things, for preferred vendor status to Liberty/Ventures Group for digital basic distribution on AT&T's systems of new programming services created by Liberty/Ventures Group and for a renewal of existing affiliation agreements. The transfer of other immaterial assets was also effected. Pursuant to amended corporate governance documents for the entities included in Liberty/Ventures Group and certain agreements among AT&T and TCI, the business of Liberty/Ventures Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T Merger. AT&T will initially designate one third of the directors of such entities and its rights as the sole shareholder of the common stock of such entities following the AT&T Merger will, in accordance with Delaware law, be limited to actions which will require shareholder approval. Therefore, management has concluded that TCI does not have a controlling financial interest (as that term is used in Statement of Financial Accounting Standards No. 94) in the entities comprising the Liberty/Ventures Group following the AT&T Merger, and will account for its investment in such entities under the equity method. (continued) 46 47 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Pursuant to a proposed final judgment (the "Final Judgment") agreed to by TCI, AT&T and the United States Department of Justice (the "DOJ") on December 30, 1998, Liberty/Ventures Group prior to the AT&T Merger transferred all of the equity securities of Sprint Corporation ("Sprint") beneficially owned by the Liberty/Ventures Group (the "Sprint Securities") to a trust with an independent trustee (the "Trustee"), pursuant to a trust agreement approved by the DOJ (the "Trust Agreement"). The Final Judgment, if entered by the United States District Court for the District of Columbia, would require the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities held by the trust and beneficially owned by Liberty/Ventures Group sufficient to cause Liberty/Ventures Group to own beneficially no more than 10% of the outstanding Series 1 PCS Stock of Sprint on a fully diluted basis (assuming the issuance of all shares of Series 1 PCS Stock of Sprint ultimately issuable in respect of the applicable securities of Sprint upon the exercise, conversion or other issuance thereof in accordance with the terms of such securities) on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty/Ventures Group. The Trust Agreement grants the Trustee the sole right to sell the Sprint Securities and provides that all decisions regarding such divestiture will be made by the Trustee without discussion or consultation with AT&T or the entities in the Liberty/Ventures Group; however, the Final Judgment would provide that the Trustee shall consult with the board of directors of the Liberty/Ventures Group entity that owns the Sprint Securities regarding such divestiture (other than certain directors appointed by AT&T following the AT&T Merger and any director, officer or shareholder that owns more than 0.10% of the outstanding AT&T Common Stock). The Trustee has the power and authority to accomplish such divestiture only in a manner reasonably calculated to maximize the value of the Sprint Securities beneficially owned by Liberty/Ventures Group. The Final Judgment would provide that the Trustee vote the Sprint Securities beneficially owned by Liberty/Ventures Group in the same proportion as other holders of Sprint's PCS Stock so long as such securities are held by the trust. The Final Judgment also would prohibit the acquisition by Liberty/Ventures Group of additional Sprint Securities (other than in connection with the exercise or conversion, as applicable, of certain Sprint Securities) without the prior written consent of the DOJ. (continued) 47 48 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Immediately prior to the AT&T Merger, TCI restructured its ownership of certain of its subsidiaries. This restructuring included merging TCI's cable subsidiary, TCIC, into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of TCIC have been assumed by TCI, including TCIC's public debt. In connection with TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred Stock, Series A was converted into 2.119 shares of TCI Group Series A Stock, and such shares of TCI Group Series A Stock were subsequently converted into AT&T Common Stock in connection with the AT&T Merger. All other public securities issued by subsidiaries of TCIC (other than TCI Pacific Communications, Inc. ("Pacific")) otherwise remained unaffected. Furthermore, as part of the restructuring, (i) certain asset transfers were made between TCI and its subsidiaries, (ii) 123,896 shares of the Company's Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock") which were held by subsidiaries of TCI, were converted into 185,428,946 shares of TCI Group Series A Stock (which in turn were converted into 143,837,233 shares of AT&T Common Stock in the AT&T Merger and continue to be held by subsidiaries of TCI), (iii) the remaining 154,411 shares of Series F Preferred Stock which were formerly held by subsidiaries of TCI were distributed to TCI through a series of liquidations and canceled, and (iv) 125,728,816 shares of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock, 6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty Group Series B Stock, and 67,536 shares of Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock ("Class B Preferred Stock"), each formerly held by subsidiaries of TCI, were distributed to TCI through a series of liquidations and canceled. After the AT&T Merger, under the terms of the 5% Class A Senior Cumulative Exchangeable Preferred Stock of Pacific (the "Exchangeable Preferred Stock"), each share of that preferred stock is exchangeable, from and after August 1, 2001, for approximately 4.225 shares of AT&T Common Stock, subject to certain anti-dilution adjustments. Additionally, after the AT&T Merger, Pacific may elect to make any dividend, redemption or liquidation payment on the Exchangeable Preferred Stock in cash, by delivery of shares of AT&T Common Stock or by a combination of the foregoing forms of consideration. (3) Summary of Significant Accounting Policies Cash Equivalents Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1998 and 1997 was not significant. Program Rights Prepaid program rights are amortized on a film-by-film basis over the specific number of exhibitions. Committed program rights and program rights payable are recorded at the estimated costs of the programs when the film is available for airing less prepayments. Such amounts are amortized on a film-by-film basis over the anticipated number of exhibitions. (continued) 48 49 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Investments Marketable equity securities held by the Company are classified as available-for-sale and are reported at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a component of accumulated other comprehensive earnings in stockholders' equity. Realized gains and losses are determined on a specific-identification basis. Other investments in which the ownership interest is less than 20% and are not considered marketable securities are generally carried at the lower of cost or net realizable value. For those investments in affiliates in which the Company's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of the net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received. The Company's share of losses are generally limited to the extent of the Company's investment in, advances to and commitments for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of the difference between the Company's investment and its share of the net assets of the investee. Recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to the Company's ownership interest in such affiliates. Changes in the Company's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such subsidiary or equity investee, generally are recognized as gains or losses in the Company's consolidated statements of operations and comprehensive earnings. Property and Equipment Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, labor and applicable overhead related to installations and interest during construction are capitalized. During 1998, 1997 and 1996, interest capitalized was not significant. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. (continued) 49 50 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts allocated to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by the Company in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. Impairment of Long-Lived Assets The Company periodically reviews the carrying amounts of property, plant and equipment and its identifiable intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. Derivative Financial Instruments The Company has entered into variable and fixed interest rate exchange agreements ("Interest Rate Swaps") which it uses to manage interest rate risk arising from the Company's financial liabilities. Such Interest Rate Swaps are accounted for as hedges; and accordingly, amounts receivable or payable under Interest Rate Swaps are recognized as adjustments to interest expense. Gains and losses on early terminations of Interest Rate Swaps are included in the carrying amount of the related debt and amortized as yield adjustments over the remaining term of the derivative financial instruments or the remaining term of the related debt, whichever is shorter. The Company does not use such instruments for trading purposes. Derivative financial instruments that can be settled, at the Company's option, in shares of the Company's common stock are accounted for as equity instruments. Periodic settlements of amounts payable/receivable pursuant to such financial instruments are included in additional paid-in capital. In conjunction with a stock repurchase program or similar transaction, the Company may elect to sell put options on its own common stock. Proceeds from any such sales are reflected as an increase to additional paid-in capital and an amount equal to the maximum redemption amount under unexpired put options is reflected as redeemable common stock. (continued) 50 51 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements From time to time, the Company uses certain derivative financial instruments to manage its foreign currency risks. Because the Company generally views its foreign operating subsidiaries and affiliates as long-term investments, the Company generally does not attempt to hedge existing investments in its foreign affiliates and subsidiaries. However, the Company may enter into forward contracts to reduce its exposure to short-term (generally no more than one year) movements in the exchange rates applicable to firm funding commitments that are denominated in currencies other than the U.S. dollar. When high correlation of changes in the market value of the forward contract and changes in the fair value of the firm commitment is probable, the forward contract is accounted for as a hedge. Changes in the market value of a forward contract that qualifies as a hedge and any gains or losses on early termination of such a forward contract are deferred and included in the measurement of the item (generally an investment in, or an advance to, a foreign affiliate) that results from the funding of such commitment. Market value changes in derivative financial instruments that do not qualify as hedges are recognized currently in the consolidated statements of operations and comprehensive earnings. To date, the Company's use of forward contracts, as described above, has not had a material impact on the Company's financial position or results of operations. Minority Interests Recognition of minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the common equity of those consolidated subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of consolidated subsidiaries have the right to cause the Company to repurchase such holders' common equity. Included in minority interests in equity of consolidated subsidiaries is $925 million and $927 million in 1998 and 1997, respectively, of preferred stocks (and accumulated dividends thereon) of certain subsidiaries. Dividend requirements on such subsidiary preferred stocks are reflected as minority interests in the accompanying consolidated statements of operations and comprehensive earnings. Foreign Currency Translation All balance sheet accounts of foreign investments are translated at the current exchange rate as of the end of the accounting period. Statement of operations items are translated at average currency exchange rates. The resulting translation adjustment is recorded as a separate component of accumulated other comprehensive earnings in stockholders' equity. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the combined statements of operations as unrealized (based on the applicable period end translation) or realized upon settlement of the transactions. Such realized and unrealized gains and losses were not material to the accompanying consolidated financial statements. (continued) 51 52 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Revenue Recognition Cable revenue for customer fees, equipment rental, advertising, pay-per-view programming and revenue sharing agreements is recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution system. Stock Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by SFAS 123, the Company continues to account for stock-based compensation pursuant to Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"). The Company has included the disclosures required by SFAS 123 in note 15. Operating Segments The Company has significant operations principally in two operating segments: domestic cable and communications services and programming services. Substantially all of the Company's domestic cable and communications businesses and assets ("cable") were attributed to TCI Group, and substantially all of the Company's programming businesses and assets ("programming") have been attributed to Liberty Media Group. The Company's principal international businesses and assets and the Company's remaining non-cable and non-programming domestic businesses and assets have been attributed to TCI Ventures Group. No individual business or asset within TCI Ventures Group constituted a reportable segment of the Company. See note 22 for additional segment information. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified for comparability with the 1998 presentation. (continued) 52 53 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (4) Earnings (Loss) Per Common and Potential Common Share Basic earnings per share ("EPS") is measured as the income or loss attributable to common stockholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, etc.) as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from diluted EPS. (a) TCI Group Stock The basic loss attributable to TCI Group common stockholders per common share for the years ended December 31, 1998, 1997 and 1996 and the diluted loss attributable to TCI Group common stockholders per common share for the years ended December 31, 1997 and 1996 was computed by dividing net loss attributable to TCI Group common stockholders ($240 million, $537 million and $799 million, respectively) by the weighted average number of common shares outstanding of TCI Group Stock during the period (525 million, 632 million and 665 million, respectively). Potential common shares were not included in the diluted calculation of weighted average shares outstanding because their inclusion would be anti-dilutive. At December 31, 1998, 1997 and 1996, there were 100 million, 113 million, and 126 million potential common shares, respectively, consisting of stock options and other performance awards and convertible securities that could potentially dilute future EPS calculations in periods of net earnings. Such potential common share amounts do not take into account the assumed number of shares that would be repurchased by the Company upon the exercise of stock options and other performance awards. The diluted loss attributable to TCI Group common stockholders per common share for the year ended December 31, 1998 was computed by dividing net loss attributable to TCI Group common stockholders, which is increased by aggregate payments of $15 million made during 1998 under certain contracts which may be settled in shares or cash, but for the purpose of computing diluted EPS, are assumed to be settled in shares (see notes 15 and 17), by the weighted average number of common shares outstanding of TCI Group Stock during the period. Potential common shares were not included in the diluted calculation of weighted average shares outstanding because their inclusion would be anti-dilutive. In conjunction with the March 9, 1999 AT&T Merger, TCI Group Stock was converted into AT&T Common Stock. See note 2. (b) Liberty Group Stock The basic earnings attributable to Liberty Media Group common stockholders per common share for the years ended December 31, 1998, 1997 and 1996 was computed by dividing net earnings attributable to Liberty Media Group common stockholders by the weighted average number of common shares outstanding of Liberty Group Stock during the period. (continued) 53 54 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The diluted earnings attributable to Liberty Media Group common stockholders per common and potential common share for the years ended December 31, 1998, 1997 and 1996 was computed by dividing earnings attributable to Liberty Media Group common stockholders, adjusted for Liberty Media Group's share of interest expense of an affiliate accrued during the year-ended 1998, assuming the conversion of the affiliate's convertible securities into Liberty Group Stock as of the beginning of the period, by the weighted average number of common and dilutive potential common shares outstanding of Liberty Group Stock during the period. Shares issuable upon conversion of the Series C-Liberty Media Group Preferred Stock, the Convertible Preferred Stock, Series D, the Series H Preferred Stock, convertible notes payable, convertible debentures of affiliate and stock options and other performance awards have been included in the diluted calculation of weighted average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. All of the outstanding shares of Convertible Preferred Stock, Series D, were redeemed effective April 1, 1998 (see note 13). Numerator adjustments for dividends and interest associated with the convertible preferred shares and convertible notes payable, respectively, were not made to the computation of diluted earnings per share as such dividends and interest was paid by TCI Group. See notes 12 and 13 for descriptions of the convertible notes payable and convertible preferred shares, respectively. See note 15 for descriptions of stock options. In conjunction with the March 9, 1999 AT&T Merger, Liberty Group Stock was converted into AT&T Liberty Tracking Stock. See note 2. (continued) 54 55 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Information concerning the reconciliation of basic EPS to diluted EPS with respect to Liberty Group Stock is presented below:
Years ended December 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- amounts in millions, except per share amounts Basic EPS: Earnings attributable to common stockholders $ 156 125 1,056 ======== ======== ======== Weighted average common shares 359 366 374 ======== ======== ======== Basic earnings per share attributable to common stockholders $ .43 .34 2.82 ======== ======== ======== Diluted EPS: Earnings attributable to common stockholders $ 156 125 1,056 Add interest expense 1 -- -- -------- -------- -------- Adjusted earnings attributable to common stockholders assuming conversion of convertible notes payable of affiliate $ 157 125 1,056 ======== ======== ======== Weighted average common shares 359 366 374 Add dilutive potential common shares: Employee and director options and other performance awards 8 4 3 Convertible notes payable 19 19 21 Convertible debentures of affiliate 7 -- -- Series C- Liberty Media Group Preferred Stock 4 4 4 Convertible Preferred Stock, Series D -- 6 5 Series H Preferred Stock 4 4 2 -------- -------- -------- Dilutive potential common shares 42 37 35 -------- -------- -------- Diluted weighted average common shares 401 403 409 ======== ======== ======== Diluted earnings per share attributable to common stockholders $ .39 .31 2.58 ======== ======== ========
(c) TCI Ventures Group Stock The basic earnings (loss) attributable to TCI Ventures Group stockholders per common share for the year ended December 31, 1998 and the period from September 10, 1997 (the date of the TCI Ventures Exchange) through December 31, 1997 was computed by dividing earnings (loss) attributable to TCI Ventures Group stockholders by the weighted average number of common shares outstanding of TCI Ventures Group Stock during the period. (continued) 55 56 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The diluted earnings (loss) attributable to TCI Ventures Group stockholders per common and potential common share for the year ended December 31, 1998 and the period from September 10, 1997 through December 31, 1997 was computed by dividing earnings (loss) attributable to TCI Ventures Group stockholders by the weighted average number of common and dilutive potential common shares outstanding of TCI Ventures Group stock during the period. Shares issuable upon conversion of convertible notes payable and stock options and other performance awards have been included in the diluted calculation of weighted average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. Numerator adjustments for interest associated with convertible notes payable were not made to the computation of diluted earnings per share as such interest was paid by TCI Group. In conjunction with the March 9, 1999 AT&T Merger, TCI Ventures Group Stock was converted into AT&T Liberty Tracking Stock. See note 2. Information concerning the reconciliation of basic EPS to dilutive EPS with respect to TCI Ventures Group Stock is presented below:
September 10, Year ended 1997 through December 31, December 31, 1998 1997 ------------ ------------ amounts in millions, except per share amounts Basic EPS: Earnings (loss) attributable to common stockholders $ 2,003 (191) ============ ============ Weighted average common shares 422 410 ============ ============ Basic (loss) earnings per share attributable to common stockholders $ 4.75 (.47) ============ ============ Diluted EPS: Earnings (loss) attributable to common stockholders $ 2,003 (191) ============ ============ Weighted average common shares 422 410 ------------ ------------ Add dilutive potential common shares: Employee and director options and other performance awards 8 -- Convertible notes payable 21 -- ------------ ------------ Dilutive potential common shares 29 -- ------------ ------------ Diluted weighted average common shares 451 410 ============ ============ Diluted earnings (loss) per share attributable to common stockholders $ 4.44 (.47) ============ ============
(continued) 56 57 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Supplemental Disclosures to Consolidated Statements of Cash Flows Cash paid for interest was $1,066 million, $1,183 million and $1,056 million for the years ended December 31, 1998, 1997 and 1996, respectively. Cash paid for income taxes was $57 million, $141 million, and $41 million in 1998, 1997 and 1996, respectively. In addition, the Company received income tax refunds amounting to $76 million and $36 million during the years ended December 31, 1998 and 1997, respectively. Significant noncash investing and financing activities are reflected in the following table:
Years ended December 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- amounts in millions Cash paid for acquisitions: Recorded value of assets acquired $ (1,098) (1,857) (5,064) Net liabilities assumed 11 720 1,811 Deferred tax liability recorded in acquisitions 71 145 1,379 Change in minority interests in equity of consolidated subsidiaries (169) 93 113 Elimination of notes receivable from affiliates 350 -- -- Common stock and preferred stock issued in acquisitions 376 1,060 457 TCI common stock and preferred stock held by acquired company -- (484) -- Preferred stock of subsidiaries issued in acquisitions -- -- 640 -------- -------- -------- Cash paid for acquisitions $ (459) (323) (664) ======== ======== ======== Cash received in exchanges: Recorded value of assets acquired $ (136) (392) (709) Historical cost of assets exchanged 151 399 754 Gain recorded on exchange of assets 30 11 21 -------- -------- -------- Cash received in exchanges $ 45 18 66 ======== ======== ======== Capitalized costs of distribution agreements (note 18) $ 74 173 -- ======== ======== ======== Exchange of consolidated subsidiaries for note receivable and equity investments $ -- -- 894 ======== ======== ========
For a description of certain non-cash transactions, see notes 6 and 10. @Home's cash and cash equivalent balances of $419 million and $120 million are included in the Company's cash and cash equivalent balances at December 31, 1998 and 1997, respectively. Such @Home balances are available to be applied towards the liquidity requirements of @Home. Accordingly, it is not anticipated that any portion of such @Home balances will be distributed or otherwise made available to the Company. The Company's restricted cash is primarily comprised of proceeds received in connection with certain asset dispositions. Such proceeds, which aggregated $162 million and $34 million at December 31, 1998 and 1997, respectively, are designated to be reinvested in certain identified assets for income tax purposes. The Company's restricted cash also includes amounts held as collateral for interest payment obligations pursuant to certain bank credit facilities. Such amounts aggregated $17 million and $5 million at December 31, 1998 and 1997, respectively. (continued) 57 58 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company ceased to consolidate Flextech p.l.c. ("Flextech") and Cablevision S.A. ("Cablevision") and began to account for Flextech and Cablevision using the equity method of accounting, effective January 1, 1997 and October 1, 1997, respectively. The effects of changing the method of accounting for the Company's ownership interest in Flextech and Cablevision from the consolidation method to the equity method are summarized below (amounts in millions): Assets (other than cash and cash equivalents) reclassified to equity investments $ 596 Liabilities reclassified to equity investments (484) Minority interests in equity of subsidiaries reclassified to equity investments (151) ------- Decrease in cash and cash equivalents $ (39) =======
(6) Investments in Affiliates The Company has various investments accounted for under the equity method. The following table includes the Company's carrying value and percentage ownership of the Company's more significant investments as of the indicated dates:
Percentage Carrying value at Percentage December 31, ownership at ---------------------- December 31, 1998 1998 1997 ----------------- -------- -------- amounts in millions USA Networks, Inc. ("USAI") and related investments (a) (a) $ 1,042 348 Cablevision Systems Corporation ("CSC") (b) 33% 945 15 Telewest Communications plc ("Telewest") (c) 22% 515 324 Flextech (d) 37% 320 261 Cablevision (e) 28% 315 239 Various foreign equity investments (other than Telewest, Flextech and Cablevision) (f) various 346 209 InterMedia Capital Partners IV, L.P. ("InterMedia IV") and InterMedia Capital Management IV, L.P. ("ICM IV") (collectively, "IP IV") (g) 50% 207 262 Falcon Communications, L.P. 46% 189 -- QVC, Inc. ("QVC") 43% 197 134 Parnassos, L.P. 33% 120 -- Sprint Spectrum Holding Company L.P., MinorCo, L.P. and PhillieCo Partnership I L.P. (the "PCS Ventures") (h) -- -- 607 TCG (i) -- -- 295 Other (j) 569 369 -------- -------- $ 4,765 3,063 ======== ========
