-----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, K0iS05CDqssUukt9Xz/B9BcTqbQ6w8q9KszRiKkMIdfbKT59gA6Zz6F9slMF9yTd Yhsit4Tns95HFiwfrtyHYw== 0000950134-98-004231.txt : 19980514 0000950134-98-004231.hdr.sgml : 19980514 ACCESSION NUMBER: 0000950134-98-004231 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TCI COMMUNICATIONS INC CENTRAL INDEX KEY: 0000096903 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 840588868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05550 FILM NUMBER: 98618976 BUSINESS ADDRESS: STREET 1: TERRACE TOWER II STREET 2: 5619 DTC PKWY CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3032675500 MAIL ADDRESS: STREET 1: TERRACE TOWER II STREET 2: 5619 DTC PKWY CITY: ENGLEWOOD STATE: CO ZIP: 80111 FORMER COMPANY: FORMER CONFORMED NAME: TELE COMMUNICATIONS INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-5550 TCI COMMUNICATIONS, INC. ----------------------------------------------------- (Exact name of Registrant as specified in its charter) State of Delaware 84-0588868 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5619 DTC Parkway Englewood, Colorado 80111 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 267-5500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] All of the Registrant's common stock is owned by Tele-Communications, Inc. The number of shares outstanding of the Registrant's common stock as of April 30, 1998, was: Class A common stock - 811,655 shares; and Class B common stock - 94,447 shares. 2 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Balance Sheets (unaudited)
March 31, December 31, 1998 1997 ---------- ------------ Assets amounts in millions Cash and cash equivalents $ -- 36 Trade and other receivables, net 326 319 Investment in Cablevision Systems Corporation ("CSC"), accounted for under the equity method (note 3) 645 -- Investments in other affiliates, accounted for under the equity method, and related receivables (note 4) 259 231 Property and equipment, at cost: Land 70 70 Distribution systems 9,562 9,547 Support equipment and buildings 1,311 1,351 ------- ------ 10,943 10,968 Less accumulated depreciation 4,456 4,444 ------- ------ 6,487 6,524 ------- ------ Franchise costs 16,555 17,154 Less accumulated amortization 2,660 2,711 ------- ------ 13,895 14,443 ------- ------ Other assets, net of amortization 316 305 ------- ------ $21,928 21,858 ======= ======
(continued) I-1 3 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Balance Sheets, continued (unaudited)
March 31, December 31, 1998 1997 --------- ------------ Liabilities and Common Stockholder's Deficit amounts in millions Accounts payable $ 161 131 Accrued interest 168 248 Accrued programming expense 261 242 Other accrued expenses 623 651 Debt (note 6) 13,423 13,528 Deferred income taxes 5,325 5,215 Other liabilities 127 125 -------- -------- Total liabilities 20,088 20,140 -------- -------- Minority interests in equity of consolidated subsidiaries 787 787 Redeemable preferred stock 232 232 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Preferred Securities") holding solely subordinated debt securities of the Company (note 7) 1,500 1,500 Common stockholder's deficit: Class A common stock, $1 par value. Authorized 910,553 shares; issued and outstanding 811,655 shares 1 1 Class B common stock, $1 par value Authorized, issued and outstanding 94,447 shares -- -- Additional paid-in capital 1,863 1,857 Accumulated other comprehensive earnings, net of taxes (note 1) 5 4 Accumulated deficit (919) (957) -------- -------- 950 905 Investment in Tele-Communications, Inc. ("TCI"), at cost (1,143) (1,143) Due from related parties (note 8) (486) (563) -------- -------- Total common stockholder's deficit (679) (801) -------- -------- Commitments and contingencies (note 9) $ 21,928 21,858 ======== ========
See accompanying notes to consolidated financial statements. I-2 4 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Operations (unaudited)
Three months ended March 31, -------------------- 1998 1997 ------- ------- amounts in millions Revenue (note 8) $ 1,511 1,505 Operating costs and expenses: Operating: Related party (note 8) 60 23 Other 504 521 Selling, general and administrative (note 8) 303 282 Stock compensation (note 9) 59 -- Depreciation and amortization 359 331 ------- ------- 1,285 1,157 ------- ------- Operating income 226 348 Other income (expense): Interest expense (265) (272) Interest income 1 6 Intercompany interest, net (note 8) 2 3 Share of losses of CSC (note 3) (18) -- Share of earnings (losses) of other affiliates, net (note 4) 32 (12) Loss on early extinguishment of debt (note 6) (16) -- Minority interests in earnings of consolidated subsidiaries, net (note 7) (43) (26) Gain on disposition and exchange of assets, net (note 5) 157 18 Other, net 1 (4) ------- ------- (149) (287) ------- ------- Earnings before income taxes 77 61 Income tax expense (39) (22) ------- ------- Net earnings 38 39 Preferred stock dividend requirements (2) (2) ------- ------- Net earnings attributable to common stockholder $ 36 37 ======= ======= Comprehensive earnings (note 1) $ 39 44 ======= =======