(continued) 58 59 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - ----------- (a) USAI Pursuant to an agreement among the Company, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), the Company contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Silver King Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $4 million in cash, representing the exercise price of the Silver King Option. BDTV-I is a corporation formed by the Company and Mr. Diller pursuant to the BDTV Agreement, in which the Company owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the Silver King Option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the Federal Communications Commission ("FCC") in June 1996, subject, however, to the condition that the equity interest of the Company in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. The Company accounted for the HSN Merger as a sale of a portion of its investment in HSN and accordingly, recorded a pre-tax gain of approximately $47 million. In order to effect the HSN Merger in compliance with the FCC Order, the Company agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that the Company received (i) 15.6 million shares of Class B common stock of Silver King, all of which shares the Company contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right to be issued up to an additional 5.2 million shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow the Company to own additional shares in compliance with the FCC Order (including events resulting in the dilution of the Company's percentage equity interest), and (iii) approximately 739,000 shares of Class B common stock and 17.6 million shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by the Company and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of the Company and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. As a result of the HSN Merger, HSN is no longer included in the consolidated financial results of the Company. Subsequent to the HSN Merger, Silver King was renamed HSN, Inc. ("HSNI"). (continued) 59 60 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In February 1998, pursuant to an Investment Agreement among Universal Studios, Inc. ("Universal"), HSNI, HSN and the Company, dated as of October 1997 and amended and restated as of December 1997, HSNI consummated a transaction (the "Universal Transaction") through which USA Networks Partners, Inc., a subsidiary of Universal, sold its 50% interest in USAI, a New York general partnership, to HSNI and Universal contributed the remaining 50% interest in USAI and its domestic television production and distribution operations to HSNI. Subsequent to these transactions, HSNI was renamed USAI. In connection with the Universal Transaction, Universal, USAI, HSN and the Company became parties to a number of other agreements relating to, among other things, (i) the management of USAI, (ii) the purchase and sale or other transfer of voting securities of USAI, including securities convertible or exchangeable for voting securities of USAI, and (iii) the voting of such securities. At the closing of the Universal Transaction, Universal (i) was issued 6 million shares of USAI's Class B common stock, 7 million shares of USAI's common stock and 109 million common equity shares ("LLC Shares") of USANi LLC, a limited liability company formed to hold all of the businesses of USAI and its subsidiaries, except for its broadcasting business and its equity interest in Ticketmaster Group, Inc. and (ii) received a cash payment of $1.3 billion. Pursuant to an Exchange Agreement relating to the LLC Shares (the "LLC Exchange Agreement"), approximately 74 million of the LLC Shares issued to Universal are each exchangeable for one share of USAI's Class B common stock and the remainder of the LLC Shares issued to Universal are each exchangeable for one share of USAI's common stock. At the closing of the Universal Transaction, the Company was issued 1.2 million shares of USAI's Class B common stock. Of such shares, 800,000 shares of Class B common stock were contributed to BDTV IV INC. (collectively with BDTV-I, BDTV-II and BDTV III INC., "BDTV"), a newly-formed entity having substantially the same terms as BDTV-I, BDTV-II and BDTV III INC. (with the exception of certain transfer restrictions) in which the Company owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Barry Diller owns less than 1% of the equity and all of the voting power. The Company accounts for its investment in BDTV under the equity method. In addition, the Company purchased 10 LLC Shares at the closing of the Universal Transaction for an aggregate purchase price of $200. On June 24, 1998, USAI consummated the previously announced agreement to acquire the remaining stock of Ticketmaster Group, Inc. which it did not previously own through a tax-free merger (the "Ticketmaster Transaction"). In connection with the increases in USAI's equity, net of the dilution of the Company's ownership interest, that resulted from the issuance of common stock by USAI in the Universal Transaction and the Ticketmaster Transaction, the Company recorded a $64 million increase to equity (after deducting a deferred income tax liability of $42 million) and an increase to the carrying value of the Company's investment in USAI of $106 million. No gain was recognized in the consolidated statements of operations and comprehensive earnings due primarily to the Company's commitment to purchase additional equity interests in USAI. (continued) 60 61 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In connection with the Universal Transaction, each of Universal and the Company was granted a preemptive right with respect to future issuances of USAI's common stock, subject to certain limitations, to maintain their respective percentage ownership interests in USAI that they had prior to such issuances. In connection with such right, during 1998, the Company purchased approximately 4.7 million shares of USAI's common stock and approximately 22.9 million LLC Shares for an aggregate cost of approximately $560 million. Pursuant to the LLC Exchange Agreement, each LLC Share issued or to be issued to the Company is exchangeable for one share of USAI's common stock. At December 31, 1998, the Company held 24.4 million shares of USAI's common stock through BDTV and 5.2 million shares of USAI's common stock directly. Additionally, the Company held 22.9 million LLC Shares at December 31, 1998 as well as shares of HSN's common stock which are exchangeable for 16.6 million shares of USAI's common stock. The Company's direct ownership of USAI is restricted under the FCC. Assuming the exchange of the Company's shares in HSN and its LLC Shares for USAI common stock, and the exchange of certain securities owned by Universal and certain of its affiliates for USAI common stock, the Company would own 69.1 million shares or approximately 21% of USAI, including shares held through BDTV at December 31, 1998. USAI's common stock had a closing market value of $33-1/8 per share on December 31, 1998. During the years ended December 31, 1998, 1997 and 1996, the Company's share of affiliates' earnings (losses) from its interests in USAI and related investments accounted for $30 million, $3 million and ($1 million), respectively. (b) CSC On March 4, 1998, the Company contributed to CSC certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 48.9 million newly issued CSC Class A common shares (the "CSC Transaction"). CSC also assumed and repaid approximately $574 million of debt owed by the Company to external parties and $95 million of debt owed to the Company. As a result of the CSC Transaction, the Company recognized a $506 million gain in the accompanying consolidated statement of operations and comprehensive earnings for the year ended December 31, 1998. Such gain represents the excess of the $1,161 million fair value of the CSC Class A common shares received over the historical cost of the net assets transferred by the Company to CSC. The $1.9 billion difference between the carrying value of the Company's investment in CSC and CSC's net deficiency is being amortized over an estimated useful life of 20 years. Including the amortization of such difference, CSC accounted for $240 million of the Company's share of its affiliates' losses during the year ended December 31, 1998. The Company has also entered into letters of intent with CSC which provide for the Company to acquire a cable system in Michigan and an additional 4% 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 the Company's debt. (continued) 61 62 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 1998, the Company owned 49,982,572 shares of CSC Class A common stock, which had a closing market price of $50.13 per share on such date. Such shares represented an approximate 33.0% equity interest in CSC's total outstanding shares and an approximate 9% voting interest in CSC in all matters except for (i) the election of directors, in which case the Company effectively has the right to designate two of CSC's directors, and (ii) any increase in authorized shares, in which case the Company has agreed to vote its interest in proportion with the public holders of CSC Class A common shares. The ability of the Company to sell or increase its investment in CSC is subject to certain restrictions and limitations set forth in a stockholders agreement with CSC. (c) Telewest Telewest currently operates and constructs cable television and telephone systems in the United Kingdom ("UK"). Telewest accounted for $134 million, $145 million and $109 million of the Company's share of its affiliates' losses during the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the Company indirectly owned 463 million or 21.6% of the issued and outstanding Telewest ordinary shares. The reported closing price on the London Stock Exchange of Telewest ordinary shares was (pound)1.74 ($2.88) per share at December 31, 1998. Effective September 1, 1998, Telewest and General Cable PLC ("General Cable") consummated a merger (the "General Cable Merger") in which holders of General Cable received 1.243 new Telewest shares and (pound)0.65 ($1.11) in cash for each share of General Cable. In addition, holders of American Depository shares of General Cable ("General Cable ADS") (each representing five General Cable shares) received 6.215 new Telewest shares and (pound)3.25 ($5.53) in cash for each share of General Cable ADS. Based upon Telewest's closing share price of (pound)0.89 ($1.51) on April 14, 1998, the General Cable Merger was valued at approximately (pound)649 million ($1.1 billion). The cash portion of the General Cable Merger was financed through an offer to qualifying Telewest shareholders for the purchase of approximately 261 million new Telewest shares at a price of (pound)0.925 ($1.57) per share (the "Telewest Offer"). The Company subscribed to 85 million Telewest ordinary shares at an aggregate cost of (pound)78 million ($133 million) in connection with the Telewest Offer. Immediately following the Telewest Offer, the Company held 28% of the issued and outstanding Telewest ordinary shares. In connection with the General Cable Merger, the Company converted its entire holdings of Telewest convertible preference shares (133 million shares) into Telewest ordinary shares. As a result of the General Cable Merger, the Company's ownership interest in Telewest decreased to 21.6%. In connection with the increase in Telewest's equity, net of the dilution of the Company's interest in Telewest, that resulted from the General Cable Merger, the Company recorded a non-cash gain of $60 million (before deducting deferred income tax expense of $21 million) during 1998. (continued) 62 63 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (d) Flextech In January 1997, the Company's voting interest in Flextech was reduced to 50% and the Company ceased to include Flextech in its consolidated financial results and began to account for Flextech using the equity method of accounting. In April 1997, Flextech and BBC Worldwide Limited formed two separate joint ventures (the "BBC Joint Ventures") and entered into certain related transactions. The consummation of the BBC Joint Ventures and related transactions resulted in, among other things, a reduction of the Company's economic ownership interest in Flextech from 46.2% to 36.8%. The Company continues to maintain a voting interest in Flextech of approximately 50%. As a result of such dilution, the Company recorded a $152 million increase to the carrying amount of the Company's investment in Flextech, a $53 million increase to deferred income tax liability, a $66 million increase to equity and a $33 million increase to minority interests in equity of consolidated subsidiaries. No gain was recognized in the statement of operations and comprehensive earnings due primarily to certain contingent obligations of the Company with respect to one of the BBC Joint Ventures. Flextech accounted for $21 million and $16 million of the Company's share of its affiliates' losses during the years ended December 31, 1998 and 1997, respectively. Based on the (pound)6.07 ($10.07) per share closing price of the Flextech ordinary shares on the London Stock Exchange, the 58 million Flextech ordinary shares owned by the Company had an aggregate market value of (pound)351 million ($583 million) at December 31, 1998. (e) Cablevision On October 9, 1997, the Company sold a portion of its 51% interest in Cablevision to unaffiliated third parties. In connection with such sale and certain related transactions, the Company recognized a gain of $49 million. Additionally, effective October 1, 1997, the Company ceased to consolidate Cablevision and began to account for Cablevision using the equity method of accounting. Cablevision accounted for $23 million and $3 million of the Company's share of its affiliates' losses during the years ended December 31, 1998 and 1997, respectively. See note 20. (continued) 63 64 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (f) Various Foreign Investments Internationally, The News Corporation Limited ("News Corp.") and the Company formed a venture ("Fox Sports International") to operate sports programming services in Latin American and Australia and a variety of new sports services throughout the world except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. The Company owns 50% of Fox Sports International with News Corp. owning the other 50%. Fox Sports International accounted for $34 million, $30 million and $21 million of the Company's share of its affiliates' losses during the years ended December 31, 1998, 1997 and 1996, respectively. In addition to Telewest, Flextech and Fox Sports International and Cablevision, the Company has other less significant equity method investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other foreign investments in affiliates accounted for $70 million, $70 million and $54 million of the Company's share of its affiliates losses during the years ended December 31, 1998, 1997 and 1996, respectively. (g) IP IV In July 1996, the Company completed a series of transactions that resulted in the transfer of all or part of the Company's ownership interests in certain cable television systems to InterMedia IV in exchange for a 49% limited partnership interest in InterMedia IV and assumed debt of $120 million. Simultaneously, the Company received a cable television system and cash from InterMedia IV in exchange for a cable television system that had been recently acquired by the Company. The Company recognized no gain or loss in connection with the above-described transactions. The $225 million excess of the Company's investment in InterMedia IV over the Company's share of the partners' capital of InterMedia IV is being amortized over an estimated useful life of 20 years. Including such amortization, the Company's share of InterMedia IV's losses was $53 million, $46 million and $16 million during the years ended December 31, 1998, 1997 and 1996, respectively. ICM IV owns a 1.12% limited partnership interest in InterMedia IV. The Company acquired its limited partnership interest in ICM IV in August 1997 pursuant to the transactions described in note 17. (h) PCS Ventures PCS Ventures accounted for $629 million, $493 million and $167 million of the Company's share of its affiliates' losses during the years ended December 31, 1998, 1997 and 1996, respectively. The 1996 amount includes $34 million related to prior periods. See notes 2 and 9. (i) TCG TCG accounted for $32 million, $66 million and $51 million of the Company's share of affiliates' losses during the years ended December 31, 1998, 1997 and 1996, respectively. See Note 8. (j) Other As of April 29, 1996, the Company and News Corp. formed two sports programming ventures. In the U.S., the Company and News Corp. formed Fox/Liberty Networks LLC ("Fox Sports") into which the Company contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. The Company received a 50% interest in Fox Sports and a distribution of $350 million in cash. No gain or loss was recognized as the cash distribution approximated the carrying amount of the assets contributed. Prior to the first quarter of 1998, the Company had no obligation, nor intention, to fund Fox Sports. During 1998, the Company made the determination to provide funding to Fox Sports based on specific transactions consummated by Fox Sports. Consequently, the Company's share of losses of Fox Sports of $83 million for the year ended December 31, 1998 includes previously unrecognized losses of Fox Sports of approximately $64 million. Losses for Fox Sports were not recognized in prior periods due to the fact that the Company's investment in Fox Sports was less than zero. Certain of the Company's affiliates are general partnerships and any subsidiary of the Company 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) 64 65 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Summarized unaudited combined financial information for the Company's affiliates for the periods in which the Company used the equity method to account for such affiliates is as follows:
December 31, ----------------------- 1998 1997 -------- -------- amounts in millions Combined Financial Position Property and equipment, net $ 11,018 8,319 Franchise costs, net 7,994 3,582 Other assets, net 21,109 20,849 -------- -------- Total assets $ 40,121 32,750 ======== ======== Debt $ 23,159 18,973 Other liabilities 11,361 6,836 Redeemable securities 1,727 1,137 Owners' equity 3,874 5,804 -------- -------- Total liabilities and equity $ 40,121 32,750 ======== ========
Years ended December 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- amounts in millions Combined Operations Revenue $ 15,528 7,811 6,088 Operating expenses (13,889) (7,815) (5,576) Depreciation and amortization (3,152) (1,506) (1,070) -------- -------- -------- Operating loss (1,513) (1,510) (558) Interest expense (2,056) (921) (615) Other, net (141) (360) (354) -------- -------- -------- Net loss $ (3,710) (2,791) (1,527) ======== ======== ========
(7) Investment in Time Warner On October 10, 1996, Time Warner and Turner Broadcasting System, Inc. ("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 1.5 Time Warner common shares (as adjusted for a two-for-one stock split) for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 1.6 Time Warner common shares (as adjusted for a two-for-one stock split) for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. (continued) 65 66 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Time Warner, TBS and TCI entered into an Agreement Containing Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other things, the Company agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, the Company received approximately 101.2 million shares (as adjusted for a two-for-one stock split) of the TW Exchange Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, the Company recognized a pre-tax gain of $1.5 billion in the fourth quarter of 1996. The Company accounts for its investment in Time Warner as an available-for-sale security. See note 12. On June 24, 1997 the Company granted Time Warner an option to acquire the business of Southern Satellite Systems, Inc. ("Southern") and certain of its subsidiaries (together with Southern, the "Southern Business") through a purchase of assets (the "Southern Option"). The Company received 12.8 million shares (as adjusted for a two-for-one stock split) of TW Exchange Stock valued at $306 million in consideration for the grant. In September 1997, Time Warner exercised the Southern Option. Pursuant to the Southern Option, Time Warner acquired the Southern Business, effective January 1, 1998, for $213 million in cash. The Company recognized a $515 million pre-tax gain in connection with such transactions in the first quarter of 1998. (8) Investment in AT&T On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T, was consummated. As a result of such merger, TCI received in exchange for all of its interest in TCG, approximately 47 million shares of AT&T Common Stock. TCI recognized a $2.3 billion gain (before deducting deferred income tax expense of $883 million) on such transaction during the third quarter of 1998 based on the difference between the carrying amount of TCI's interest in TCG and the fair value of the AT&T Common Stock received. TCI had accounted for its ownership interest in AT&T Common Stock as an available-for-sale security. Such AT&T Common Stock was transferred from TCI Ventures Group to TCI Group in connection with the AT&T Merger. Following the AT&T Merger, TCI will treat its investment in AT&T Common Stock as an investment in its parent. Accordingly, the fair value of TCI's investment in AT&T Common Stock will be reflected as a reduction of TCI's equity, and any dividends received on such AT&T Common Stock will be recorded as an increase to TCI's additional paid-in capital. During 1998, TCI recognized dividends of $31 million on its investment in AT&T Common Stock. (continued) 66 67 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On April 22, 1998, TCG completed a merger transaction with ACC Corp. ("ACC") in which ACC shares were exchanged with shares of TCG in the ratio of .90909 of a share of TCG stock for each share of ACC stock. As a result of such merger transaction, TCI's interest in TCG was reduced to approximately 26%. In connection with the increase in TCG's equity, net of the dilution of TCI's interest in TCG, that resulted from such merger, TCI recorded a non-cash gain of $201 million (before deducting deferred income tax expense of $71 million). During the year ended December 31, 1997, TCG issued 6.6 million shares of its Class A common stock for certain acquisitions. The total consideration paid by TCG through the issuance of common stock was approximately $123 million. In addition, effective November 5, 1997, TCG consummated a public offering of 7.3 million shares of its Class A common stock. TCG received net proceeds from its sale of shares pursuant to such offering of $318 million. As a result of the above transactions, TCI's ownership interest in TCG was reduced to approximately 28%. Accordingly, as a result of the increase in TCG's equity, net of the dilution of TCI's ownership interest in TCG, TCI recognized non-cash gains aggregating $112 million (before deducting deferred income tax expense of $43 million). On July 2, 1996, TCG conducted an initial public offering (the "TCG IPO") in which it sold 27 million shares of Class A common stock at $16.00 per share to the public for aggregate net proceeds of approximately $410 million. As a result of the TCG IPO, TCI's ownership interest in TCG was reduced from approximately 35% to approximately 31%. Accordingly, TCI recognized a gain amounting to $12 million (before deducting deferred income tax expense of approximately $5 million). (9) Investment in Sprint Prior to November 23, 1998, the PCS Ventures included Sprint Spectrum Holding Company, L. P. and MinorCo, L.P. (collectively, "Sprint PCS") and PhillieCo Partnership I, L.P. ("PhillieCo"). The partners of each of the Sprint PCS partnerships were subsidiaries of Sprint, Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the Company. The partners of PhillieCo were subsidiaries of Sprint, Cox and the Company. The Company had a 30% partnership interest in each of the Sprint PCS partnerships and a 35% partnership interest in PhillieCo. On November 23, 1998, the Company, Comcast, and Cox exchanged their respective interests in Sprint PCS and PhillieCo (the "PCS Exchange") for shares of "Sprint PCS Group Stock" which tracks the performance of Sprint's newly created "PCS Group" (consisting initially of the PCS Ventures and certain PCS licenses which were separately owned by Sprint). The Sprint PCS Group Stock collectively represents an approximate 17% voting interest in Sprint. As a result of the PCS Exchange, the Company holds shares of Sprint PCS Group Stock, as well as certain additional securities of Sprint exercisable for or convertible into such Sprint Securities, representing approximately 24% of the equity value of Sprint attributable to its PCS Group and less than 1% of the voting interest in Sprint. Through November 23, 1998, the Company accounted for its interest in the PCS Ventures using the equity method of accounting; however, as a result of the PCS Exchange and the Company's less than 1% voting interest in Sprint, the Company no longer exercises significant influence with respect to its investment in the PCS Ventures. Accordingly, the Company accounts for its investment in the Sprint PCS Group Stock as an available-for-sale security. (continued) 67 68 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the PCS Exchange, the Company recorded a non-cash gain of $1.9 billion (before deducting deferred income tax expense of $647 million) during the fourth quarter of 1998 based on the difference between the carrying amount of the Company's interest in PCS Ventures and the fair value of the Sprint Securities received. In connection with the March 9, 1999 AT&T Merger, the Company consented to divest its interest in the Sprint Securities. See note 2. (10) Acquisitions and Dispositions In addition to the CSC Transaction described in note 6, the Company completed, during 1998, eight transactions whereby the Company contributed cable television systems serving in the aggregate approximately 1,924,000 customers to eight separate joint ventures (collectively, the "1998 Joint Ventures") in exchange for non-controlling ownership interests in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998 Joint Ventures of debt owed by the Company to external parties aggregating $323 million and intercompany debt owed to the Company aggregating $2,374 million. The Company has agreed to take certain steps to support compliance by certain of the 1998 Joint Ventures with their payment obligations under certain debt instruments, up to an aggregate contingent commitment of $980 million. In light of such contingent commitments, the Company has deferred any gains on the formation of such 1998 Joint Ventures. Accordingly, the Company has recorded deferred gains aggregating $163 million and recognized net gains aggregating $392 million in connection with the formation of the 1998 Joint Ventures. The deferred gains will not be recognized until such time as the Company's contingent commitments are eliminated. The Company uses the equity method of accounting to account for its investments in the 1998 Joint Ventures. The CSC