See accompanying notes to consolidated financial statements. I-3 5 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statement of Common Stockholder's Deficit Three months ended March 31, 1998 (unaudited)
Accumulated other Due Total Common stock Additional comprehensive Investment from common ----------------- paid-in earnings, Accumulated in related stockholder's Class A Class B capital net of taxes deficit TCI parties deficit ------- ------- ---------- ------------- ----------- ---------- ------- ------------- amounts in millions Balance at January 1, 1998 $ 1 -- 1,857 4 (957) (1,143) (563) (801) Net earnings -- -- -- -- 38 -- -- 38 Accreted dividends on redeemable preferred stock -- -- (2) -- -- -- -- (2) Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- 1 -- -- -- 1 Gain from contribution of cable television systems to joint ventures, net of taxes (note 5) -- -- 58 -- -- -- -- 58 Transfer of net liabilities from related party (note 8) -- -- (50) -- -- -- -- (50) Change in due from related parties -- -- -- -- -- -- 77 77 ----- ---- ----- ---- ---- ------ ---- ----- Balance at March 31, 1998 $ 1 -- 1,863 5 (919) (1,143) (486) (679) ===== ==== ===== ==== ==== ====== ==== =====
See accompanying notes to consolidated financial statements. I-4 6 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, ----------------------- 1998 1997 --------- -------- amounts in millions (see note 2) Cash flows from operating activities: Net earnings $ 38 39 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 359 331 Stock compensation 59 -- Payments of obligation relating to stock compensation (27) (1) Share of losses of CSC 18 -- Share of losses (earnings) of other affiliates, net (32) 12 Loss on early extinguishment of debt 16 -- Deferred income tax expense (benefit) 36 (30) Minority interests in earnings of consolidated subsidiaries, net 43 26 Gain on disposition and exchange of assets, net (157) (18) Intercompany tax allocation -- 51 Payments of restructuring charges (3) (16) Other noncash charges 11 2 Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (6) 5 Change in accrued interest (80) (103) Change in other accruals and payables (17) (80) ----- ---- Net cash provided by operating activities 258 218 ----- ---- Cash flows from investing activities: Capital expended for property and equipment (198) (80) Cash paid for acquisitions (58) (68) Cash received in exchanges -- 22 Proceeds from disposition of assets 12 140 Additional investments in and loans to affiliates and others (136) -- Collections of loans to affiliates and others 427 1 Other investing activities 2 (21) ----- ---- Net cash provided (used) by investing activities 49 (6) ----- ---- Cash flows from financing activities: Borrowings of debt 533 284 Repayments of debt (825) (695) Prepayment penalties on debt (15) -- Payment of redeemable preferred stock dividends (2) (2) Payment of dividends on subsidiary preferred stock and Trust Preferred Securities (45) (32) Net change in due from related parties 11 (221) Proceeds from issuance of Trust Preferred Securities -- 490 ----- ---- Net cash used in financing activities (343) (176) ----- ---- Net change in cash and cash equivalents (36) 36 Cash and cash equivalents at beginning of period 36 -- ----- ---- Cash and cash equivalents at end of period $ -- 36 ===== ====
See accompanying notes to consolidated financial statements. I-5 7 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements March 31, 1998 (unaudited) (1) Basis of Presentation The accompanying consolidated financial statements include the accounts of TCI Communications, Inc. ("TCIC" or the "Company") and those of all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. TCI owns 100% of the common stock of TCIC. TCIC, through its subsidiaries and affiliates, is principally engaged in the construction, acquisition, ownership and operation of cable television systems. TCIC operates its cable television systems throughout the United States. TCI common stock, par value $1.00 per share, is comprised of six series: Tele-Communications, Inc. Series A TCI Group Common Stock ("TCI Group Series A Stock"), Tele-Communications, Inc. Series B TCI Group Common Stock ("TCI Group Series B Stock" and, together with the TCI Group Series A Stock, "TCI Group Stock"), Tele-Communications, Inc. Series