Transaction (see note 6) and the formation of the 1998 Joint Ventures are collectively referred to herein as the "1998 Contribution Transactions." During the year ended December 31, 1998, the Company's revenue and operating cash flow (defined by the Company as operating income before depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger costs and stock compensation) included $622 million and $278 million, respectively, from the cable television systems included in the 1998 Contribution Transactions. In addition to the 1998 Contribution Transactions, the Company, as of December 31, 1998, has signed agreements or letters of intent to contribute within the next twelve months, certain cable television systems (the "Pending Contribution Cable Systems") serving approximately 1.2 million basic customers to joint ventures in which the Company will retain non-controlling ownership interests (the "Pending Contribution Transactions"). Following the completion of the Pending Contribution Transactions, the Company will no longer consolidate the Pending Contribution Cable Systems. Accordingly it is anticipated that the completion of the Pending Contribution Transactions, as currently contemplated, will result in aggregate estimated reductions (based on 1998 amounts) to the Company's debt, annual revenue and annual operating cash flow of $1.5 billion, $500 million and $200 million, respectively. No assurance can be given that any of the Pending Contribution Transactions will be consummated. (continued) 68 69 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On March 1, 1999, TV Guide, Inc. (Formerly United Video Satellite Group, Inc. ("UVSG")) and The News Corporation Limited ("News Corp.") completed a transaction whereby News Corp.'s TV Guide properties were combined with UVSG to create a platform for offering television guide services and advertising to consumers. As part of this combination, a unit of News Corp. received consideration consisting of $800 million in cash and 60 million shares of UVSG's stock, including 22.5 million shares of its Class A common stock and 37.5 million shares of its Class B common stock. In addition, News Corp. elected to purchase approximately 6.5 million additional shares of UVSG Class A common stock for $129 million in order to equalize its ownership with that of the Company. Prior to such transactions, UVSG was a subsidiary of the Company. As a result of these transactions, and another transaction completed on the same date, News Corp., TCI and UVSG's public stockholders own, on an economic basis, approximately 44%, 44% and 12%, respectively, of UVSG. Following such transactions, News Corp. and TCI each have approximately 49% of the voting power of UVSG's outstanding stock. Upon consummation, TCI began accounting for its interest in UVSG under the equity method of accounting. On November 19, 1998, TCI exchanged, in a merger transaction, 0.58 of a share of Liberty Group Series A Stock for each share of the issued and outstanding Series A common stock of its then majority-owned subsidiary, Tele-Communications International, Inc. ("TINTA"), not beneficially owned by TCI (the "TINTA Merger"). Such transaction was accounted for as an acquisition of a minority interest. The aggregate value assigned to the 10,086,594 shares of Liberty Group Series A Stock issued by TCI was based upon the market value of Liberty Group Series A Stock at the time the TINTA Merger was announced. Assuming the TINTA Merger had occurred on January 1, 1997, the Company's results of operations and comprehensive earnings would not have been materially different from the Company's historical results of operations and comprehensive earnings for the years ended December 31, 1998 and 1997. On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of TCI, which held non-voting class C common stock of International Family Entertainment, Inc. ("IFE") ("Class C Stock") and $23 million of IFE 6% convertible secured notes due 2004, convertible into Class C Stock, ("Convertible Notes"), contributed its Class C Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in exchange for a new series of 30 year non-convertible 9% preferred stock of FKW with a stated value of $345 million (the "FKW Preferred Stock"). As a result of the exchange, TCI recognized a gain of approximately $304 million. Effective July 31, 1997, a wholly-owned subsidiary of TCI merged with and into Kearns-Tribune Corporation ("Kearns-Tribune"). The merger was valued at $808 million. TCI exchanged 47.2 million shares of TCI Group Series A Stock for shares of Kearns-Tribune which held 17.9 million shares of TCI Group Stock and 10.1 million shares of Liberty Group Stock. The merger of Kearns-Tribune has been accounted for by the purchase method. Accordingly, the results of operations of Kearns-Tribune have been combined with those of the Company since the date of acquisition, and the Company recorded Kearns-Tribune's assets and liabilities at fair value. (continued) 69 70 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In January 1997, the Company acquired the 50% ownership interest in TKR Cable Company ("TKR Cable") that the Company did not previously own and certain additional assets for aggregate consideration of approximately $970 million. The Company issued approximately 16 million shares of TCI Group Series A Stock, assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares of Time Warner common stock valued at $41 million upon consummation of such acquisition. Prior to the acquisition date, the Company accounted for its 50% interest in TKR Cable under the equity method. This acquisition has been treated as a step acquisition for accounting purposes. Accordingly, the results of operations of TKR Cable have been combined with those of TCI Group since the date of acquisition and TCI Group's aggregate cost basis in TKR Cable has been allocated to TKR Cable's assets and liabilities based on their fair values. On July 31, 1996, pursuant to certain agreements entered into among TCIC, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to a new subsidiary of Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. (continued) 70 71 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Prior to the consummation of the Viacom Acquisition, Viacom offered to the holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the "Viacom Exchange Offer") a portion of their shares of Viacom Common Stock for shares of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following the completion of the Viacom Exchange Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Viacom Exchange Offer automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of $100 per share (the "Stated Value"). The Exchangeable Preferred Stock was exchangeable, at the option of the holder commencing after the fifth anniversary of the date of issuance, for shares of TCI Group Series A Stock at an exchange rate of 5.447 shares of TCI Group Series A Stock for each share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is subject to redemption, at the option of Cable Sub, after the fifth anniversary of the date of issuance, initially at a redemption price of $102.50 per share and thereafter at prices declining ratably annually to $100 per share on and after the eighth anniversary of the date of issuance, plus accrued and unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is also subject to mandatory redemption on the tenth anniversary of the date of issuance at a price equal to the Stated Value per share plus accrued and unpaid dividends. Amounts payable by Cable Sub in satisfaction of its optional or mandatory redemption obligations with respect to the Exchangeable Preferred Stock could have been made in cash or, at the election of Cable Sub, in shares of TCI Group Series A Stock, or in any combination of the foregoing. Upon completion of the Viacom Acquisition, Cable Sub was renamed TCI Pacific Communications, Inc. ("TCI Pacific"). See note 2. The Viacom Acquisition has been accounted for by the purchase method. Accordingly, the results of operations of TCI Pacific have been consolidated with those of the Company since the date of acquisition, and the Company recorded TCI Pacific's assets and liabilities at fair value. (11) Spin-Off of TCI Satellite Entertainment, Inc. Through December 4, 1996, the Company had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar L.P."), which the Company accounted for by the equity method. Primestar L.P. had provided programming and marketing support to each of its cable partners who provided satellite television service to their customers. On December 4, 1996, the Company distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar L.P., the Company's business of distributing Primestar L.P. programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with the Company's. (continued) 71 72 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Summarized financial information of Satellite as of December 4, 1996 and from January 1, 1996 through December 4, 1996 is as follows (amounts in millions): Financial Position Cash, receivables and other assets $ 104 Investment in Primestar L. P 32 Property and equipment, net 1,111 ------- $ 1,247 ======= Accounts payable and accrued liabilities $ 60 Due to Primestar L. P 458 Due to TCI 324 Equity 405 ------- $ 1,247 ======= Operations Revenue $ 377 Operating expenses (373) Depreciation (166) ------- Loss before income tax benefit (162) Income tax benefit 53 -------- Net loss $ (109) =======
(12) Debt Debt is summarized as follows:
Weighted average December 31, interest rate at ---------------------- December 31, 1998 1998 1997 ----------------- -------- -------- amounts in millions Debt of subsidiaries: Notes payable (a) 7.7% $ 9,412 9,017 Bank credit facilities (b) 6.1% 3,773 5,233 Commercial paper 5.6% 109 533 Convertible notes (c) 9.5% 40 40 Other debt, at varying rates 718 427 -------- -------- $ 14,052 15,250 ======== ========
(a) During the year ended December 31, 1998, the Company purchased certain notes payable which had an aggregate principal balance of $416 million and fixed interest rates ranging from 8.67% to 10.25% (the "1998 Purchases"). In connection with the 1998 Purchases, the Company recognized a loss on early extinguishment of debt of $60 million. Such loss related to prepayment penalties amounting to $52 million and the retirement of deferred loan costs. (continued) 72 73 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During the year ended December 31, 1997, the Company purchased certain notes payable which had an aggregate principal balance of $409 million and fixed interest rates ranging from 8.75% to 10.13% (the "1997 Purchases"). In connection with the 1997 Purchases, the Company recognized a loss on early extinguishment of debt of $39 million. Such loss related to prepayment penalties amounting to $33 million and the retirement of deferred loan costs. During the year ended December 31, 1996, the Company purchased certain notes payable which had an aggregate principal balance of $904 million and fixed interest rates ranging from 7.88% to 10.44% (the "1996 Purchases"). In connection with the 1996 Purchases, the Company recognized a loss on early extinguishment of debt of $62 million. Such loss related to prepayment penalties amounting to $60 million and the retirement of deferred loan costs. (b) At December 31, 1998, subsidiaries of the Company had approximately $3.7 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. As security for borrowings under one of the Company's credit facilities, the Company has pledged a portion of its TW Exchange Stock with an estimated market value at December 31, 1998 of $2.7 billion based upon the market value of the marketable common stock into which it is convertible. Additionally, as security for borrowings under another of its credit facilities, the Company has pledged its holdings in Discovery Communications, Inc., QVC and the FKW Preferred Stock. At December 31, 1998, the carrying value of such holdings aggregated $617 million. Certain of TCI's subsidiaries are required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, certain of TCI's subsidiaries pay fees ranging to 1/2% per annum on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. During the year ended December 31, 1996, certain subsidiaries of the Company terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion and refinanced certain other bank credit facilities. In connection with such termination and refinancings, the Company recognized a loss on early extinguishment of debt of $9 million related to the retirement of deferred loan costs. (continued) 73 74 (c) The convertible notes, which are stated net of unamortized discount of $166 million at December 31, 1998 and 1997, mature on December 11, 2021. Such notes are held by a director of the Company, as well as several members of his family. In connection with the AT&T Merger, such director resigned. 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. During the year ended December 31, 1997, certain of these notes were converted, pursuant to their existing terms, into 2,533,116 shares of TCI Group Series A Stock, 1,448,341 shares of Liberty Group Series A Stock and 256,484 shares of Series A Common Stock, $1.00 par value per share, of Satellite ("Satellite Series A Common Stock") and 63,432 shares of TCI Ventures Group Series A Stock. No such conversions occurred during 1998. At December 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, 19,416,889 shares of Liberty Group Series A Stock, 20,711,364 shares of TCI Ventures Group Series A Stock and 3,451,897 shares of Satellite Series A Common Stock. Pursuant to the terms of the Merger Agreement and a certain stock purchase agreement, dated as of July 9, 1986, among the Company and the holders of such convertible notes, the conversion features of the convertible notes were adjusted such that as of the March 9, 1999 consummation date of the AT&T Merger, such notes were convertible into 19,088,081 shares of AT&T Common Stock, 30,186,816 shares of AT&T Liberty Class A Tracking Stock and 3,451,897 shares of Satellite Series A Common Stock. The bank credit facilities and various other debt instruments of the Company's subsidiaries 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 the debt of the Company's subsidiaries is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. At December 31, 1998, the fair value of the Company's debt was $17,816 million (including $2,724 million attributable to the value of the common stock underlying the convertible notes) as compared to a carrying value of $14,052 million on such date. In order to achieve the desired balance between variable and fixed rate indebtedness, the Company may enter into Interest Rate Swaps pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") and receives variable interest rates and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates. During the years ended December 31, 1998, 1997 and 1996, the Company's net payments pursuant to the Fixed Rate Agreements were less than $1 million, $7 million and $14 million, respectively; and the Company's net receipts (payments) pursuant to the Variable Rate Agreements were $10 million, (less than $1 million) and $15 million, respectively. At December 31, 1998, all of the Company's Fixed Rate Agreements had expired. (continued) 74 75 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During the year ended December 31, 1996, the Company terminated certain Variable Rate Agreements with an aggregate notional amount of $700 million. The Company received $16 million upon such terminations. The Company will amortize such termination settlement over the remainder of the original terms of the terminated Variable Rate Agreements. Information concerning the Company's Variable Rate Agreements at December 31, 1998 is as follows (dollar amounts in millions):
Amount to be Expiration Interest rate Notional received upon date to be received amount termination (a) -------------- -------------- ----------- --------------- April 1999 7.4% $ 50 $ 1 September 1999 6.4% 350 3 February 2000 5.8%-6.6% 300 4 March 2000 5.8%-6.0% 675 7 September 2000 5.1% 75 -- March 2027 9.7% 300 36 December 2036 9.7% 200 12 ----------- ----------- $ 1,950 $ 63 =========== ===========
- ---------- (a) The estimated amount that the Company would receive to terminate the agreements at December 31, 1998, taking into consideration current interest rates and the current creditworthiness of the counterparties, represents the fair value of the Interest Rate Swaps. In addition to the Variable Rate Agreements, the Company entered into Interest Rate Swaps pursuant to which it pays a variable rate based on the London Interbank Offered Rate ("LIBOR") (5.5% at December 31, 1998) and receives a variable rate based on the Constant Maturity Treasury Index ("CMT") (4.9% at December 31, 1998) on a notional amount of $400 million through September 2000; and pays a variable rate based on LIBOR (5.4% at December 31, 1998) and receives a variable rate based on CMT (5.0% at December 31, 1998) on notional amounts of $95 million through February 2000. During the years ended December 31, 1998 and 1997, the Company's net payments (receipts) pursuant to such agreements were $2 million and (less than $1 million), respectively. At December 31, 1998, the Company would be required to pay an estimated $4 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, the Company does not anticipate material near-term losses in future earnings, fair values or cash flows resulting from derivative financial instruments as of December 31, 1998. (continued) 75 76 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Annual maturities of debt for each of the next five years are as follows (amounts in millions): 1999 $ 1,539* 2000 1,574 2001 1,029 2002 661 2003 2,298
* Includes $109 million of commercial paper. (13) Redeemable Preferred Stocks Convertible Preferred Stock, Series C. TCI issued 70,575 shares of a series of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series C," par value $.01 per share, as partial consideration for an acquisition by TCI ("Series C Preferred Stock"). All of the issued and outstanding shares of Series C Preferred Stock were retired on December 31, 1997, with the effect that such retired shares have been restored to the status of authorized and unissued shares of Series Preferred Stock, and may be reissued as shares of another series of Series Preferred Stock but may not be reissued as Series C Preferred Stock. Dividends paid on such shares aggregated $12 million and $9 million during 1997 and 1996, respectively. Series C-TCI Group Preferred Stock. On December 31, 1997, TCI issued 70,575 shares designated as Series C-TCI Group Preferred Stock as partial consideration for retired Series C Preferred Stock. See also Series C-Liberty Media Group Preferred Stock below. There were 43,575 shares of Series C-TCI Group Preferred Stock outstanding at December 31, 1998. No dividends on such shares were paid in 1998. In connection with the AT&T Merger, shares of Series C-TCI Group Preferred Stock were converted into shares of AT&T Common Stock. See note 2. Series C-Liberty Media Group Preferred Stock. On December 31, 1997, TCI issued 70,575 shares designated as Series C-Liberty Media Group Preferred Stock as remaining consideration for retired Series C Preferred Stock. There were 70,575 shares of Series C-Liberty Media Group Preferred Stock authorized and outstanding at December 31, 1998. No dividends on such shares were paid in 1998. In connection with the AT&T Merger, shares of Series C-Liberty Media Group Preferred Stock were converted into shares of AT&T Liberty Class A Tracking Stock. See note 2. Convertible Preferred Stock, Series D. The Company had designated and issued 1,000,000 shares of a series of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series D", par value $.01 per share. Outstanding shares during the years ended December 31, 1998, 1997 and 1996 accrued dividends at a rate of 5-1/2% per annum of the liquidation value ($300 per share). Dividends paid on such shares aggregated $10 million, $16 million and $17 million during 1998, 1997 and 1996, respectively. (continued) 76 77 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On February 20, 1998, the Company issued a Notice of Redemption which called for the redemption of all of its outstanding Convertible Preferred Stock, Series D for $304.0233 per share. Effective April 1, 1998, all of the outstanding shares of Convertible Preferred Stock, Series D were redeemed to the extent not previously converted into shares of TCI Group Series A Stock and Liberty Group Series A Stock. The shares of Convertible Preferred Stock, Series D, that were redeemed, as well as previously unissued shares of Convertible Preferred Stock, Series D, were retired, undesignated and restored to the status of authorized and unissued shares of Series Preferred Stock. Series F Preferred Stock. The Company is authorized to issue 500,000 shares of Series F Preferred Stock, par value $.01 per share. Prior to the March 9, 1999 consummation of the AT&T Merger and related transactions, subsidiaries of TCI held all the issued and outstanding shares (278,307 shares). See note 2. Series G Preferred Stock and Series H Preferred Stock. In January, 1996, TCI designated and issued 7,259,380 shares of a series of TCI Series Preferred Stock designated "Redeemable Convertible TCI Group Preferred Stock, Series G" and 7,259,380 shares of a series of TCI Series Preferred Stock designated "Redeemable Convertible Liberty Media Group Preferred Stock, Series H" as consideration for an acquisition. At December 31, 1998, there were 6,444,244 shares of Series G Preferred Stock and 6,564,794 shares of Series H Preferred Stock outstanding. The initial liquidation value for the Series G Preferred Stock and Series H Preferred Stock was $21.60 per share and $5.40 per share, respectively, subject in both cases, to increase in an amount equal to aggregate accrued but unpaid dividends, if any. Dividends began to accrue on the Series G and Series H Preferred Stock on the first anniversary of issuance of the Series G and Series H Preferred Stock, and were thereafter payable semi-annually commencing January 25, 1997, at a rate of 4% per annum on the liquidation value. Dividends paid on shares of Series G Preferred Stock aggregated $6 million and $3 million during 1998 and 1997, respectively. Dividends paid on shares of Series H Preferred Stock aggregated $1 million in each of 1998 and 1997. In connection with the AT&T Merger, shares of Series G and Series H Preferred Stock were converted into shares of AT&T Common Stock and AT&T Liberty Class A Tracking Stock, respectively. See note 2. (14) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC The Company, through certain subsidiary trusts, (the "Trusts"), had preferred securities outstanding at December 31, 1998 as follows:
Subsidiary Trust Interest Rate Face Amount ---------------- ------------- ----------- in millions TCI Communications Financing I 8.72% $ 500 TCI Communications Financing II 10.00% 500 TCI Communications Financing III 9.65% 300 TCI Communications Financing IV 9.72% 200 ---------- $ 1,500 ==========
(continued) 77 78 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Trusts exist for the exclusive purpose of issuing the Trust Preferred Securities and investing the proceeds thereof into Subordinated Deferrable Interest Notes (the "Subordinated Debt Securities") of TCIC. The Subordinated Debt Securities have interest rates equal to the interest rate of the corresponding Trust Preferred Securities and have maturity dates ranging from 30 to 49 years from the date of issuance. The Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the Subordinated Debt Securities, the Trust Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of the Trusts' obligations under the Trust Preferred Securities. 