A Liberty Media Group Common Stock ("Liberty Group Series A Stock"), Tele-Communications, Inc. Series B Liberty Media Group Common Stock ("Liberty Group Series B Stock" and, together with the Liberty Group Series A Stock, the "Liberty Group Stock"), Tele-Communications, Inc. Series A TCI Ventures Group Common Stock ("TCI Ventures Group Series A Stock") and Tele-Communications, Inc. Series B TCI Ventures Group Common Stock ("TCI Ventures Group Series B Stock" and, together with the TCI Ventures Group Series A Stock, the "TCI Ventures Group Stock"). The Liberty Group Stock is intended to reflect the separate performance of the "Liberty Media Group," which is comprised of TCI's assets which produce and distribute programming services. The TCI Ventures Group Stock is intended to reflect the separate performance of the "TCI Ventures Group," which is comprised of TCI's principal international assets and businesses and substantially all of TCI's non-cable and non-programming assets. The TCI Group Stock is intended to reflect the separate performance of TCI and its subsidiaries and assets not attributed to Liberty Media Group or TCI Ventures Group. Such subsidiaries and assets are referred to as "TCI Group" and are comprised primarily of TCI's domestic cable and communications business. TCIC is attributed to TCI Group. (continued) I-6 8 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). The Company has reclassified its prior period consolidated balance sheet and consolidated statement of operations to conform to the requirements of SFAS 130. SFAS 130 requires that all items which are components of comprehensive earnings or losses be reported in a financial statement in the period in which they are recognized. The Company has included unrealized holding gains and losses for available-for-sale securities in other comprehensive earnings that are recorded directly in stockholder's deficit. Pursuant to SFAS 130, this item is reflected, net of related tax effects, as a component of comprehensive earnings in the Company's consolidated statements of operations, and is included in accumulated other comprehensive earnings in the Company's consolidated balance sheets and statement of common stockholder's deficit. The accompanying interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in TCIC's Annual Report on Form 10-K for the year ended December 31, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified for comparability with the 1998 presentation. (2) Supplemental Disclosures to Consolidated Statements of Cash Flows Cash paid for interest was $345 million and $375 million for the three months ended March 31, 1998 and 1997, respectively. Also during these periods, cash paid for income taxes was not material. (continued) I-7 9 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Summary of cash paid for acquisitions and cash received in exchanges is as follows:
Three months ended March 31, ------------------- 1998 1997 -------- ------- amounts in millions Cash paid for acquisitions: Aggregate cost basis of assets acquired $(250) (67) Liabilities assumed, net of current assets 2 2 Deferred tax liability recorded in acquisitions 35 -- Minority interests in equity of acquired entities 2 (3) Elimination of notes receivable from affiliates 129 -- Change in due from related parties resulting from common stock of TCI issued in acquisition 24 -- ----- ----- Cash paid for acquisitions $ (58) (68) ===== ===== Cash received in exchanges: Aggregate cost basis of assets acquired $ -- (294) Historical cost of assets disposed of -- 305 Gain recorded on exchange of assets -- 11 ----- ----- Cash received in exchanges $ -- 22 ===== =====
For a description of certain non-cash transactions, see notes 4, 5 and 8. (3) Investment in Cablevision Systems Corporation As further described in note 5, TCIC acquired an approximate 18.7% interest in CSC on March 4, 1998. At March 31, 1998, TCIC owned 13,975,524 shares of CSC Class A common stock, which had a closing market price of $65.75 per share on March 31, 1998. Summarized unaudited results of operations for CSC, accounted for under the equity method, are as follows for the period from the date of acquisition through March 31, 1998 (amounts in millions): Revenue $ 236 Operating, selling, general and administrative expenses (202) Depreciation and amortization (56) ----- Operating loss (22) Interest expense (35) Other, net (18) ----- Net loss $ (75) =====
(continued) I-8 10 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (4) Investments in Other Affiliates TCIC's investments in affiliates other than CSC are comprised of limited partnerships and other entities that are primarily engaged in the domestic cable business. Summarized unaudited results of operations for other affiliates for the periods in which the Company used the equity method to account for such other affiliates are as follows:
Three months ended March 31, ----------------------- Combined Operations 1998 1997 - ------------------- --------- -------- amounts in millions Revenue $ 105 83 Operating, selling, general and administrative expenses (56) (51) Depreciation and amortization (42) (36) -------- ------ Operating income (loss) 7 (4) Interest expense (22) (19) Other, net 2 2 -------- ------ Net loss $ (13) (21) ======== ======
During 1997, TCIC adopted the equity method of accounting for its investment in InterMedia Partners, a California limited partnership ("InterMedia Partners"). In January 1998, InterMedia Partners repurchased substantially all of the equity interests held by partners other than TCIC. As a result of such repurchases, TCIC began consolidating InterMedia Partners. Certain of TCIC's affiliates are general partnerships and any subsidiary of TCIC that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (continued) I-9 11 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (5) Acquisitions and Dispositions On March 4, 1998, subsidiaries of TCI (including certain subsidiaries of TCIC) contributed to CSC certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 24.5 million newly issued CSC Class A common shares (as adjusted for a stock dividend). Such shares represent an approximate 32.7% equity interest in CSC's total outstanding shares and an approximate 9% voting interest in CSC in all matters except for the election of directors, in which case TCI has an approximate 47% voting interest in the election of one-fourth of CSC's directors. CSC also assumed and repaid approximately $574 million of debt owed by TCIC to external parties and $95 million of debt owed to TCI. As a part of such transaction, TCIC subsidiaries contributed to CSC cable television systems serving approximately 410,000 customers in exchange for approximately 14.0 million shares (as adjusted for a stock dividend) or 18.7% of CSC's newly issued Class A common shares, and CSC assumed approximately $78 million of intercompany debt owed to TCIC. As a result of this transaction, TCIC recognized a $148 million gain in the accompanying consolidated statement of operations for the three months ended March 31, 1998. Such gain represents the excess of the $663 million fair value of the CSC Class A common shares received over the historical cost of the net assets transferred by TCIC to CSC. TCIC has also entered into letters of intent with CSC which provide for TCIC to acquire a cable system in Michigan and an additional 3% of CSC's Class A common shares and for CSC to (i) acquire cable systems serving approximately 250,000 customers in Connecticut and (ii) assume $110 million of TCIC's debt. The ability of TCIC to sell or increase its investment in CSC is subject to certain restrictions and limitations set forth in a stockholders agreement with CSC. In light of TCI's overall ownership interest in CSC of approximately 32.7%, TCIC will account for its approximate 18.7% ownership interest in CSC under the equity method. During the first quarter of 1998, TCIC also completed two transactions whereby TCIC contributed cable television systems serving in the aggregate approximately 235,000 customers to two separate joint ventures (collectively, the "Q1 Joint Ventures") in exchange for non-controlling ownership interests in each of the Q1 Joint Ventures, and the assumption and repayment by the Q1 Joint Ventures of intercompany debt owed to TCIC aggregating $343 million. In connection with such transactions, TCIC has agreed to take certain steps to support compliance by the Q1 Joint Ventures with their payment obligations under certain debt instruments, up to an aggregate total contingent commitment of $294 million. In light of such agreement, the $97 million aggregate excess of the TCIC debt assumed by the Q1 Joint Ventures over the historical cost of the remaining net assets contributed to the Q1 Joint Ventures has been reflected as a direct decrease to consolidated deficit (net of related deferred income taxes of $39 million). The Company uses the equity method of accounting to account for its investments in the Q1 Joint Ventures. The March 4, 1998 CSC transaction and the formation of the Q1 Joint Ventures are collectively referred to herein as the "Q1 1998 Contribution Transactions." (continued) I-10 12 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements On April 30, 1998, TCIC contributed certain cable television systems serving in the aggregate approximately 435,000 customers in Kentucky to a joint venture in exchange