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 TCI Communications, Inc." Dividends accrued and paid on the Trust Preferred Securities aggregated $142 million, $132 million and $71 million for the years ended December 31, 1998, 1997 and 1996, respectively, and are included in minority interests in earnings of consolidated subsidiaries in the accompanying consolidated financial statements. (15) Stockholders' Equity Common Stock The Series A Stock each had one vote per share, and the Series B Stock each had ten votes per share. Each share of Series B Stock was convertible, at the option of the holder, into one share of Series A Stock of the applicable Group. See notes 1 and 2. The rights of holders of the TCI Group Stock, Liberty Media Group Stock and TCI Ventures Group Stock upon liquidation of TCI were based upon the ratio of the aggregate market capitalization, as defined, of each of the TCI Group Stock, Liberty Group Stock and TCI Ventures Group Stock to the aggregate market capitalization, as defined, of the TCI Group Stock, Liberty Group Stock, and TCI Ventures Group Stock. Stock Repurchases During the year ended December 31, 1998, pursuant to a stock repurchase program, 66,041 shares of TCI Group Series A Stock, 145,450 shares of TCI Ventures Group Series A Stock, 94,000 shares of TCI Ventures Group Series B Stock and 766,783 shares of Liberty Group Series A Stock were repurchased at an aggregate cost of approximately $31 million. During the year ended December 31, 1997, pursuant to a stock repurchase program approved by the Board, Liberty Media Group repurchased 916,500 shares of Liberty Group Series A Stock in open market transactions and 219,937 shares of Liberty Group Series A Stock from the spouse of an officer and director of TCI at an aggregate cost of approximately $18 million. Such shares were canceled and returned to an authorized but unissued status. (continued) 78 79 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In addition, pursuant to the stock repurchase program, 4,000,000 shares of TCI Group Series A Stock, 330,902 shares of TCI Group Series B Stock and 338,196 shares of TCI Ventures Group Series B Stock were repurchased at an aggregate cost of $77 million during the year ended December 31, 1997. Such shares are reflected as treasury stock in the accompanying consolidated financial statements. Effective July 31, 1997, TCI merged Kearns-Tribune into a wholly-owned TCI subsidiary attributed to TCI Group. TCI exchanged 47.2 million shares of TCI Group Series A Stock for shares of Kearns-Tribune which held 17.9 million shares of TCI Group Stock and 10.1 million shares of Liberty Group Stock. Such shares are reflected as common stock held by subsidiaries in the accompanying consolidated financial statements. See note 2. During the third quarter of 1997, TCI commenced a tender offer (the "Liberty Tender Offer") to purchase up to an aggregate of 22.5 million shares of Liberty Group Stock at a price of $20 per share through October 3, 1997. During the fourth quarter of 1997, TCI repurchased 21.7 million shares of Liberty Group Series A Stock and 82,074 shares of Liberty Group Series B Stock at an aggregate cost of approximately $435 million pursuant to the Liberty Tender Offer. Such purchases are reflected as treasury stock in the accompanying consolidated financial statements. See note 2. Employee Benefit Plans The Company had several employee stock purchase plans to provide employees an opportunity to create a retirement fund including ownership interests in TCI. The primary employee stock purchase plan provided for employees to contribute up to 10% of their compensation to a trust for investment in several diversified investment choices, including investment in Company common stock. The Company, by annual resolution of the Board, generally contributed up to 100% of the amount contributed by employees. Such TCI contribution was invested in TCI Group Stock, Liberty Group Stock and TCI Ventures Group Stock. Certain of the Company's subsidiaries had their own employee benefit plans. Contributions to all plans aggregated $43 million, $38 million and $35 million for 1998, 1997 and 1996, respectively. Subsequent to the AT&T Merger, the significant terms of the employee stock purchase plans will remain substantially unchanged and contributions on behalf of employees will continue to be made in stock. Preferred Stock Series Preferred Stock. The TCI Series Preferred Stock is issuable, from time to time, in one or more series, with such designations, preferences and relative participating, option or other special rights, qualifications, limitations or restrictions thereof, as shall be stated and expressed in a resolution or resolutions providing for the issue of such series adopted by the Board. The Company is authorized to issue 50,000,000 shares of Series Preferred Stock. All shares of any one series of the TCI Series Preferred Stock are required to be alike for every particular and all shares are required to rank equally and be identical in all respects, except insofar as they may vary with respect to matters which the Board is expressly authorized by the TCI Charter to determine in the resolution or resolutions proving for the issue of any series of the TCI Series Preferred Stock. (continued) 79 80 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Class A Preferred Stock. The Company is authorized to issue 700,000 shares of Class A Preferred Stock, par value $.01 per share. No such shares were issued and outstanding as of December 31, 1998. Class B Preferred Stock. The Company is authorized to issue 1,675,096 shares of Class B Preferred Stock and 1,552,490 of such shares are issued and outstanding, net of shares held by a TCI subsidiary as of December 31, 1998. Following the AT&T Merger, the rights of holders of Class B Preferred Stock will remain unchanged, except that rights applicable to TCI Group Series A Stock will continue to apply to AT&T Common Stock. See note 2. Dividends accrue cumulatively (but without compounding) at an annual rate of 6% of the stated liquidation value of $100 per share (the "Stated Liquidation Value"), whether or not such dividends are declared or funds are legally available for payment of dividends. Accrued dividends will be payable annually on March 1 of each year (or the next succeeding business day if March 1 does not fall on a business day), and, in the sole discretion of the Board, may be declared and paid in cash, in shares of TCI Group Series A Stock or in any combination of the foregoing. Accrued dividends not paid as provided above on any dividend payment date will accumulate and such accumulated unpaid dividends may be declared and paid in cash, shares of TCI Group Series A Stock or any combination thereof at any time (subject to the rights of any senior stock and, if applicable, to the concurrent satisfaction of any dividend arrearages on any class or series of TCI preferred stock ranking on a parity with the Class B Preferred Stock with respect to dividend rights) with reference to any regular dividend payment date, to holders of record of Class B Preferred Stock as of a special record date fixed by the Board (which date may not be more than 45 days nor less than 10 days prior to the date fixed for the payment of such accumulated unpaid dividends). Dividends paid on shares of Class B Preferred Stock aggregated $10 million in each of 1998, 1997 and 1996. The Class B Preferred Stock ranks junior to the Series F Preferred Stock with respect to the declaration and payment of dividends. If all or any portion of a dividend payment is to be paid through the issuance and delivery of shares of TCI Group Series A Stock, the number of such shares to be issued and delivered will be determined by dividing the amount of the dividend to be paid in shares of TCI Group Series A Stock by the Average Market Price of the TCI Group Series A Stock. For this purpose, "Average Market Price" means the average of the daily last reported sale prices (or, if no sale price is reported on any day, the average of the high and low bid prices on such day) of a share of TCI Group Series A Stock for the period of 20 consecutive trading days ending on the tenth trading day prior to the regular record date or special record date, as the case may be, for the applicable dividend payment. In the event of any liquidation, dissolution or winding up of TCI, the holders of Class B Preferred Stock will be entitled, after payment of preferential amounts on any class or series of stock ranking prior to the Class B Preferred Stock with respect to liquidating distributions, to receive from the assets of TCI available for distribution to stockholders an amount in cash or property or a combination thereof, per share, equal to the Stated Liquidation Value thereof, plus all accumulated and accrued but unpaid dividends thereon to and including the redemption date. TCI does not have any mandatory obligation to redeem the Class B Preferred Stock as of any fixed date, at the option of the holders or otherwise. (continued) 80 81 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Subject to the prior preferences and other rights of any class or series of TCI preferred stock, the Class B Preferred Stock will be exchangeable at the option of TCI in whole but not in part at any time for junior subordinated debt securities of TCI ("Junior Exchange Notes"). The Junior Exchange Notes will be issued pursuant to an indenture (the "Indenture"), to be executed by TCI and a qualified trustee to be chosen by TCI. If TCI exercises its optional exchange right, each holder of outstanding shares of Class B Preferred Stock will be entitled to receive in exchange therefor newly issued Junior Exchange Notes of a series authorized and established for the purpose of such exchange, the aggregate principal amount of which will be equal to the aggregate Stated Liquidation Value of the shares of Class B Preferred Stock so exchanged by such holder, plus all accumulated and accrued but unpaid dividends thereon to and including the exchange date. The Junior Exchange Notes will be issuable only in principal amounts of $100 or any integral multiple thereof and a cash adjustment will be paid to the holder for any excess principal that would otherwise be issuable. The Junior Exchange Notes will mature on the fifteenth anniversary of the date of issuance and will be subject to earlier redemption at the option of TCI, in whole or in part, for a redemption price equal to the principal amount thereof plus accrued but unpaid interest. Interest will accrue, and be payable annually, on the principal amount of the Junior Exchange Notes at a rate per annum to be determined prior to issuance by adding a spread of 215 basis points to the "Fifteen Year Treasury Rate" (as defined in the Indenture). Interest will accrue on overdue principal at the same rate, but will not accrue on overdue interest. The Junior Exchange Notes will represent unsecured general obligations of TCI and will be subordinated in right of payment to all "Senior Debt" (as defined in the Indenture). Accordingly, holders of Class B Preferred Stock who receive Junior Exchange Notes in exchange therefor may have difficulty selling such Junior Exchange Notes. (continued) 81 82 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For so long as any dividends are in arrears on the Class B Preferred Stock or any class or series of TCI preferred stock ranking pari passu with the Class B Preferred Stock which is entitled to payment of cumulative dividends prior to the redemption, exchange, purchase or other acquisition of the Class B Preferred Stock, and until all dividends accrued up to the immediately preceding dividend payment date on the Class B Preferred Stock and such parity stock shall have been paid or declared and set apart so as to be available for payment in full thereof and for no other purpose, neither TCI nor any subsidiary thereof may redeem, exchange, purchase or otherwise acquire any shares of Class B Preferred Stock, any such parity stock or any class or series of its capital stock ranking junior to the Class B Preferred Stock (including the TCI common stock), or set aside any money or assets for such purpose, unless all of the outstanding shares of Class B Preferred Stock and such parity stock are redeemed. If TCI fails to redeem or exchange shares of Class B Preferred Stock on a date fixed for redemption or exchange, and until such shares are redeemed or exchanged in full, TCI may not redeem or exchange any parity stock or junior stock, declare or pay any dividend on or make any distribution with respect to any junior stock or set aside money or assets for such purpose and neither TCI nor any subsidiary thereof may purchase or otherwise acquire any Class B Preferred Stock, parity stock or junior stock or set aside money or assets for any such purpose. The failure of TCI to pay any dividends on any class or series of parity stock or to redeem or exchange on any date fixed for redemption or exchange any shares of Class B Preferred Stock shall not prevent TCI from (i) paying any dividends on junior stock solely in shares of junior stock or the redemption purchase or other acquisition of junior stock solely in exchange for (together with cash adjustment for fractional shares, if any) or (but only in the case of a failure to pay dividends on any parity stock) through the application of the proceeds from the sale of, shares of junior stock; or (ii) the payment of dividends on any parity stock solely in shares of parity stock and/or junior stock or the redemption, exchange, purchase or other acquisition of Class B Preferred Stock or parity stock solely in exchange for (together with a cash adjustment for fractional shares, if any), or (but only in the case of failure to pay dividends on any parity stock) through the application of the proceeds from the sale of, parity stock and/or junior stock. The Class B Preferred Stock will vote in any general election of directors, will have one vote per share for such purpose and will vote as a single class with the TCI common stock and any class or series of TCI preferred stock entitled to vote in any general election of directors. The Class B Preferred Stock will have no other voting rights except as required by the Delaware General Corporation Law. Redeemable Convertible Preferred Stock, Series E. The Company is authorized to issue 400,000 shares of Redeemable Convertible Preferred Stock, Series E, par value $.01 per share. No such shares were issued and outstanding as of December 31, 1998. (continued) 82 83 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Stock-Based Compensation As of December 31, 1998, the Company and its subsidiaries had several stock-based compensation plans for certain employees, officers, directors and other persons. Such plans are described below. Tele-Communications, Inc. Stock Incentive Plans. In 1994, the Company adopted the Tele-Communications, Inc. 1994 Stock Incentive Plan (the "1994 Plan"). The Plan provided for awards to be made in respect of a maximum of 16 million shares of TCI Class A common stock. Awards may be made as grants of stock options, stock appreciation rights, restricted shares, stock units or any combination thereof. In 1995, the Company adopted the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (the "1995 Plan"). In addition, the Company has established the Tele-Communications, Inc. 1996 Stock Incentive Plan (the "1996 Plan" and the Tele-Communications, Inc. 1998 Incentive Plan (the "1998 Plan") and together with the 1994 Plan and the 1995 Plan, the "Incentive Plans"). The 1996 Plan provides (i) for stock-based awards to be made in respect of a maximum of 16 million shares of TCI Group Series A Stock and a maximum of 6 million shares of Liberty Group Series A Stock (subject to certain adjustments described below) and (ii) for cash awards in amounts determined by the TCI compensation committee. The 1998 Plan provides (i) for stock-based awards to be made in respect of a maximum of 10 million shares of any combination of TCI Group Series A Stock or TCI Group Series B Stock, a maximum of 7.5 million shares of any combination of Liberty Group Series A Stock or Liberty Group Series B Stock, and a maximum of 7.5 million shares of any combination of TCI Ventures Group Series A Stock or TCI Ventures Group Series B Stock; and (ii) for cash awards in amounts determined by the TCI compensation committee. Awards may be made as grants of stock options ("Options"), stock appreciation rights ("SARs"), restricted shares ("Restricted Shares"), stock units ("Stock Units"), performance awards, or any combination thereof (collectively, "Awards"). Shares in respect of which Awards are made may be either authorized but unissued shares of Series A Stock or issued shares reacquired by the Company, including shares purchased in the open market. Shares of Series A Stock that are subject to Awards that expire, terminate or are annulled for any reason without having been exercised (or, with respect to tandem SARs deemed exercised, by virtue of the exercise of a related Option), or are Restricted Shares or Stock Units that are forfeited prior to becoming vested, or are subject to Awards of SAR's that are exercised for cash, will return to the pool of such shares available for grant under the 1996 Plan or 1998 Plan. (continued) 83 84 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In connection with the Liberty Distribution, each holder of an outstanding option or SAR received an additional option or stock appreciation right, as applicable, covering a number of shares of Liberty Group Series A Stock equal to 56% (as adjusted) of the number of shares of Class A common stock theretofore subject to the outstanding option or stock appreciation right, and the outstanding option or stock appreciation right would continue in effect as an option or stock appreciation right covering the same number of shares of TCI Group Series A Stock (as redesignated) that were theretofore subject to the option or stock appreciation right. The aggregate pre-adjustment strike price of the outstanding options or stock appreciation rights was allocated between the outstanding options or stock appreciation rights and the newly issued options or stock appreciation rights in a ratio determined by the Compensation Committee of TCI. The following descriptions of stock options and/or stock appreciation rights have been adjusted to reflect such change. As a result of the TCI Ventures Exchange, the Compensation Committee of TCI elected to adjust the options in tandem with SARs to purchase TCI Group Series A Stock to reflect the expected shift of attributable value from TCI Group to the newly created TCI Ventures Group. The options in tandem with SARs to purchase TCI Group Series A Stock outstanding immediately prior to the TCI Ventures Exchange were canceled and reissued as two separately exercisable options in tandem with SARS: (i) with 70% of the options in tandem with SARs allocated to an option in tandem with SARs to purchase TCI Group Series A Stock, and (ii) with 30% of the options in tandem with SARs allocated to an option in tandem with SARs to purchase TCI Ventures Group Series A Stock. The terms of these adjusted options in tandem with SARs, including the exercise price and the date of grant, are in all material respects the same as the terms of the original options in tandem with SARs. The following descriptions of stock options and/or stock appreciation rights have been adjusted to reflect such change. Awards granted subsequent to the Liberty Distribution may include Awards relating to TCI Group Series A Stock or Liberty Group Series A Stock and Awards granted subsequent to the TCI Ventures Exchange may include Awards relating to TCI Group Series A Stock, Liberty Group Series A Stock or TCI Ventures Group Series A Stock in such amounts and types as the Compensation Committee of TCI determines in accordance with the terms of the Incentive Plans. (continued) 84 85 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Awards of TCI Group Series A Stock made under the Incentive Plans prior to the Satellite Spin-off were adjusted in connection with the Satellite Spin-off such that immediately prior to the Satellite Spin-off, each option was divided into two separately exercisable options: (i) an option to purchase Satellite Series A Common Stock (an "Add-on Satellite Option"), exercisable for the number of shares of Satellite Series A Common Stock that would have been issued in the Satellite Spin-off in respect of the shares of TCI Group Series A Stock subject to the applicable TCI Option, if such TCI option had been exercised in full immediately prior to the record date of the Satellite Spin-off, and containing substantially equivalent terms as the existing TCI Option, and (ii) an option to purchase TCI Group Series A Stock (an "Adjusted TCI Option"), exercisable for the same number of shares of TCI Group Series A Stock as the corresponding TCI Option had been. The aggregate exercise price of each TCI Option was allocated between the Add-on Satellite Option and the Adjusted TCI Option into which it is divided, and all other terms of the Add-on Satellite Option and Adjusted TCI Option will in all material respects be the same as such TCI Option. Similar adjustments were made to the outstanding TCI SARs, resulting in the holders thereof holding Adjusted TCI SARs and Add-on Satellite SARs instead of TCI SARs, effective immediately prior to the Satellite Spin-off. As a result of the foregoing, certain persons who remain TCI employees or non-employee directors after the Satellite Spin-off and certain persons who were TCI employees prior to the Satellite Spin-off but became Satellite employees after the Satellite Spin-off hold both Adjusted TCI Options and separate Add-on Satellite Options and/or hold both Adjusted TCI SARs and separate Add-on Satellite SARs. The obligations with respect to the Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs held by TCI employees and non-employee directors following the Satellite Spin-off are obligations solely of TCI. The obligations with respect to the Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs held by persons who are Satellite employees at the time of the Satellite Spin-off and following the Satellite Spin-off are no longer TCI employees are obligations solely of Satellite. Prior to the Satellite Spin-off, TCI and Satellite entered into an agreement to sell to each other from time to time at the then current market price shares of TCI Group Series A Stock and Satellite Series A common stock, respectively, as necessary to satisfy their respective obligations under such securities. (continued) 85 86 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table presents the number and weighted average exercise price ("WAEP") of certain options in tandem with SARs to purchase TCI Group Series A Stock, Liberty Group Series A Stock and TCI Ventures Group Series A Stock pursuant to the Incentive Plans.
TCI Liberty Ventures TCI Group Group Group Series A Series A Series A Stock WAEP Stock WAEP Stock WAEP --------- -------- --------- ------- -------- -------- amounts in thousands, except for WAEP Outstanding at January 1, 1996 17,702 $ 15.08 11,568 $ 9.39 -- Exercised (196) 12.70 (132) 7.93 -- Canceled (132) 15.35 (42) 8.45 -- ------- ------- ------ Outstanding at December 31, 1996 17,374 12.97 11,394 9.41 -- Adjustment for TCI Ventures Exchange (7,946) 14.22 -- 15,899 $ 7.11 Granted 12,395 15.27 3,514 15.89 300 7.84 Exercised (5,618) 11.95 (2,502) 8.42 (1,035) 6.76 Canceled (54) 14.27 (42) 10.25 (2) 7.10 ------- ------- ------- Outstanding at December 31, 1997 16,151 14.47 12,364 11.45 15,162 7.15 Granted 1,175 33.51 8,245 43.23 20 16.50 Exercised (3,091) 13.50 (1,807) 8.13 (2,940) 6.69 Canceled (512) 15.47 (11) 9.78 (521) 6.92 ------- ------- ------- Outstanding at December 31, 1998 13,723 16.28 18,791 25.71 11,721 7.29 ======= ======= ======= Exercisable at December 31, 1998 5,093 13.99 5,522 10.64 5,025 6.91 ======= ======= ======= Vesting Period 5 years 5 years 5 years ======= ======= =======
(continued) 86 87 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On December 13, 1995, pursuant to the 1994 Plan, the Company awarded 330,000 restricted shares of TCI Group Series A Stock and 67,500 restricted shares of Liberty Group Series A Stock to certain officers and other key employees of the Company. Based on the terms at the date of grant, such restricted shares vest as to 50% in December 1999 and as to the remaining 50% in December 2000. Such restricted shares had a fair value of $20.625 and $11.67, respectively, on the date of grant. At December 31, 1998, 123,886 restricted shares of TCI Group Series A Stock (after adjustment for TCI Ventures Exchange), 102,228 restricted shares of TCI Ventures Group Series A Stock (after adjustment for TCI Ventures Exchange and a stock dividend) and 45,000 restricted shares of Liberty Group Series A Stock (after adjustment for stock dividends) were unvested. On July 23, 1997, pursuant to the 1996 Plan, the Company awarded 400,000 restricted shares of TCI Group Series A Stock to an officer and a director of the Company. Such restricted shares vest as to 50% in July 2001 and as to the remaining 50% in July 2002. Such restricted shares had a fair value of $15.81 on the date of grant. At December 31, 1998, 338,154 restricted shares of TCI Group Series A Stock (after adjustment for TCI Ventures Exchange) and 123,692 restricted shares of TCI Ventures Group Series A Stock (after adjustment for TCI Ventures Exchange and a stock dividend) were unvested. On December 16, 1997, the Company granted options in tandem with stock appreciation rights to acquire 2,800,000 shares of TCI Ventures Group Series B Stock to an officer and director of the Company. The options in tandem with stock appreciation rights have an exercise price of $10.37 and vest ratably over five years with such vesting period beginning December 16, 1997, first became exercisable on December 16, 1998 and expire on December 16, 2007. On June 23, 1998, pursuant to the 1998 Plan, the Company awarded 1,350,000 restricted shares of TCI Group Series A Stock to certain officers of the Company. Such restricted shares vest as to 50% in June 2002 and as to the remaining 50% in June 2003. Such restricted shares had a fair value of $38.69 on the date of grant. On September 3, 1998, pursuant to the 1998 Plan, the Company awarded 1,509,880 restricted shares of TCI Group Series A Stock to certain officers and other key employees of the Company. Such restricted shares vest as to 50% in September 2002 and as to the remaining 50% in September 2003. Such restricted shares had a fair value of $33.75 on the date of grant. On December 10, 1998, pursuant to the 1998 Plan, the Company awarded 287,500 restricted shares of TCI Group Series A Stock to an officer and a director of the Company. Such restricted shares vest as to 50% in December 2002 and as to the remaining 50% in December 2003. Such restricted shares had a fair value of $48.375 on the date of grant. SARs with respect to 150,000 shares of TCI Group Series A Stock, 569,553 shares of Liberty Group Series A Stock and 577,526 shares of TCI Ventures Group Series A Stock were outstanding at December 31, 1998. These rights have an adjusted strike price of $.52, $.36 and $.26 per share, respectively. All such SARs are 100% vested at December 31, 1998 and expire on March 28, 2001. The Company has the option of paying the holder in stock or cash. During the year ended December 31, 1998, SARs with respect to 358,350 shares of TCI Group Series A Stock were exercised. (continued) 87 88 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Tele-Communications, Inc. Director Stock Option Plan. On August 3, 1995, stockholders of the Company approved the Director Stock Option Plan (the "DSOP") including the grant, effective as of November 16, 1994, to each person that as of that date was a member of the Board and was not an employee of the Company or any of its subsidiaries, of options to purchase 50,000 shares of TCI Class A common stock. Pursuant to the DSOP, options to purchase 300,000 shares of TCI Class A common stock were granted at an exercise price of $22.00 per share. Such options had a weighted average fair value of $16.49 on the date of grant. Options issued pursuant to the DSOP vest and become exercisable over a five-year period from the date of grant and expire 10 years from the date of grant. During the year ended December 31, 1995, options to purchase 50,000 shares of TCI Group Series A Stock and options to purchase 28,125 shares of Liberty Group Series A Stock were canceled. During the year ended December 31, 1996, options to purchase 150,000 shares of TCI Group Series A Stock and options to purchase 84,375 shares of Liberty Group Series A Stock with a WAEP of $14.75 and $11.52, respectively, were issued pursuant to the DSOP. Such options had a weighted average fair value of $9.83 and $7.67, respectively, on the date of grant. At December 31, 1998, 330,000 options with respect to TCI Group Stock granted pursuant to the DSOP were outstanding, 204,000 of which were exercisable. Such options had a range of exercise prices of $12.25 to $16.99, with a WAEP of $14.08, and a weighted average remaining contractual life of 6.76 years. At December 31, 1998, 225,000 options with respect to Liberty Group Stock granted pursuant to the DSOP were outstanding, 146,250 of which were exercisable. Such options had a range of exercise prices of $9.78 to $11.67, with a WAEP of $10.18, and a weighted average remaining contractual life of 6.63 years. Tele-Communications International, Inc. Stock Incentive Plan. In 1995, TINTA adopted the Tele-Communications International, Inc. 1995 Stock Incentive Plan (the "TINTA 1995 Plan"). The TINTA 1995 Plan provides for Awards to be made in respect of a maximum of 3,000,000 shares of TINTA Series A common stock ("TINTA Series A Stock") (subject to certain anti-dilution adjustments). Shares of TINTA Series A Stock that are subject to Awards that expire, terminate or are annulled for any reason without having been exercised (or deemed exercised, by virtue of the exercise of a related stock appreciation right), or are forfeited prior to becoming vested will return to the pool of such shares available for grant under the TINTA 1995 Plan. On December 13, 1995, stock options in tandem with SARs to purchase 1,352,000 shares of TINTA Series A Stock were granted pursuant to the TINTA 1995 Plan. Such options vest evenly over five years, first became exercisable August 4, 1996 and expire on August 4, 2005. During 1997, TINTA granted stock options in tandem with SARs to purchase 1,130,000 shares of TINTA Series A Stock. Such options vest evenly over five years, first become exercisable one year after date of grant, and expire ten years after date of grant. (continued) 88 89 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the TINTA Merger on November 19, 1998, each stock option and SAR to purchase TINTA Series A Stock was converted into a stock option or SAR to purchase Liberty Group Series A Stock determined by multiplying the number of TINTA stock options or SARs by 0.58 at an exercise price per share of such stock option or SAR divided by 0.58. The following descriptions of stock options and/or SARs have been adjusted to reflect such change. The following table presents the number and WAEP of certain options in tandem with SARs to purchase TINTA Series A Stock and Liberty Group Series A Stock pursuant to the TINTA 1995 Plan (amounts in thousands, except for WAEP).
Liberty TINTA Group Series A Series A Stock WAEP Stock WAEP -------- --------- -------- ------ amounts in thousands, except for WAEP Outstanding at January 1, 1996 and 1997 1,352 $ 16.00 -- -- Granted 1,130 14.69 -- -- ------ -------- Outstanding at December 31, 1997 2,482 15.40 -- -- Adjustment for TINTA Merger (1,982) 15.31 1,150 $26.40 Exercised (500) 15.75 (1) 25.21 ------ -------- Outstanding at December 31, 1998 -- -- 1,149 26.40 ====== ======== Exercisable at December 31, 1998 -- -- 448 26.97 ====== ======== Vesting Period -- 5 years ====== ========
On December 13, 1995, pursuant to the TINTA 1995 Plan, 40,000 restricted shares of TINTA Series A Stock were awarded to certain officers and directors of TINTA. Such restricted shares vest as to 50% in December 1999 and as to the remaining 50% in December 2000. Such restricted shares had a fair value of $25.375 on the date of grant. At December 31, 1998, 23,200 restricted shares of Liberty Group Series A Stock (after adjustment for TINTA Merger) were unvested. On July 23, 1997, pursuant to the TINTA 1995 Plan, 150,000 restricted shares of TINTA Series A Stock were awarded to a director of TINTA. Such restricted shares vest as to 50% in July 2001 and as to the remaining 50% in July 2002. Such restricted shares had a fair value of $14.625 on the date of grant. At December 31, 1998, 87,000 restricted shares of Liberty Group Series A Stock (after adjustment for TINTA Merger) were unvested. (continued) 89 90 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Tele-Communications International, Inc. Nonemployee Director Stock Option Plan. On April 11, 1996, TINTA adopted the Tele-Communications International, Inc. 1996 Nonemployee Director Stock Option Plan (the "TINTA Director Plan"). The TINTA Director Plan provides for grants to be made to nonemployee directors of TINTA of options to purchase a maximum of 1,000,000 shares of TINTA Series A Stock (subject to certain anti-dilution adjustments). Shares that are subject to such options that expire or terminate for any reason without having been exercised will return to the pool of shares underlying options available to grant under the TINTA Director Plan. Pursuant to the TINTA Director Plan, options to purchase 200,000 shares of TINTA Series A Stock were granted in April 1996 at an exercise price of $16.00 per share. Such options had a weighted average fair value of $14.01 on the date of grant. Options issued pursuant to the TINTA Director Plan vest and become exercisable over a five-year period from the date of grant and expire 10 years from the date of grant. At December 31, 1998, 116,000 options with respect to Liberty Group Series A Stock (after adjustment for TINTA Merger) granted pursuant to the TINTA Director Plan were outstanding, 46,400 of which were exercisable. Such options had an exercise price of $27.58 and a weighted average remaining contractual life of 8 years. Founders Options. Effective December 1, 1996, certain officers and key employees of the Company were each granted options (the "Telephony Option") representing 1.0% of the Company's common equity in TCI Telephony Services, Inc., a consolidated subsidiary of the Company, ("Telephony Services"). The aggregate exercise price for each such option was equal to 1.0% of (i) the Company's cumulative investment in Telephony Services as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise, less (ii) the sum of (x) $500 million and (y) the amount of the tax benefits generated by Telephony Services (up to $500 million) as and when used by TCI. Such options had a fair value of $1,347,700 per option on the date of grant. Each such option was replaced during 1997 with a separate SAR with respect to each of Telephony Services' two direct wholly-owned subsidiaries, TCI Teleport Holdings, Inc. ("TCI Teleport") and TCI Wireless Holdings, Inc. ("TCI Wireless"). Each of the SAR with respect to TCI Teleport (the "CLEC SAR") and the SAR with respect to TCI Wireless (the "Wireless SAR") entitles the holder to the excess of the value of the shares subject to the SAR (based on the percentage that such shares represent of the total value of the common equity of TCI Teleport or TCI Wireless, as applicable, as of the exercise date) over the "strike price" (i.e., 1% of TCI's cumulative investment in TCI Teleport or TCI Wireless, as applicable, and their respective subsidiaries at December 1, 1996, plus a 6% per annum interest factor from the date when each such investment was made to the date of exercise). The material terms of the CLEC SAR and the Wireless SAR are the same as those of the Telephony Option, except that the strike price for each such SAR is an allocated portion of the exercise price under the Telephony Option based on TCI's cumulative investment in TCI Teleport and TCI Wireless. All such SARs will vest and become exercisable in five equal annual installments, with the first annual installment vesting on February 1, 1997, and will expire on February 1, 2006. Any exercise by one of such executive officers of all or part of the CLEC SAR would need to be accompanied by the exercise by such executive officer of a pro rata portion of Wireline Option described below. (continued) 90 91 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Each such officer and key employee was also granted a similar option (the "Wireline Option") representing 1.0% of the Company's common equity in TCI Wireline, Inc., another consolidated subsidiary of the Company, ("Wireline"). The aggregate exercise price for each such Wireline Option is equal to 1.0% of the Company's cumulative investment in Wireline as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise. All of such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. Such options had a fair value of $4,400 per option on the date of grant. Such options must be exercised on a pro rata basis with the CLEC SARs discussed above. On February 19, 1999 the Company repurchased from the holders of the Wireline Options all shares of the common stock of Wireline acquired by such holders pursuant to the Wireline Options. At such time the Company canceled the Wireline Options and deleted the requirement in the CLEC SARs that holders thereof exercise their Wireline Option in order to exercise their CLEC SAR. (continued) 91 92 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Effective December 1, 1996, certain officers and key employees of the Company were each granted options (the "Internet Option") representing 1% of the Company's common equity in TCI Internet Services, Inc. ("TCI Internet"), a consolidated subsidiary of the Company. The aggregate exercise price for each Internet Option was equal to 1.0% of the Company's cumulative investment in TCI Internet as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise price. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. Such options had a fair value of $346,800 on the date of grant. In anticipation of the transfer to TCI.NET, Inc. ("TCI.NET") of the Internet services distribution business conducted through subsidiaries of TCI Internet, each such option was replaced during 1997 with an option to acquire a number of shares equal to 1.0% of TCI's common equity in TCI.NET at December 1, 1996 and a SAR with respect to a number of shares equal to 1.0% of TCI's common equity in TCI Internet at December 1, 1996. The material terms of the option to acquire shares of TCI.NET are the same as those of the Internet Option, except that the exercise price, which will be payable to TCI. NET, is an allocated portion of the exercise price under the Internet Option based on TCI's cumulative investment in the Internet services distribution business relative to the balance of its cumulative investment in TCI Internet at December 1, 1996. The SAR entitles the holder to the excess of the value of the shares subject to the SAR (based on the percentage that such shares represent of the total value of the common equity of TCI Internet as of the exercise date) over 1% of TCI's cumulative investment in TCI Internet at December 1, 1996, plus a 6% per annum interest factor from the date when each such investment was made to the date of exercise. Any exercise by the holder of all or part of the TCI.NET option must be accompanied by the exercise by such holder of a pro rata portion of the TCI Internet SAR, and vice versa. On February 19, 1999 the Company repurchased from the holders of the TCI.NET options all shares of the common stock of TCI.NET acquired by such holders pursuant to the TCI.NET option. At such time the Company canceled the TCI.NET options and deleted the requirement in the TCI Internet SARs that holders thereof exercise their TCI.NET option in order to exercise their TCI Internet SAR. In connection with the AT&T Merger, the TCI Ventures Group's equity interest in @Home, which constituted substantially all of the value of the assets of TCI Internet, was transferred to the TCI Group. As a result, on March 8, 1999 each Internet SAR was amended to provide, among other things, that following the AT&T Merger the amounts payable upon exercise of the Internet SARs would not be determined by reference to the fair market value of TCI Internet, but would instead be based upon the fair market value (determined as of the date of exercise of an Internet SAR) of the investment securities held by TCI Internet prior to the AT&T Merger, subject to certain adjustments. Such amendment also provided that the cash settlement value of the Internet SAR would be paid, at the grantor's election, in cash, AT&T stock or other stock owned by the grantor. In connection with such amendment, TCI or Liberty Media Corporation ("Liberty") (depending upon which entity employed the holder of the Internet SAR) was substituted for TCI Internet as the obligor under the Internet SARs. (continued) 92 93 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 1998, 20 Wireless SARs were outstanding, all of which were exercisable. Such SARs had an exercise price of $1,040,968 and an average remaining contractual life of 8 years. At December 31, 1998, 12 TCI Internet SARs were outstanding, none of which were exercisable. Such SARs and options had an exercise price of $37,023 and an average remaining contractual life of 8 years. At December 31, 1998, all of the CLEC SARs had been exercised. United Video Satellite Group, Inc. Equity Incentive Plan and United Video Satellite Group, Inc. Stock Option Plan for Non-Employee Directors. UVSG sponsors the United Video Satellite Group, Inc. Equity Incentive Plan under which 8.0 million shares of UVSG's Class A Common Stock are authorized to be issued in connection with the exercise of awards of stock options, stock appreciation rights and restricted stock granted under the plan. UVSG's Equity Incentive Plan provides that the price at which each share of stock covered by an option may be acquired shall in no event be less than 100% of the fair market value of the stock on the date the option is granted, except in certain limited circumstances. Additionally, UVSG sponsors the United Video Satellite Group, Inc. Stock Option Plan for Non-Employee Directors under which 500,000 shares of UVSG's Class A Common Stock are authorized to be issued in connection with the exercise of stock options granted thereunder. At December 31, 1998, 6.3 million shares of UVSG's Class A Common Stock were reserved for issuance under the stock option plans. The options granted under the stock option plans expire ten years from the date of grant. Options outstanding are as follows (amounts in thousands, except for WAEP):
UVSG Class A Common Stock (1) WAEP (1) -------------- -------- At January 1, 1996 $ 4,121 4.25 Granted 1,276 11.11 Exercised (815) 4.04 Canceled (805) 9.21 ------- At December 31, 1996 3,777 5.56 Granted 916 8.54 Exercised (2,089) 4.04 Canceled (252) 5.88 ------- At December 31, 1997 2,352 8.03 Granted 709 16.61 Exercised (254) 6.84 Canceled (36) 9.41 ------- Exercisable at December 31, 1998 2,771 10.32 =======
- ---------- (1) Adjusted for two-for-one stock split. Exercise prices for options outstanding as of December 31, 1998 ranged from $4 to $17. The weighted-average remaining contractual life of such options is 7.8 years. (continued) 93 94 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On March 1, 1999, the Company's voting interest in UVSG was reduced to 49% and the Company ceased to include UVSG in its consolidated financial results and began to account for UVSG using the equity method of accounting. See note 10. At Home Corporation Stock Option Plans. @Home adopted certain stock option plans (the "@Home Plans") during 1996, 1997 and 1998. The @Home Plans provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards and stock bonuses to employees, directors and consultants of @Home. Options under the @Home Plans generally vest at the rate of 25% after one year and ratably on a monthly basis for three years thereafter. Options outstanding are as follows (amounts in thousands, except for WAEP):
@Home Series A Common Stock WAEP --------------- ------ At January 1, 1996 -- $ -- Granted 5,296 .06 Exercised (4,875) .06 Canceled (198) .05 ------- At December 31, 1996 223 .06 Granted 5,158 6.30 Exercised (2,170) .25 Canceled (153) 3.78 ------- At December 31, 1997 3,058 10.26 Granted 7,648 40.73 Exercised (425) 7.01 Canceled (268) 18.83 ------- At December 31, 1998 10,013 33.44 ======= Exercisable at December 31, 1998 1,616 6.69 =======
Exercise prices for options outstanding as of December 31, 1998 ranged from $.05 to $71.50. The weighted-average remaining contractual life of such options is 8.31 to 9.97 years. TCI Music, Inc. Stock Incentive Plan. During 1997 and 1998, TCI Music, Inc., a subsidiary of the Company, ("TCI Music") granted stock options with tandem SARs to employees under the TCI Music, Inc. 1997 Stock Incentive Plan (the "TCI Music Stock Plan") which is authorized to issue up to 4,000,000 shares. Options granted under the TCI Music Stock Plan expire ten years from the date of grant. In addition TCI Music granted stock options with tandem SARs to the board of directors and employees in connection with certain mergers. Options issued under the TCI Music Stock Plan and in connection with certain mergers generally vest annually in 20% cumulative increments. On December 21, 1998, TCI Music re-priced the stock options with tandem SARs pursuant to the TCI Music Stock Plan at $4.00 for all grants to executive officers and employees of TCI Music and its subsidiaries. (continued) 94 95 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table presents the number and WAEP of options in tandem with SARs to purchase TCI Music Series A Common Stock, after giving effect to the re-pricing at $4.00 for certain options and tandem SARs (amounts in thousands, except for WAEP):
TCI Music Series A Common Stock WAEP ------------ ---- At January 1, 1997 -- -- Granted 3,609 5.75 ------ At December 31, 1997 3,609 5.75 Granted 1,771 4.00 Exercised (21) 4.00 Canceled (311) 4.00 ------ At December 31, 1998 5,048 5.25 ====== Exercisable at December 31, 1998 1,373 5.84 ======
Exercise prices for options outstanding as of December 31, 1998 ranged from $4.00 to $6.25. The weighted average remaining contractual life of such options is 8.7 years. The weighted average fair value of options granted during 1998, after giving effect to the re-pricing at $4.00 for certain options and tandem SARs, and 1997 was $3.51 and $3.31, respectively. The estimated fair values of the Options noted above are based on the Black-Scholes model and are stated in current annualized dollars on a present value basis. The key assumptions used in the model for purposes of these calculations generally include the following: (a) a discount rate equal to the 10-year Treasury rate on the date of grant; (b) a 35% volatility factor, (c) the 10-year option term; (d) the closing price of the respective common stock on the date of grant; and (e) an expected dividend rate of zero. (continued) 95 96 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Estimated compensation relating to restricted stock awards, options with tandem SARs and SARs has been recorded through December 31, 1998 pursuant to APB Opinion No. 25. Such estimate is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised or the restricted stock awards are vested. Compensation recognized for options with tandem SARs and SARs for the years ended December 31, 1998, 1997 and 1996 was $858 million, $485 million and $(14 million), respectively. Compensation recognized for restricted stock awards for the years ended December 31, 1998, 1997 and 1996 was $8 million, $3 million and $1 million, respectively. Had the Company accounted for its stock based compensation pursuant to the fair value based accounting method in SFAS 123, the Company's net earnings (loss) and net earnings (loss) per share would have changed to the pro forma amounts indicated below (amounts in millions, except per share amounts):
1998 1997 1996 ---- ---- ---- Pro forma net earnings (loss) attributable to common stockholders $ 1,902 (608) 256 Pro forma basic net earnings (loss) attributable to common stockholders per common share TCI Group Series A and Series B $ (.46) (.86) (1.20) Liberty Media Group Series A and Series B $ .43 .34 2.82 TCI Ventures Group Series A and Series B $ 4.71 (.47) -- Pro forma diluted net earnings (loss) attributable to common stockholders per common and potential common share TCI Group Series A and Series B $ (.49) (.86) (1.20) Liberty Media Group Series A and Series B $ .39 .31 2.58 TCI Ventures Group Series A and Series B $ 4.41 (.47) --
(continued) 96 97 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Treasury Stock and Common Stock Held by Subsidiaries, at Cost
December 31, 1998 December 31, 1997 --------------------------- ------------------------- Number of Number of shares Cost basis shares Cost basis ------------ ------------ ---------- ------------ (dollar amounts in millions) Treasury stock is summarized as follows: TCI Group Series A Stock 11,362,365 $ 182 11,296,324 $ 180 TCI Group Series B Stock 330,902 7 30,876,766 518 Liberty Group Series A Stock 25,561,455 505 25,082,172 489 Liberty Group Series B Stock 82,074 2 82,074 2 TCI Ventures Group Series A Stock 61,450 1 -- -- TCI Ventures Group Series B Stock 432,196 5 338,196 4 Common stock held by subsidiaries is summarized as follows: TCI Group Series A Stock 125,728,816 466 125,645,656 464 TCI Group Series B Stock 9,154,134 161 9,112,500 160 Liberty Group Series A Stock 6,654,367 113 6,654,367 113 Liberty Group Series B Stock 3,417,187 61 3,417,187 61 ------------ ------------ $ 1,503 $ 1,991 ============ ============
In conjunction with the AT&T Merger, such shares held in treasury and such shares held by subsidiaries were canceled. See note 2. (continued) 97 98 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements General During the fourth quarter of 1997, the Company entered into a total return equity swap facility (the "Equity Swap Facility"). Pursuant to the Equity Swap Facility, the Company would have the right to direct the counterparty (the "Counterparty") to use the Equity Swap Facility to purchase shares ("Equity Swap Shares") of TCI Group Series A Stock and TCI Ventures Group Series A Stock with an aggregate purchase price of up to $300 million. The Company would have the right, but not the obligation, to purchase Equity Swap Shares through the September 30, 2000 termination date of the Equity Swap Facility. During such period, the Company would settle periodically any increase or decrease in the market value of the Equity Swap Shares. If the market value of the Equity Swap Shares should exceed the Counterparty's cost, Equity Swap Shares with a fair value equal to the difference between the market value and cost would be segregated from the other Equity Swap Shares. If the market value of Equity Swap Shares should be less than the Counterparty's cost, the Company, at its option, would settle such difference with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or, subject to certain conditions, with cash or letters of credit. In addition, the Company would be required to periodically pay the Counterparty a fee equal to a LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares. Due to the Company's ability to issue shares to settle periodic price fluctuations and fees under the Equity Swap Facility, the Company records all amounts received or paid under this arrangement as increases or decreases, respectively, to equity. As of December 31, 1998, the Equity Swap Facility had acquired 4,935,780 shares of TCI Group Series A Stock and 1,171,800 shares of TCI Ventures Group Series A Stock at an aggregate cost that was approximately $135 million less than the fair value of such Equity Swap Shares at December 31, 1998. From February 10, 1999 to March 5, 1999, the Company terminated all transactions under the Equity Swap Facility and the related swap agreement. In connection with the termination of such transactions the Company received an aggregate cash payment of $170 million. At December 31, 1998, there were 99,890,031 shares of TCI Group Series A Stock, 55,828,238 shares of Liberty Group Series A Stock, 33,009,606 shares of TCI Ventures Group Series A Stock and 2,800,000 shares of TCI Ventures Group Series B Stock reserved for issuance under exercise privileges related to options, convertible debt securities and convertible preferred stock. Also, one share of Series A Stock is reserved for each share of Series B Stock. Additionally, at December 31, 1998, subsidiaries of TCI owned an aggregate of 278,307 shares of Series F Preferred Stock. In connection with a restructuring, 123,896 shares of Series F Preferred Stock were converted into 185,428,946 shares of TCI Group Series A Stock and the remaining 154,411 shares of Series F Preferred Stock were canceled. See note 2. (continued) 98 99 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (16) Other Comprehensive Earnings Accumulated other comprehensive earnings included in the Company's consolidated balance sheets and consolidated statements of stockholders' equity reflect the aggregate of foreign currency translation adjustments and unrealized holding gains and losses on securities classified as available-for-sale. The change in the components of accumulated other comprehensive earnings, net of taxes, is summarized as follows:
Foreign Unrealized Accumulated currency gains other translation (losses) on comprehensive adjustments securities earnings --------------- -------------- ----------------- amounts in millions Balance at January 1, 1996 $ (9) 338 329 Other comprehensive earnings (loss) 35 (323) (288) ------------- -------------- ----------------- Balance at December 31, 1996 26 15 41 Other comprehensive earnings (loss) (22) 753 731 ------------- -------------- ----------------- Balance at December 31, 1997 4 768 772 Other comprehensive earnings 2 2,975 2,977 ------------- -------------- ----------------- Balance at December 31, 1998 $ 6 3,743 3,749 ============= ============== =================
(continued) 99 100 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The components of other comprehensive earnings are reflected in the Company's consolidated statements of operations and comprehensive earnings, net of taxes and reclassifications adjustments for gains realized in net earnings (loss). The following table summarizes the tax effects and reclassification adjustments related to each component of other comprehensive earnings.
Tax Before-tax (expense) Net-of-tax amount benefit amount ------------- -------------- --------------- amounts in millions Year ended December 31, 1998: Foreign currency translation adjustments $ 3 (1) 2 ------------- -------------- --------------- Unrealized gains on securities: Unrealized holding gains arising during period 4,889 (1,912) 2,977 Less: reclassification adjustment for gains realized in net earnings (4) 2 (2) ------------- -------------- --------------- Net unrealized gains 4,885 (1,910) 2,975 ------------- -------------- --------------- Other comprehensive earnings $ 4,888 (1,911) 2,977 ============= ============== =============== Year ended December 31, 1997: Foreign currency translation adjustments $ (34) 12 (22) ------------- -------------- --------------- Unrealized gains on securities: Unrealized holding gains arising during period 1,236 (483) 753 Less: reclassification adjustment for gains realized in net earnings -- -- -- ------------- -------------- --------------- Net unrealized gains 1,236 (483) 753 ------------- -------------- --------------- Other comprehensive earnings $ 1,202 (471) 731 ============= ============== =============== Year ended December 31, 1996: Foreign currency translation adjustments $ 54 (19) 35 ------------- -------------- --------------- Unrealized gains on securities: Unrealized holding gains arising during period 67 (26) 41 Less: reclassification adjustment for gains realized in net earnings (598) 234 (364) ------------- -------------- --------------- Net unrealized gains (531) 208 (323) ------------- -------------- --------------- Other comprehensive earnings $ (477) 189 (288) ============= ============== ===============
(continued) 100 101 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) Transactions with Officers and Directors On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group Series A Stock (which shares are entitled to one vote per share) to the Estate of Bob Magness (the "Magness Estate"), the late founder and former Chairman of the Board of TCI in exchange (the "Exchange") for an equal number of shares of TCI Group Series B Stock (which shares are entitled to ten votes per share) owned by the Magness Estate, (b) the Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock received in the Exchange, together with approximately 1.5 million shares of TCI Group Series A Stock that the Magness Estate previously owned (collectively, the "Option Shares"), to two investment banking firms (the "Investment Bankers") for approximately $530 million (the "Sale Price") and (c) TCI entered into an agreement with the Investment Bankers whereby TCI would have the option, but not the obligation, to purchase the Option Shares at any time on or before June 16, 1999 (the "Option Period"). The preceding transactions are referred to collectively as the "June 16 Stock Transaction". During the Option Period, the Company and the Investment Bankers would settle quarterly any increase or decrease in the market value of the Option Shares. If the market value of the Option Shares should exceed the Investment Bankers' cost, Option Shares with a fair value equal to the difference between the market value and cost would be segregated from the other Option Shares in an account at the Investment Bankers. If the market value of the Option Shares should be less than the Investment Bankers' cost, the Company, at its option, would settle such difference with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or, subject to certain conditions, with cash or letters of credit. In addition, the Company would be required to pay the Investment Bankers a quarterly fee equal to LIBOR plus 1% on the Sale Price, as adjusted for payments made by the Company pursuant to any quarterly settlement with the Investment Bankers. Due to the Company's ability to settle quarterly price fluctuations and fees with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock, the Company records all amounts received or paid under this arrangement as increases or decreases, respectively, to equity. During the fourth quarter of 1997, the Company repurchased 4 million shares of TCI Group Series A Stock from one of the Investment Bankers for an aggregate cash purchase price of $66 million. Additionally, as a result of the Exchange Offers and certain open market transactions that were completed to obtain the desired weighting of TCI Group Series A Stock and TCI Ventures Group Series A Stock, the Investment Bankers disposed of 4,210,308 shares of TCI Group Series A Stock and acquired 23,407,118 shares of TCI Ventures Group Series A Stock during the last half of 1997. As a result of the foregoing transactions and certain transactions related to the January 5, 1998 settlement of litigation involving the Magness Estate, as described below, the Option Shares were comprised of 6,201,042 shares of TCI Group Series A Stock and 11,740,610 shares of TCI Ventures Group Series A Stock at December 31, 1998. At December 31, 1998, the market value of the Option Shares exceeded the Investment Bankers' cost by $421 million. Pursuant to a certain letter agreement, dated June 16, 1997, between Dr. Malone, TCI's Chairman and Chief Executive Officer, and the Magness Estate, Dr. Malone agreed to waive certain rights of first refusal with respect to shares of TCI Group Series B Stock beneficially owned by the Magness Estate. Such rights of first refusal arise from a letter agreement, dated June 17, 1988, among Bob Magness, Kearns-Tribune Corporation and Dr. Malone, pursuant to which Dr. Malone was granted a right of first refusal to acquire any shares of TCI Group Series B Stock which the other parties proposed to sell. As a result of Dr. Malone's rights under such June 17, 1988 letter agreement, such waiver was necessary in order for the Magness Estate to consummate the Exchange and the Sale. (continued) 101 102 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In consideration for such waiver, TCI granted Dr. Malone the right (the "Malone Right") to acquire from time to time until June 30, 1999, from TCI up to 30,545,864 shares of the TCI Group Series B Stock acquired by TCI from the Magness Estate pursuant to the Exchange. Such acquisition may be made in exchange for either, or any combination of, shares of TCI Group Series A Stock owned by Dr. Malone (exchanged on a one for one basis), or cash in an amount equal to the average closing sale price of the TCI Group Series B Stock for the five trading days preceding the acquisition. In connection with certain legal proceedings relative to the probate of the Magness Estate, one or more of Gary Magness and Kim Magness, Bob Magness' sons, Sharon Magness, Bob Magness' surviving second wife and the original personal representatives of the Magness Estate advanced various claims, causes of action, demands, complaints and requests against one or more of the others. In addition, Kim Magness and Gary Magness, in a Complaint And Request To Void Sale Of TCI Stock, And For Damages And Surcharge, filed on October 29, 1997 (the "Voiding Action"), advanced various claims relating to the June 16 Stock Transaction against TCI, Dr. Malone and the original personal representatives of the Magness Estate. Among other matters, the Voiding Action challenged the June 16 Stock Transaction on various fiduciary bases and requested rescission of such transaction and damages. Pursuant to an agreement effective as of January 5, 1998, TCI, Gary Magness, Kim Magness, Sharon Magness, the Magness Estate, the Estate of Betsy Magness (the first wife of Bob Magness) and Dr. Malone agreed to settle their respective claims against each other relating to the Magness Estate and the June 16 Stock Transaction, in each case without any of those parties admitting any of the claims or allegations against that party (the "Magness Settlement"). In connection with the Magness Settlement, portions of the Exchange and Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A Stock and 11,666,506 shares of TCI Ventures Group Series A Stock were returned to TCI as authorized but unissued shares, (ii) the Magness Estate returned to the Investment Bankers the portion of the Sale Price attributable to such returned shares and (iii) the Magness Estate paid $11 million to TCI representing a reimbursement of the Exchange fees incurred by TCI from June 16, 1997 through February 9, 1998 with respect to such returned shares. TCI then issued to the Magness Estate 10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares of TCI Ventures Group Series B Stock. In addition, as part of the Magness Settlement, TCI issued 1,339,415 shares of TCI Group Series B Stock to the Estate of Betsy Magness in exchange for an equal number of shares of TCI Group Series A Stock and issued 1,531,834 shares of TCI Ventures Group Series B Stock for an equal number of shares of TCI Ventures Group Series A Stock. (continued) 102 103 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On February 9, 1998, in connection with the Magness Settlement, TCI entered into a call agreement (the "Malone Call Agreement") with Dr. Malone and Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the Malones granted to TCI the right to acquire any shares of TCI stock which are entitled to cast more than one vote per share (the "High-Voting Shares") owned by the Malones, which at December 31, 1998 consisted of an aggregate of approximately 69 million High-Voting Shares upon Dr. Malone's death or upon a contemplated sale of the High-Voting Shares (other than a minimal amount) to third persons. In either such event, TCI has the right to acquire the shares at a maximum price equal to the then relevant market price of shares of "low-voting" Series A Stock plus a ten percent premium. The Malones also agreed that if TCI were ever to be sold to another entity, then the maximum premium that the Malones would receive on their High-Voting Shares would be no greater than a ten percent premium over the price paid for the relevant shares of Series A Stock. TCI paid $150 million to the Malones in consideration of their entering into the Malone Call Agreement. Also on February 9, 1998, in connection with the Magness Settlement, certain members of the Magness family, individually and in certain cases, on behalf of the Estate of Betsy Magness and the Magness Estate (collectively, the "Magness Family") also entered into a call agreement with TCI (with substantially the same terms as the one entered into by the Malones, including a call on the shares owned by the Magness Family upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness Family's, which at December 31, 1998 consisted of an aggregate of approximately 55 million High-Voting Shares. The Magness Family was paid $124 million by TCI in consideration of their entering into the Magness Call Agreement. (continued) 103 104 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Additionally, on February 9, 1998, the Magness Family entered into a Shareholders' Agreement (the "Shareholders' Agreement") with the Malones and TCI under which (i) the Magness Family and the Malones agree to consult with each other in connection with matters to be brought to the vote of TCI's stockholders, subject to the proviso that if they cannot mutually agree on how to vote the shares, Dr. Malone has an irrevocable proxy to vote the High-Voting Shares owned by the Magness Family, (ii) the Magness Family may designate a nominee for the Board and Dr. Malone has agreed to vote his High-Voting Shares for such nominee and (iii) certain "tag along rights" have been created in favor of the Magness Family and certain "drag along rights" have been created in favor of the Malones. In addition, the Malone Right granted by TCI to Dr. Malone to acquire 30,545,864 shares of TCI Group Series B Stock was reduced to an option to acquire 14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms of the Shareholders' Agreement, the Magness Family has the right to participate in the reduced Malone Right on a proportionate basis with respect to 12,406,238 shares of the 14,511,570 shares subject to the Malone Right. On June 24, 1998, Dr. Malone delivered notice to TCI exercising his right to purchase (subject to the Magness Family proportionate right) up to 14,511,570 shares of TCI Group Series B Stock at a per share price of $35.5875 pursuant to the Malone Right. In addition, a representative of the Magness Family advised Dr. Malone that the Magness Family would participate in such purchase up to the Magness Family's proportionate right. On October 14, 1998, 8,718,770 shares of TCI Group Series B Stock were issued to Dr. Malone upon payment of cash consideration totaling $310 million. On October 16, 1998, 5,792,800 shares of TCI Group Series B Stock were issued to the Magness Family upon payment of cash consideration totaling $206 million. In connection with the acquisition of the TCI Group Series B Stock by Dr. Malone, TCI executed certain waivers to the Malone Call Agreement and TCI and the Magness Family executed a waiver to the Shareholders' Agreement to, among other things, permit (subject to certain limitations) the pledge of TCI Group Series B Stock owned by Dr. Malone as collateral to the lenders who provided the funds for his purchase of shares of TCI Group Series B Stock. In connection with the AT&T Merger, Liberty became entitled to exercise TCI's rights under each Call Agreement and the Shareholders' Agreement with respect to the AT&T Liberty Class B Tracking Stock acquired by the Malones and the Magness Family as a result of the AT&T Merger and the Malones and the Magness Family agreed that the Shareholders' Agreement would continue to apply to the AT&T Liberty Class B Tracking Stock. On February 1, 1999, the Company began to terminate the transactions under the agreements with the Investment Bankers described above, and as of March 5, 1999, such transactions were terminated. In connection with the termination of such transactions the Company received an aggregate cash payment of $509 million. After the Company's stockholders voted to approve the terms of the AT&T Merger, on February 17, 1999, the Board approved the payment by Liberty/Ventures Group of $1 million to each of two directors of the Company for their services on the Special Committee of the Company's Board in evaluating the AT&T Merger and the consideration to be received by the stockholders of the Company. (continued) 104 105 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Prior to the AT&T Merger, a limited liability company owned by Dr. Malone acquired, from certain subsidiaries of the Company, for $17 million working cattle ranches located in Wyoming. No gain or loss was recognized on such acquisition. The purchase price was paid by such limited liability company was in the form of a 12-month note in the amount of $17 million having an interest rate of 7%. Such note is payable at any time without penalty and is personally guaranteed by Dr. Malone. On April 30, 1998, TCI ICM VI, Inc., a subsidiary of the Company, acquired a 99.999% limited partnership interest in InterMedia Capital Management VI, L.P. ("ICM VI") from an individual who is an executive officer and a director of the Company, in exchange for (i) 153,183 shares of Liberty Group Series B Stock (the "Liberty Shares") valued at $5 million and (ii) a .495% limited partnership interest in InterMedia Capital Partners VI, L.P. ("ICP VI") having a capital account of $1 million (the "InterMedia VI Transaction"). Such individual acquired his partnership interest in ICM VI in July 1996 for $10,000. On the InterMedia VI Transaction closing date, the .001% general partnership interest in ICM VI was held by InterMedia Management, Inc. ("IMI"), a corporation all of the stock of which is owned by a former officer of the Company. The other partnership interests in ICP VI are held by TCI IP-VI, LLC, a wholly owned subsidiary of the Company (49.005% limited partnership interest), Blackstone Cable Acquisition Company, LLC or its affiliates (49.500% limited partnership interest), ICM VI (.999% limited partnership interest), and InterMedia Capital Management VI, LLC, an entity of which IMI is the sole member (.001% general partnership interest). On August 5, 1998, a then director of the Company paid $1.8 million to purchase, at fair value, the Company's interest in General Communication, Inc. On December 10, 1998, the Board approved the grant to a director of the Company of 250,000 restricted shares of TCI Group Series A Stock contingent upon the consummation of the AT&T Merger. In addition, Liberty paid such director $10 million immediately prior to the AT&T Merger for his services in negotiating the merger agreement with AT&T and completing the AT&T Merger. On September 25, 1997, certain subsidiaries of the Company entered into an Asset Contribution Agreement with, among others, Fisher Communications Associates, L.L.C. ("Fisher Communications"), a Colorado limited liability company, controlled by a then director of the Company. On January 15, 1998, pursuant to the agreement, the cable television assets of the applicable cable systems of the Company were contributed to Peak Cablevision in exchange for a 66.7% partnership interest in Peak Cablevision. Additionally, cable television assets of Fisher Communications were contributed in 1998 in exchange of a 33.3% interest in Peak Cablevision. In connection with the formation of Peak Cablevision, the Company contributed approximately 87,000 customers passing 136,500 homes and Fisher Communications contributed approximately 27,000 customers passing 42,100 homes. The Company contributed debt amounting to $93 million and Fisher Communications contributed debt amounting to $19 million. On July 23, 1997, Dr. Malone acquired from the Company an aggregate of 7,296,324 shares of TCI Group Series B Stock and 3,417,187 shares of Liberty Group Series B Stock, in exchange for a like number of shares of TCI Group Series A Stock and Liberty Group Series A Stock, respectively, held by such executive officer and director. (continued) 105 106 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On July 24, 1997, the Company repurchased 219,937 shares of Liberty Group Series A Stock from the spouse of Dr. Malone at an aggregate cost of approximately $4 million. On June 10, 1997 (the "IP Phase I Closing Date"), the Company issued 139,513 shares of TCI Group Series B Stock (the "IP I Shares") to the IP Series B Trust I ("Trust"). An executive officer who is also a director of the Company is the trustee of the Trust. The IP I Shares were issued in connection with a partial closing under two Partnership Interest Purchase Agreements both dated as of June 10, 1997 (the "IP-I and IP-III Purchase Agreements"), pursuant to which the Company acquired on the IP Phase I Closing Date (a) a 99.998% limited partnership interest in InterMedia Capital Management III, L.P., (b) a 75% limited partnership interest in InterMedia CM - LP, and (c) a 99.998% limited partnership interest in InterMedia Capital Management, L.P. in exchange for total consideration of the IP I Shares and cash and assumption of current liabilities in an aggregate amount of $6 million. As a result of such transactions the Company increased its direct and indirect ownership of the limited partnership interests of InterMedia Partners, a California limited partnership, from approximately 53.6% to 54.7% and obtained the right to receive an administrative fee from InterMedia Partners and the right to receive a 20% overriding interest on any distributions in excess of the partners' capital contributions. In light of such increased ownership interests and rights and the January 1, 1998 consummation of a transaction in which InterMedia Partners acquired substantially all of the equity interests held by partners other than TCI, the Company retroactively adopted the equity method of accounting for its investment in InterMedia Partners for all periods ended prior to January 1, 1998. On January 1, 1998, the Company began consolidating its investment in InterMedia Partners. InterMedia Partners, InterMedia IV and ICM IV are all managed by the same management group. See note 6. On August 5, 1997 (the "IP Phase II Closing Date"), the Company issued 2,405,942 shares of TCI Group Series B Stock (the "IP II Shares") to the IP Series B Trust II ("Trust II"). An executive officer who is also a director of the Company is the trustee of the Trust II. The IP II Shares were issued in connection with the closing under the Partnership Interest Purchase Agreement dated as of August 5, 1997, and a partial and final closing under the IP-I and IP-III Purchase Agreements, pursuant to which the Company acquired on the IP Phase II Closing Date a 99.997% limited partnership interest in ICM IV and an additional .001% limited partnership interest in InterMedia Capital Management, L.P. in exchange for total consideration of the IP II Shares and $4.8 million in cash and TCI's assumption of liabilities in an aggregate amount of $18 million. See note 6. In connection with the three Partnership Interest Purchase Agreements, a director of the Company received a consulting fee in the amount of $400,000 in cash and 31,030 shares of TCI Group Series B Stock and the son of a director of the Company received an advisory fee in the amount of 36,364 shares of TCI Group Series B Stock. (continued) 106 107 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On January 27, 1999, the Company announced the planned acquisition by Charter Communications ("Charter") and TCI of certain cable television systems owned by InterMedia IV and InterMedia Partners. Charter will pay consideration consisting of cash and cable television systems for the systems its acquires from InterMedia IV. TCI will acquire certain other cable systems in a non-cash transaction. Upon the consummation of the transactions described above, TCI will own all of the partnership interests in InterMedia IV and InterMedia Partners. The transactions are subject to the negotiation and signing of definitive documents and various closing conditions. An individual who is a director and executive officer of TCI, currently has a .001% special limited partnership interest in ICM IV, which in turn has a 1.19% limited partnership interest in InterMedia IV. Such individual's special limited partnership interest in ICM IV was created in August 1997 in connection with TCI's acquisition of all of the partnership interests (other than a .002% general partnership interest and a .001% special limited partnership interest) in ICM IV. Such individual also indirectly owns a minimal interest in InterMedia Partners. In connection with the proposed transaction described above, it is anticipated that such individual, by virtue of his .001% special limited partnership interest in ICM IV, will participate in a profit sharing mechanism of InterMedia IV and receive cash consideration based on the valuation of InterMedia IV in the transaction described above. Although the amount of such consideration is uncertain at this time, its is expected that such consideration will be approximately $10 million. In the transaction described above, it is expected that such individual will receive less than $50,000 for his indirect interest in InterMedia Partners. In connection with the July 1997 Kearns-Tribune merger (see note 10), the former Chairman of the Board of Kearns-Tribune who was also a director of TCI (the "Former Kearns-Tribune Chairman") received (i) a cash payment of $1.6 million and (ii) an assignment of all of Kearns-Tribune right, title and interest in and to all patented mining claims owned by Kearns-Tribune, including but not limited to royalties, buildings, fixtures, surface rights, licenses and contracts related thereto, which patented mining claims are valued at $438,000. With respect to the assignment of the mining claims, the Former Kearns-Tribune Chairman agreed to assume all liabilities with respect thereto and agreed to indemnify Kearns-Tribune for any and all liabilities of Kearns-Tribune, if any, relating to the mining claims, including those arising from past operations. As of December 31, 1997, Kearns-Tribune had made the cash payment to the Former Kearns-Tribune Chairman. As of November 11, 1998, Kearns-Tribune completed the transfers of the mining claims to a corporation designated by the Former Kearns-Tribune Chairman. Also in connection with the Kearns-Tribune Merger, Silver King Group L.L.C. ("SKG"), which is owned and controlled by a director of TCI, entered into an agreement with Kearns-Tribune to purchase assets consisting primarily of land, oil and gas royalties and patents for $10.87 million. On November 30, 1997 such purchase was consummated and SKG paid Kearns-Tribune $9.5 million of the $10.87 million purchase price in cash and the remainder of such purchase price in the form of a non-interest bearing promissory note. As of March 10, 1999, $1,318,000 of such note remains outstanding. (continued) 107 108 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On March 4, 1997, Dr. Malone received an advance from a wholly-owned subsidiary of the Company in the amount of $6 million. On March 5, 1997, Dr. Malone received a second advance from a wholly-owned subsidiary of the Company in the amount of $6 million. The terms of the advances were memorialized by a promissory note. The interest rate on such loans is 1% over the one-month LIBOR rate compounded annually. Dr. Malone used the proceeds of the advance to purchase shares of Satellite Series A Common Stock. On February 9, 1998, Dr. Malone repaid the $12 million promissory note balance and accrued interest in the amount of $723,000. On the date of the Satellite Spin-off, the Company granted options to two of its then executive officers and a key employee of TCIC to acquire an aggregate of 1,660,190 shares of Satellite Series A Common Stock. The exercise price for each such option is equal to $8.86 per share. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. Effective January 31, 1996, a then director of the Company purchased one-third of the Company's interest in two limited partnerships and obtained two ten-year options to purchase the Company's remaining partnership interests. The purchase price for the one-third partnership interests was 37.209 shares of WestMarc Communications, Inc. ("WestMarc", a wholly-owned subsidiary of the Company) 12% Series C Cumulative Compounding Preferred Stock owned by such director, and the purchase price for the ten-year options was $100 for each option. All options were exercised during the first quarter of 1998. The aggregate exercise price of $3 million was satisfied with five non-interest bearing promissory notes that are due and payable to the Company in 2006. On July 1, 1996, pursuant to a Restricted Stock Award Agreement, a then executive officer of TCI was transferred all of TCI's right title and interest in and to 62 shares of the 12% Series C Cumulative Compounding Preferred Stock of WestMarc owned by TCI. Such preferred stock has a liquidation value of $1,999,500 and is subject to forfeiture by such former officer in the event of certain circumstances from the date of grant through December 13, 2005. (18) At Home Corporation On January 19, 1999, @Home entered into a merger agreement with Excite, Inc. ("Excite"), a global internet media company that offers consumers and advertisers comprehensive internet navigation services with extensive personalization capabilities. Under the terms of the merger agreement, @Home will issue approximately 55 million shares of its common stock for all of the outstanding common stock of Excite based on an exchange ratio of 1.041902 shares of @Home's common stock for each share of Excite's common stock. @Home may issue up to approximately 15 million additional shares of common stock in connection with the assumption of obligations under Excite's stock option and employer stock purchase plans and outstanding warrants. @Home will account for the transaction as a purchase. @Home's preliminary estimate of the total purchase consideration is approximately $7 billion, based on the fair value at the time of announcement of the merger, of common stock to be issued and stock option, stock purchase plan and warrant obligations assumed, plus estimated transaction costs. As a result of the proposed merger, TCI's economic interest in @Home would decrease from 38.8% to 26.5%, which economic interest would represent an approximate 58% voting interest. The merger is subject to several conditions, including approval by both companies' stockholders and the expiration of applicable waiting periods under certain antitrust laws. (continued) 108 109 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During 1998, @Home completed a public offering (the "@Home Offering") in which 2.9 million shares of @Home common stock were sold for net cash proceeds of approximately $125 million. In connection with the @Home Offering, TCI paid $37 million to purchase 800,000 shares of @Home common stock. Additionally, @Home issued 1.2 million shares of common stock in certain acquisitions, along with the assumption of options to purchase @Home's common stock. As a result of these stock issuances, TCI's economic interest in @Home decreased to 38.8%, which then represented an approximate 70.88% voting interest. As a result of the increase in @Home's equity in connection with such stock issuances, net of the dilution of TCI's ownership interest in @Home, TCI recognized a gain of $51 million. In April 1997, @Home issued 240,000 shares of convertible preferred stock, resulting in cash proceeds of $48 million, less issuance costs. On July 11, 1997, @Home completed its initial public offering (the "@Home IPO"), in which 10.4 million shares of @Home common stock were sold for net cash proceeds of approximately $100 million. As a result of the @Home IPO, TCI's economic interest in @Home decreased from 43% to 39%, which economic interest then represented an approximate 72% voting interest. In connection with the increase in @Home's equity, net of the dilution of TCI's ownership interest in @Home, TCI recognized a gain of $60 million during the third quarter of 1997. In 1997, @Home entered into an exclusive distribution agreement with CSC. In connection with such agreement, CSC was issued a warrant to purchase up to 7.9 million shares of @Home's Series A common stock at an exercise price of $0.50 per share (the "Warrant"), which was immediately exercisable. In 1997, @Home recorded the $173 million fair value of the Warrant as an intangible asset which is being amortized ratably over 56 months. The agreement with CSC also provided for the issuance of an additional warrant to CSC to purchase up to 3.1 million shares of @Home's Series A common stock at an exercise price of $0.50 per share under certain circumstances (the "Contingent Warrant"). During 1998, the Contingent Warrant became exercisable for 2.4 million shares of @Home's Series A common stock and @Home recorded the $74 million fair value of the exercisable portion of the Contingent Warrant as an intangible asset which is being amortized ratably over 51 months. During 1998, @Home issued performance-based warrants to certain cable operators to purchase up to 10.3 million shares of @Home Series A common stock at an exercise price of $10.50 per share. Warrants to purchase approximately 920,000 shares of @Home's Series A common stock became exercisable in 1998. @Home recorded non-cash charges to operations of $50 million for the fair value of these warrants. Such charges are included in cost of distribution agreements in the accompanying consolidated statements of operations and comprehensive earnings. In the event the performance milestones are met with respect to the remaining unexercisable performance-based warrants, @Home will record non-cash charges to operations in future periods based on the difference between the then fair market value of @Home's Series A common stock and the exercise price of $10.50 per share. (continued) 109 110 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (19) Income Taxes TCI files a consolidated federal income tax return with all of its 80%-or-more owned subsidiaries. Consolidated subsidiaries in which the Company owns less than 80% each file a separate income tax return. TCI and such subsidiaries calculate their respective tax liabilities on a separate return basis which are combined in the accompanying consolidated financial statements. Income tax benefit (expense) for the years ended December 31, 1998, 1997 and 1996 consists of:
Current Deferred Total ---------- ---------- ---------- amounts in millions Year ended December 31, 1998: Federal $ (115) (1,244) (1,359) State and local (19) (217) (236) ---------- ---------- ---------- $ (134) (1,461) (1,595) ========== ========== ========== Year ended December 31, 1997: Federal $ (10) 264 254 State and local (31) 11 (20) ---------- ---------- ---------- $ (41) 275 234 ========== ========== ========== Year ended December 31, 1996: Federal $ (25) (184) (209) State and local (13) (49) (62) ---------- ---------- ---------- $ (38) (233) (271) ========== ========== ==========
Income tax benefit (expense) differs from the amounts computed by applying the federal income tax rate of 35% as a result of the following:
Years ended December 31, ------------------------------------------ 1998 1997 1996 ---------- ---------- ---------- amounts in millions Computed "expected" tax benefit (expense) $ (1,238) 278 (197) Amortization not deductible for tax purposes (37) (27) (22) Minority interest in losses (earnings)of consolidated subsidiaries 32 27 (3) Gain on sale of subsidiary stock 31 21 -- State and local income taxes, net of federal income tax benefit (153) (5) (50) Increase in valuation allowance (43) (26) (24) Settlement of tax contingencies (99) -- -- Effect of deconsolidations on deferred taxes (34) -- -- Other (54) (34) 25 ---------- ---------- ---------- $ (1,595) 234 (271) ========== ========== ==========
(continued) 110 111 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
December 31, -------------------------- 1998 1997 ---------- ---------- amounts in millions Deferred tax assets: Net operating loss carryforwards $ 853 920 Less - valuation allowance (227) (183) Investment tax credit carryforwards 74 117 Less - valuation allowance (40) (41) Alternative minimum tax credit carryforwards 153 95 Gains deferred for financial statement purposes 210 -- Future deductible amount attributable to accrued stock appreciation rights and deferred compensation 387 132 Future deductible amounts principally due to non-deductible accruals 133 150 Other 20 5 ---------- ---------- Net deferred tax assets 1,563 1,195 ---------- ---------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 1,099 1,295 Franchise costs, principally due to differences in amortization 3,429 4,354 Investment in affiliates, due principally to undistributed earnings of affiliates 6,455 1,277 Deferred intercompany gains 151 181 Other 178 192 ---------- ---------- Total gross deferred tax liabilities 11,312 7,299 ---------- ---------- Net deferred tax liability $ 9,749 6,104 ========== ==========
The valuation allowance for deferred tax assets as of December 31, 1998 and 1997 was $267 million and $224 million, respectively. At December 31, 1998, the Company had net operating loss carryforwards for income tax purposes aggregating approximately $1,555 million of which, if not utilized to reduce taxable income in future periods, $3 million expires in 2001, $69 million in 2002, $82 million in 2003, $66 million in 2004, $332 million in 2005, $221 million in 2006, $267 million in 2010, $226 million in 2011, $210 million in 2012 and $79 million in 2013. Certain subsidiaries of the Company had additional net operating loss carryforwards for income tax purposes aggregating approximately $488 million and these net operating losses are subject to certain rules limiting their usage. In addition, certain subsidiaries of the Company file their own separate federal and state tax returns. These subsidiaries had additional net operating loss carryforwards aggregating approximately $94 million. These net operating losses are subject to certain rules limiting their usage. (continued) 111 112 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Upon consummation of the AT&T Merger, Liberty/Ventures Group became entitled to the benefit of net operating loss carryforwards available to the entities included in TCI's consolidated income tax return as of the date of the AT&T Merger. See note 2. At December 31, 1998, the Company had remaining available investment tax credits of approximately $63 million which, if not utilized to offset future federal income taxes payable, expire at various dates through 2005. Certain subsidiaries of the Company had additional investment tax credit carryforwards aggregating approximately $63 million and these investment tax credit carryforwards are subject to certain rules limiting their usage. During 1998, TCI settled examinations by the IRS of certain federal income tax returns for the years 1983 through 1992. Certain of the federal income tax returns of TCI and its subsidiaries which filed separate income tax returns are presently under examination by the Internal Revenue Service (the "IRS") for the years 1993 through 1995 (the "IRS Examinations"). In the opinion of management, any additional tax liability, not previously provided for, resulting from the IRS Examinations ultimately determined to be payable, should not have a material adverse effect on the consolidated financial position of the Company. (20) 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 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, the Company'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. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, the Company's rates for Regulated Services are subject to review by the FCC, if a complaint has been 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. (continued) 112 113 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at December 31, 1998, these agreements require minimum payments aggregating approximately $808 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable 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. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. The Company is a party to affiliation agreements with programming suppliers. Pursuant to certain of such agreements, the Company is committed to carry such suppliers' programming on its cable systems. Additionally, certain of such agreements provide for penalties and charges in the event the programming is not carried or not delivered to a contractually specified number of customers. The Company is committed to purchase billing services from an unaffiliated third party pursuant to three successive five year agreements. Pursuant to such arrangement, the Company is obligated at December 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. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $415 million at December 31, 1998. As described in note 10, the Company also has provided certain credit enhancements with respect to obligations of the 1998 Joint Ventures. The Company also has guaranteed the performance of certain affiliates and other parties with respect to such parties' contractual and other obligations. Although there can be no assurance, management of the Company 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 the Company. Subsequent to December 31, 1998, a subsidiary of the Company agreed to enter into a contribution agreement ("Contribution Agreement") with certain shareholders of Primestar, Inc. ("Primestar") pursuant to which the Company would, to the extent it is relieved of $166.3 million of contingent liabilities currently owed to certain creditors of Primestar and its subsidiaries, contribute $166.3 million to Primestar to the extent necessary to satisfy liabilities of Primestar. During the fourth quarter of 1998, the Company recorded a $90 million charge to provide for the estimated losses that are expected to result from the Contribution Agreement. The Company's obligation under the Contribution Agreement will expire in 2001. TINTA has guaranteed the obligation of an affiliate ("The Premium Movie Partnership") to pay fees for the license to exhibit certain films through 2000. Although the aggregate amount of The Premium Movie Partnership's license fee obligations is not currently estimable, TINTA believes that the aggregate payments pursuant to such obligations could be significant. If TINTA were to fail to fulfill its obligations under the guarantee, the beneficiaries have the right to demand an aggregate payment from TINTA of approximately $26 million. Although TINTA has not had to perform under such guarantee to date, TINTA cannot be certain that it will not be required to perform under such guarantee in the future. (continued) 113 114 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company leases business offices, has entered into converter lease agreements, pole rental agreements, transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $230 million, $212 million and $187 million in 1998, 1997 and 1996, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in millions):
Years ending December 31, ---------------------- 1999 $ 153 2000 130 2001 111 2002 97 2003 83 Thereafter 309
It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on other properties. Effective as of December 16, 1997, NDTC, a subsidiary of TCI, 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 ("GI") to purchase advanced digital set-top devices. The hardware and software incorporated into these devices are 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 set-top device. Through December 31, 1998, approximately 1.6 million set-top devices had been purchased pursuant to this commitment. GI agreed to provide NDTC and its Approved Purchasers the most favorable prices, terms and conditions made available by GI to any customer purchasing advanced digital set-top devices. In connection with NDTC's purchase commitment, GI agreed to grant warrants to purchase its common stock proportional to the number of devices ordered by each organization, which as of the effective date of the Digital Terminal Purchase Agreement, would have represented at least a 10% equity interest in GI (on a fully diluted basis). Such warrants vest as annual purchase commitments are met. On December 31, 1998, the Company vested in 4,928,000 warrants pursuant to such arrangements. Such warrants were recorded at their fair value of $64 million on such date resulting in a reduction in the basis of the set-top devices. Vested warrants are accounted for as available-for-sale securities in the Company's consolidated financial statements. NDTC has the right to terminate the Digital Terminal Purchase Agreement if, among other reasons, GI fails to meet a material milestone designated in the Digital Terminal Purchase Agreement with respect to the development, testing and delivery of advanced digital set-top devices. (continued) 114 115 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On July 17, 1998, the Company acquired 21.4 million shares of common stock of GI in exchange for (i) certain of the assets of NDTC's set-top authorization business, (ii) the license of certain related software to GI, (iii) a $50 million promissory note from the Company to GI, and (iv) a nine-year revenue guarantee from the Company in favor of GI. In connection therewith, NDTC also entered into a services agreement pursuant to which it will provide certain postcontract services to GI's set-top authorization business. The 21.4 million shares of GI common stock are, in addition to other transfer restrictions, restricted as to their sale by NDTC for a three year period, and represent approximately 13% of the outstanding common stock of GI at December 31, 1998. The Company recorded its investment in such shares at fair value which included a discount attributable to the above-described liquidity restriction. The Company carries its investment in such shares at the lower of cost or net realizable value. The $346 million excess of the fair value of GI common stock received over (i) the book value of certain assets transferred from NDTC to GI, and (ii) the $42 million present value of the promissory note due from the Company to GI, has been deferred by the Company in the accompanying consolidated financial statements. A portion of such excess equal to the $160 million present value of the annual amounts specified by the revenue guarantee will be amortized to revenue over nine years in proportion to such annual guaranteed amounts. The remaining $186 million excess will be amortized to revenue on a straight-line basis over the nine-year period that NDTC is required to perform postcontract services. Certain key employees of the Company and members of the Board hold restricted stock awards, options and options with tandem SARs to acquire shares of certain subsidiaries' common stock. Estimates of the compensation related to SARs have been recorded in the accompanying consolidated financial statements pursuant to APB Opinion No. 25. Such estimates are subject to future adjustment based upon the market value of the respective common stock and, ultimately, on the final market value when the rights are exercised. Estimates of compensation relating to phantom stock appreciation rights granted to employees of a subsidiary of TCI have been recorded in the accompanying consolidated financial statements, but are subject to future adjustment based upon a valuation model derived from such subsidiary's cash flow, working capital and debt. The Company has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company 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) 115 116 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (21) Year 2000 During 1998, the Company continued its enterprise-wide, comprehensive efforts to assess and remediate its computer systems and related software and equipment to ensure such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. The Company's year 2000 remediation efforts include an assessment of its most critical systems, such as customer service and billing systems, headends and other cable plant systems that support the Company's programming services, business support operations, and other equipment and facilities. The Company also continued its efforts to verify the year 2000 readiness of its significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess such partners and affiliates' year 2000 status. The Company has a year 2000 Program Management Office (the "PMO") to organize and manage its year 2000 remediation efforts. The PMO is responsible for overseeing, coordinating and reporting on the Company's year 2000 remediation efforts. During 1998, the Company continued its survey of significant third-party vendors and suppliers whose systems, services or products are important to the Company's operations (e.g., suppliers of addressable controllers and set-top devices, and the provider of the Company's billing services). The year 2000 readiness of such providers is critical to continued provision of the Company's cable service. In addition to the survey process described above, management of the Company has identified its most critical supplier/vendor relationships and has instituted a verification process to determine the vendor's year 2000 readiness. Such verification includes, as deemed necessary, reviewing vendors' test and other data and engaging in regular conferences with vendors' year 2000 teams. The Company is also requiring testing to validate the year 2000 compliance of certain critical products and services. Significant market value is associated with the Company's investments in certain public and private corporations, partnerships and other businesses. Accordingly, the Company is monitoring the public disclosure of such publicly-held business entities to determine their year 2000 readiness. In addition, the Company has surveyed and monitored the year 2000 status of certain privately-held business entities in which the Company has significant investments. Year 2000 expenses and capital expenditures incurred during the year ended December 31, 1998 were $11 million and $2 million, respectively. Management of the Company currently estimates the remaining costs to be not less than $113 million, bringing the total estimated cost associated with the Company's year 2000 remediation efforts to be not less than $126 million (including $33 million for replacement of noncompliant information technology systems). Also included in this estimate is $14 million in future payments to be made pursuant to unfulfilled executory contracts or commitments with vendors for year 2000 remediation services. (continued) 116 117 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. There can be no assurance that the Company's systems or the systems of other companies on which the Company relies will be converted in time or that any such failure to convert by the Company or other companies will not have a material adverse effect on its financial position, results of operations or cash flows. (22) Information about the Company's Operating Segments The Company has two reportable operating segments: domestic cable and communications services and domestic programming services. Domestic cable and communications services receives video, audio and data signals from various sources, and amplify and distribute the signals by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. Domestic programming services are produced, acquired, and distributed, through all available formats and media, branded entertainment and informational programming and software, including multimedia products, delivered in both analog and digital form. The Company's domestic cable and communications services business and assets were included in TCI Group, and the Company's domestic programming business and assets were included in Liberty Media Group. The Company's principal international businesses and assets and the Company's remaining non-cable and non-programming domestic businesses and assets were included in TCI Ventures Group. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on a measure of operating cash flow (operating income before depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger costs and stock compensation). 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 flow provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. The Company generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technology and marketing strategies. (continued) 117 118 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company utilizes the following financial information for purposes of making decisions about allocating resources to a segment and assessing a segment's performance:
Domestic cable Domestic & communications programming All services services other Total ------------------ ------------- ------- ----- amounts in millions Year ended December 31, 1998: Revenues from external customers including intersegment revenue $ 6,022 680 947 7,649 Intersegment revenue -- 232 66 298 Segment operating cash flow 2,469 100 143 2,712 Year ended December 31, 1997: Revenues from external customers including intersegment revenue $ 6,429 374 969 7,772 Intersegment revenue -- 173 29 202 Segment operating cash flow 2,766 55 154 2,975 Year ended December 31, 1996: Revenues from external customers including intersegment revenue $ 5,881 1,339 926 8,146 Intersegment revenue -- 107 17 124 Segment operating cash flow 2,016 164 96 2,276 As of December 31, 1998 Segment assets $ 21,476 10,181 10,630 42,287 Investment in equity method investees 1,686 1,979 1,708 5,373 Expenditures for segment assets 1,773 19 125 1,917 As of December 31, 1997 Segment assets $ 23,578 5,039 3,934 32,551 Investment in equity method investees 414 524 2,113 3,051 Expenditures for segment assets 538 4 167 709
(continued) 118 119 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A reconciliation of reportable segment amounts to the Company's consolidated balances is as follows:
Year ended December 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- amounts in millions Revenue Total revenue for reportable segments $ 6,702 6,803 7,220 Other revenue 947 969 926 Elimination of intersegment revenue (298) (202) (124) ----------- ----------- ----------- Total consolidated revenue $ 7,351 7,570 8,022 =========== =========== =========== Reconciliation of Operating Cash Flow to Earnings (Loss) Before Income Tax Total operating cash flow for reportable segments $ 2,569 2,821 2,180 Other operating cash flow 143 154 96 Other items excluded from operating cash flow: Year 2000 costs (11) -- -- AT&T merger costs (14) -- -- Stock compensation (866) (488) 13 Reserve for loss arising from contingent obligation (90) -- -- Cost of distribution agreements (50) -- -- Impairment of assets (5) (15) -- Restructuring charges -- -- (41) Depreciation (1,121) (1,077) (1,093) Amortization (614) (546) (523) Interest expense (1,061) (1,160) (1,096) Interest and dividend income 122 88 64 Share of losses of affiliates, net (1,384) (930) (450) Loss on early extinguishment of debt (60) (39) (71) Minority interest in earnings of consolidated subsidiaries, net (88) (154) (56) Gains on issuance of equity interests by subsidiaries 89 60 -- Gains on issuance of stock by equity investees 268 112 12 Gains on disposition of assets, net 5,760 401 1,593 Other, net (49) (22) (65) ----------- ----------- ----------- Earnings (loss) before income taxes $ 3,538 (795) 563 =========== =========== ===========
(continued) 119 120 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
As of December 31, ---------------------------- 1998 1997 ----------- ----------- amounts in millions Assets Total assets for reportable segments $ 31,657 28,617 Other segment assets 10,630 3,934 Consolidating and eliminating adjustments (436) (74) ----------- ----------- Consolidated total $ 41,851 32,477 =========== =========== Other Significant Items Equity method investments for reportable segments $ 3,665 938 Other equity method investments 1,708 2,113 Consolidating and eliminating adjustments (608) 12 ----------- ----------- Consolidated equity method investments $ 4,765 3,063 =========== =========== Expenditures for reportable segment assets $ 1,792 542 Other asset expenditures 125 167 ----------- ----------- Consolidated total asset expenditures $ 1,917 709 =========== ===========
Substantially all revenue and assets of TCI's reportable segments are attributed to or located in the United States. The Company does not have a single external customer which represents 10 percent or more of its consolidated revenues. (continued) 120 121 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (23) Quarterly Financial Information (Unaudited)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter --------- --------- --------- --------- amounts in millions, except per share data 1998: Revenue $ 1,872 1,813 1,825 1,841 ========= ========= ========= ========= Operating income (loss) $ 43 39 241 (382) ========= ========= ========= ========= Net earnings (loss) $ 346 (299) 1,340 556 ========= ========= ========= ========= Basic earnings (loss) attributable to common stockholders per common share: TCI Group Stock $ .44 (.28) .09 (.69) ========= ========= ========= ========= Liberty Group Stock $ .85 (.18) (.03) (.20) ========= ========= ========= ========= TCI Ventures Group Stock $ (.46) (.22) 3.07 2.35 ========= ========= ========= ========= Diluted earnings (loss) attributable to common stockholders per common and potential common share: TCI Group Stock $ .38 (.28) .08 (.70) ========= ========= ========= ========= Liberty Group Stock $ .78 (.18) (.03) (.20) ========= ========= ========= ========= TCI Ventures Group Stock $ (.46) (.22) 2.88 2.19 ========= ========= ========= ========= 1997: Revenue $ 1,821 1,882 1,934 1,933 ========= ========= ========= ========= Operating income $ 349 253 222 25 ========= ========= ========= ========= Net loss $ (58) (154) (22) (327) ========= ========= ========= ========= Basic earnings (loss) attributable to common stockholders per common share: TCI Group Stock $ (.12) (.25) (.34) (.11) ========= ========= ========= ========= Liberty Group Stock $ .04 .02 .44 (.17) ========= ========= ========= ========= TCI Ventures Group Stock $ -- -- .07 (.54) ========= ========= ========= ========= Diluted earnings (loss) attributable to common stockholders per common and potential common share: TCI Group Stock $ (.12) (.25) (.34) (.11) ========= ========= ========= ========= Liberty Group Stock $ .04 .02 .40 (.17) ========= ========= ========= ========= TCI Ventures Group Stock $ -- -- .07 (.54) ========= ========= ========= =========
121 EX-99.2 6 AT&T UNAUDITED PRO FORMA CONDENSED FINANCIALS 1 EXHIBIT 99.2 UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION The unaudited pro forma information set forth below for AT&T gives effect to the merger with TCI (the Merger) and certain merger-related asset transfers from New Liberty Media Group as if they had been completed on January 1, 1998 for income statement purposes and December 31, 1998 for balance sheet purposes, subject to the assumptions and adjustments in the accompanying notes to the pro forma financial information. AT&T has accounted for the New Liberty Media Group in the AT&T pro forma financial statements under the equity method of accounting. Following the Merger, New Liberty Media Group (Liberty) tracking stock will continue to represent an interest in the same assets and businesses as TCI Liberty Media Group and TCI Ventures Group (Liberty/Ventures Group) tracking stocks did prior to the Merger (after giving effect to the asset transfers). Pursuant to certain agreements, the New Liberty Media Group will be managed separately from the AT&T Common Stock Group. Under Delaware corporate law, the Liberty Board will have virtually all of the New Liberty Media Group's corporate governance powers and the Class B and C directors on the Liberty Board (who were designees of TCI prior to the merger) will constitute a majority of the Liberty Board. AT&T will initially designate one third of the directors and its rights as the sole shareholder of the common stock of the New Liberty Media Group following the Merger will be limited to actions which will require shareholder approval. Those actions are limited to (a) approval of the merger or sale of all or substantially all of the assets of Liberty Media Corporation (b) the liquidation of the Liberty Media Corporation (c) amendment of Liberty Media Corporation's certificate of incorporation, and (d) election of directors. Furthermore, AT&T will not have the ability to remove the then Class B and C directors (or their designees) or have an opportunity to elect a majority of the Liberty Board until 2006, at which time election by AT&T to the Liberty Board of persons other than those designated by the then Class B and C directors will constitute a "Triggering Event" which will result in all of the assets and businesses of the New Liberty Media Group being transferred into an entity controlled by persons other than AT&T unless the "Triggering Event" is waived by Liberty Management LLC. Therefore, management has concluded that AT&T will not have a controlling financial interest (as that term is used in Statement of Financial Accounting Standards No. 94) in the New Liberty Media Group following the Merger, and will account for its equity investment in the New Liberty Media Group under the equity method. In addition, as a tracking stock all of its earnings or losses are excluded from the earnings available to the holders of AT&T common stock. The AT&T common stock represents historical AT&T together with TCI Group, which consists primarily of TCI's domestic cable and telecommunications operations as well as TCI's interest in At Home Corporation (@Home). This pro forma financial information should be read in conjunction with the historical financial statements of AT&T and TCI. Historical AT&T financial statements can be found in the Company's annual report on Form 10-K filed March 19, 1999. 2 TCI historical financial statements can be found on Exhibit 99.1 of this document. The pro forma adjustments do not reflect any operating efficiencies and cost savings that may be achievable with respect to the combined companies. The pro forma adjustments do not include any adjustments to historical sales for any future price changes nor any adjustments to selling and marketing expenses for any future operating changes. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Merger and the asset transfers been consummated on the dates, or at the beginning of the periods, for which such transactions are being given effect. The pro forma adjustments reflecting the consummation of the Merger are based upon the purchase method of accounting and upon the assumptions set forth in the notes hereto, including the exchange of all the outstanding shares of TCI Group Tracking Stock for an aggregate of approximately 439 million shares of AT&T Common Stock. For purposes of preparing the AT&T consolidated financial statements, AT&T will establish a new basis for TCI's assets and liabilities based upon the fair values thereof and the AT&T purchase price, including the costs of the Merger. A final determination of required purchase accounting adjustments, including the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values, has not yet been made. Accordingly, the purchase accounting adjustments made in connection with the development of the pro forma combined financial information are preliminary and have been made solely for purposes of developing such pro forma combined financial information. AT&T has undertaken a study to determine the fair value of certain of TCI's assets and liabilities (as so adjusted) and will make appropriate purchase accounting adjustments upon completion of that study. The actual financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein because of a variety of factors, including access to additional information and changes in value not currently identified. 3 AT&T UNAUDITED PRO FORMA CONDENSED BALANCE SHEET December 31, 1998 (In Millions)
Pro Forma Liberty/ Other Pro Forma Historical Historical Ventures Pro Forma AT&T AT&T(1) TCI(1) Adjustment(2) Adjustments with TCI ASSETS: Cash and cash equivalents $ 3,160 $ 419 $ -- $ (2,500) (3b) $ 3,505 (7,000) (7) (250) (3c) 176 (4) 9,500 (6) Receivables-net 8,652 593 (154) -- 9,091 Other current assets 2,306 448 (279) -- 2,475 ------- ------- -------- -------- -------- Total current assets 14,118 1,460 (433) (74) 15,071 Property, plant and equipment-net 26,903 7,153 (157) -- 33,899 Licensing cost-net 7,948 -- -- -- 7,948 Investments 4,434 17,885 (3,714) 1,559 (3J) 30,998 (64) (4) 14,454 (12) (3,556)(15) Franchise costs, goodwill and other long-term assets-net 6,147 15,353 (2,284) 700 (3i) 50,182 30,266 (3q,4) Total assets $59,550 $41,851 $(6,588) $ 43,285 $138,098 ------- ------- -------- -------- -------- LIABILITIES: Accounts payable $ 6,226 $229 $ $ -- $ 6,455 Debt maturing within one year 1,171 1,551 (612) 1,900 (6) 4,010 Other current liabilities 8,045 1,852 (415) -- 9,482 ------- ------- -------- -------- Total current liabilities 15,442 3,632 (1,027) 1,900 19,947 Long-term debt 5,556 12,501 (1,881) 7,600 (6) 24,870 1,094 (3l) Deferred income taxes 5,453 9,749 (3,306) 596 (3p) 11,231 (1,261)(15) Other long-term liabilities and deferred credits 7,577 1,819 (227) 561 (3h) 9,745 15 (3o) ------ ------ ------- ------ -------- Total liabilities 34,028 27,701 (6,441) 10,505 65,793 Minority interest -- 1,460 (130) 1,468 (3m) 2,798 Mandatorily redeemable preferred equity -- 1,500 -- 137 (3n) 1,637 Redeemable securities -- 322 (17) (300) (3f) 5 Common shares 1,754 1,511 -- (3,265)(16) -- Additional Paid in Capital 15,195 5,987 -- (21,182)(16) -- Retained earnings 8,676 1,124 -- (9,800)(16) -- Other (103) 2,246 -- (2,143)(16) -- ------- ------- -------- -------- -------- Total shareowners'equity (deficit) (36,390) 36,390 (16) 14,454 (12) 26,556 (3a) 446 (3d) (122) (3e) (564) (3g) (7,000) (7) (44,514)(13) (23,351)(13) (2,295)(15) AT&T Equity (pro forma) 44,514 (13) 44,514 New Liberty Media Group equity (Tracking stock) 23,351 (13) 23,351 -------- -------- Total liabilities and shareowners' equity $59,550 $41,851 $(6,588) $ 43,285 $138,098 ======= ======= ======== ======== ========
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements. 4 AT&T UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME Year Ended December 31, 1998 (In millions, except per share amounts)
Pro Forma Liberty/ Other Pro Forma Historical Historical Ventures Pro Forma AT&T AT&T(1) TCI(1) Adjustment(2) Adjustments with TCI REVENUES $ 53,223 $ 7,351 $ (1,148) $ -- $ 59,426 Operating expenses: Access and other interconnection 15,328 -- -- -- 15,328 Network and other communications services 10,250 3,087 (495) -- 12,842 Depreciation and amortization 4,629 1,735 (135) 757 (8) 6,986 Selling, general and administrative 13,015 2,583 (943) -- 14,655 Restructuring and other charges 2,514 5 (5) -- 2,514 -------- -------- -------- -------- -------- Total operating expenses 45,736 7,410 (1,578) 757 52,325 -------- -------- -------- -------- -------- Operating income (loss) 7,487 (59) 430 (757) 7,101 Other income (expense)- net 1,247 4,658 (1,005) (78) (8) 1,881 (401)(12) (2,540)(15) Interest expense 427 1,061 (103) 616 (9) 2,001 -------- -------- -------- -------- -------- Income (loss) from continuing operations before taxes 8,307 3,538 (472) (4,392) 6,981 Provision (benefit) for income taxes 3,072 1,595 (472) (948)(15) 2,982 (265)(10) -------- -------- -------- -------- -------- Income (loss) from continuing operations 5,235 1,943 -- (3,179) 3,999 Dividend requirements on preferred stocks -- (24) -- 14 (11) (10) -------- -------- -------- -------- -------- Income (loss) from continuing operations attributable to common shareowners $ 5,235 $ 1,919 $ -- $ (3,165) $ 3,989 -------- -------- -------- -------- -------- AT&T EPS Calculation: Income from continuing operations attributable to AT&T common shareowners $ 5,235 $ 3,764 Weighted average shares Outstanding (basic) 1,784 2,093 Basic EPS $ 2.93 $ 1.80 Income from continuing operations attributable to AT&T common shareowners $ 5,235 $ 3,778 Weighted average shares outstanding (diluted) 1,800 2,174 Diluted EPS $ 2.91 $ 1.74 New Liberty Media Group Basic EPS $ 0.38 Diluted EPS $ 0.38
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements. 5 Notes to Unaudited AT&T Pro Forma Financial Statements (In millions, except per share amounts) 1. These columns represent historical results of operations and financial position. 2. These columns represent deconsolidation to the equity method of accounting of the historical results of operations and financial position for the interests represented by the shares of New Liberty Media Group Tracking Stock to be issued in the Merger. AT&T has accounted for the New Liberty Media Group under the equity method because it does not possess a "controlling financial interest" in the New Liberty Media Group. Such deconsolidated interests exclude those interests to be included in the asset transfers. These columns also reflect adjustments to intergroup eliminations as a result of the asset transfer. In addition, the Liberty/Ventures Group and the TCI Group will exchange certain other assets. These other asset exchanges are immaterial and are not reflected in these unaudited pro forma financial statements. New Liberty Media Group Tracking Stock reflects the separate performance of the businesses and assets to be attributed to the New Liberty Media Group subsequent to the Merger. 3. This adjustment reflects the acquisition of the TCI Group and the asset transfers by AT&T and the excess consideration over net assets acquired (goodwill). Shares of TCI Group Series A Tracking Stock to be exchanged 495 AT&T exchange ratio per share 0.7757 -------- Equivalent AT&T shares 384 AT&T share price based on the average closing price three days before and after the Merger was agreed to and announced $ 60.51 Subtotal $ 23,229 Shares of TCI Group Series B Tracking Stock to be exchanged 64 AT&T exchange ratio per share 0.8533 -------- Equivalent AT&T shares 55 AT&T share price based on the average closing price three days before and after the Merger was agreed to and announced $ 60.51 Subtotal $ 3,327 a. Total consideration for the TCI Group equity $ 26,556 b. Cash consideration for @Home, NDTC and WTCI 2,500 c. Merger costs (estimated) 250 --------
6 Total Consideration $ 29,306 d. Historical net book value of the TCI Group 446 e. Historical net book value of @Home, NDTC, WTCI (122) Fair Value adjustments relating to: f. Redeemable securities of TCI Group converted (300) g. In-process research and development (564) h. Tax benefit payable to New Liberty Media Group (see Note 5) 561 i. Advances to New Liberty Media Group (see Note 14) (700) j. Investment in Cablevision Systems Corporation (1,559) k. Warrants (see Note 4) (112) l. Convertible notes 1,094 m. Preferred stock issued by subsidiaries 1,468 n. Trust preferred stock 137 o. Employee Stock Options 15 p. Deferred tax impacts 596 -------- q. Preliminary goodwill $ 30,266 --------
The total consideration will be allocated to the specific identifiable tangible and intangible assets and liabilities of the TCI Group and the asset transfers upon the completion of third-party appraisals. Preliminarily, consideration has been allocated to the TCI Group investment in Cablevision Systems Corporation and certain debt and publicly traded preferred securities of the TCI Group that may ultimately be converted into shares of AT&T although such conversion is not forced by the terms of the Merger. The fair values of the investment in Cablevision and the publicly traded preferred securities were based on quoted market prices. Debt and other preferred securities were valued assuming the instruments converted into shares of AT&T at December 31, 1998. The purchase accounting allocation may also include certain in-process research and development projects and other intangible assets, such as franchise agreements that would be amortized over 40 years (see Note 8). Assuming an estimated useful life of 10 years, each $1 billion of consideration allocated to property, plant and equipment or other tangible or intangible assets would have the effect of decreasing pro forma net income by $46 annually ($0.02 per diluted share for the year ended December 31, 1998). In-process research and development, (which had not reached technological feasibility by the close of the Merger) and which will have no alternative future use, includes: certain research and development projects that are or will be underway, as of the close of the Merger, at TCI Group. Projects that may be characterized as in-process research and development have been identified at TCI Communications, Inc., NDTC and @Home. TCI Communications is involved in efforts to increase the depth of optical fiber in its network, integrate the use of open standards modems, and implement voice over Internet protocol. NDTC is involved in software development for advanced set-top devices, as well as for the transmission of data signals. @Home has research and development efforts underway including efforts to introduce premium services, support the development and deployment of self-installable modems, enhance cashing and replication techniques to improve network performance and efficiency, enhance @Home's advanced network management capabilities, and build a next generation network-based service provisioning and customer care platform. If, due to the uncertainties surrounding the successful completion of the acquired in- 7 process research and development, AT&T is unable to establish technological feasibility and produce a commercially viable product/service, then anticipated incremental future cash flows attributable to expected profits from such new products/services may not be realized. Although there are significant technological issues to overcome in order to successfully complete the acquired in-process research and development, including integrating more advanced network software, integrating advanced set-top device software and introducing new and advanced services over the existing networks, AT&T expects to successfully complete the in-process research and development acquired from TCI. A preliminary estimate of in-process research and development of approximately $564 was used in these pro forma financial statements. 4. Reflects warrants currently attributed to the TCI Group to be transferred to the Liberty/Ventures Group in exchange for up to $176 in cash. TCI's carrying value for the warrants is approximately $64. 5. Gives effect to the transfer from the TCI Group to the New Liberty Media Group of the benefit of all of the net operating loss carryforwards available to the entities included in TCI's consolidated income tax return as of the date of the Merger. Under the terms of a Tax Sharing Agreement, the associated federal tax benefits of all premerger TCI Group net operating loss carryforwards are allocated exclusively to the New Liberty Media Group. Accordingly, the TCI Group has recorded an intercompany payable to the New Liberty Media Group that results in an increase in goodwill. 6. Reflects additional borrowing of $9.5 billion to fund TCI Group's payment to the New Liberty Media Group in connection with the asset transfers (see Notes 3 and 7) and $4 billion of AT&T Common Stock to be repurchased by AT&T under a Board approved share repurchase program. (The share repurchase program was completed in March 1999.) A borrowing mix of 20% short term and 80% long term is assumed. 7. This entry represents consideration paid for the purchase of $3 billion of AT&T Common Stock currently owned by the TCI Ventures Group as a result of the Teleport Merger which was completed in July 1998 and the $4 billion of shares repurchased (see Note 6). 8. This entry represents the amortization of goodwill resulting from the preliminary allocation of the excess of consideration over the net assets of the TCI Group and the assets acquired by AT&T in the asset transfers (see Note 3). We have assumed the amount of the excess consideration allocated to goodwill and franchise agreements pending completion of third-party appraisals to be amortized over 40 years. The amortization period of intangible assets, including goodwill, of 40 years is based upon the expected useful life of the franchise agreements and value related to the access to homes passed. The factors considered in determining the appropriate amortization period included legal and regulatory issues, experience with renewing franchises and territories, future changes in technology, anticipated market demand and competition. An allocation to customer lists and other intangibles with shorter amortization periods will be made, 8 although the amounts allocated are not expected to be material. AT&T will evaluate the periods of amortization continually to determine whether later events and circumstances warrant revised estimates of useful lives. As discussed in Note 3, amounts allocated to property, plant and equipment, investments and identifiable intangible assets may be amortized over shorter periods resulting in a lower net income. An assessment of the useful lives attributable to those assets is not complete. Any amount allocated to goodwill will also be impacted by an in-process research and development charge also discussed in Note 3. Consideration allocated to the TCI Group investment in Cablevision has been amortized over a period of 20 years. 9. These entries represent the recognition of incremental interest expense on the additional borrowings (see Note 6). Interest expense was calculated using an interest rate of 6.48% based on a credit rating agency profile indicative of the industry in which the TCI Group operates. An increase of 25 basis points in the assumed interest rates would result in additional interest expense of approximately $24 annually. 10. These adjustments represent the statutory tax effect of the pro forma adjustments. 11. Gives effect to the elimination of dividend requirements on certain TCI Group Preferred Stock to be converted at the time of the Merger. 12. Represents purchase accounting adjustments for New Liberty Media Group. 13. Represents the issuance of New Liberty Media Group Tracking Stock and AT&T Common Stock. 14. Represents the intercompany receivable from the New Liberty Media Group. 15. Represents the elimination of the Liberty/Ventures Group's investments in AT&T and certain nonrecurring gains with respect to the Liberty/Ventures Group's investments in @Home and Teleport. 16. To close out the components of equity to total equity for allocation of pro forma equity between AT&T and the New Liberty Media Group. 17. On January 8, 1999, AT&T announced that it intended to effect a three-for-two stock split of its common shares. On March 17, 1999, the Board of Directors approved the stock split and AT&T announced that the record date for eligible shareowners would be March 31, 1999 and the payment date will be April 15, 1999. The outstanding common shares and earnings per share amounts in the pro forma income statement are on a pre-split basis. Pro forma basic and diluted earnings from continuing operations per AT&T common share, adjusted to reflect the stock split would be $1.20 and $1.16 for the year ended December 31, 1998. -----END PRIVACY-ENHANCED MESSAGE-----