for a 49% limited partnership interest in such joint venture, and the assumption and repayment by such joint venture of intercompany debt owned to TCIC and debt owed by TCIC to external parties aggregating $812 million. In connection with such transaction, TCIC has agreed to take certain steps to support compliance by the joint venture with its payment obligations under certain debt instruments, up to an aggregate total contingent commitment of $490 million. TCIC will use the equity method of accounting to account for its investment in this joint venture. Including the Q1 1998 Contribution Transactions and the above-described April 30, 1998 transaction, TCIC, as of April 30, 1998, has, since January 1, 1997, contributed, or signed agreements or letters of intent to contribute within the next twelve months, certain cable television systems (the "Contributed Cable Systems") serving approximately 3.5 million customers to joint ventures in which TCIC will retain non-controlling ownership interests (the "Contribution Transactions"). Following the completion of the Contribution Transactions, TCIC will no longer consolidate the Contributed Cable Systems. Accordingly, it is anticipated that the completion of the Contribution Transactions, as currently contemplated, will result in an aggregate estimated reduction (based on actual amounts with respect to the Q1 1998 Contribution Transactions and currently contemplated amounts with respect to the pending Contribution Transactions) to TCIC's debt of $4.2 billion and aggregate estimated reductions (based on 1997 amounts) to TCIC's annual revenue and annual operating income before depreciation, amortization and stock compensation of $1.5 billion and $735 million, respectively. No assurance can be given that any of the pending Contribution Transactions will be consummated. (6) Debt Debt is summarized as follows:
March 31, December 31, 1998 1997 --------- ------------ amounts in millions Parent company debt: Notes payable (a) $ 8,216 7,949 Commercial paper 528 533 ------- ------- 8,744 8,482 Debt of subsidiaries: Bank credit facilities (b) 3,718 4,268 Notes payable (a) 723 723 Convertible notes (c) 40 40 Capital lease obligations and other debt 198 15 ------- ------- $13,423 13,528 ======= =======
(continued) I-11 13 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (a) During the three months ended March 31, 1998, TCIC purchased in the open market certain notes payable which had an aggregate principal balance of $95 million and fixed interest rates ranging from 8.75% to 10.125% (the "1998 Purchases"). In connection with the 1998 Purchases, TCIC recognized a loss on early extinguishment of debt of $16 million. Such loss related to prepayment penalties amounting to $15 million and the retirement of deferred loan costs. (b) At March 31, 1998, TCIC had approximately $1.8 billion of availability in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. TCIC is required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, TCIC pays fees ranging from 1/4% to 1/2% per annum on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. (c) These convertible notes, which are stated net of unamortized discount of $166 million at March 31, 1998 and December 31, 1997, mature on December 18, 2021. The notes require, so long as conversion of the notes has not occurred, an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. At March 31, 1998, the notes were convertible, at the option of the holders, into an aggregate of 24,163,259 shares of TCI Group Series A Stock, 19,416,910 shares of Liberty Group Series A Stock, 20,711,373 shares of TCI Ventures Group Series A Stock and 3,451,897 shares of Series A Common Stock, $1.00 par value per share, of TCI Satellite Entertainment, Inc. TCIC's bank credit facilities and various other debt instruments generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. The fair value of TCIC's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to TCIC for debt of the same remaining maturities. At March 31, 1998, the fair value of TCIC's debt was $14,208 million, as compared to a carrying value of $13,423 million on such date. In order to achieve the desired balance between variable and fixed rate indebtedness, the Company has entered into variable and fixed interest rate exchange agreements ("Interest Rate Swaps") pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") of 6.2% and receives variable interest rates on a notional amount of $10 million at March 31, 1998 and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,400 million at March 31, 1998. During the three months ended March 31, 1998 and 1997, the Company's net receipts (payments) pursuant to the Fixed Rate Agreements were (less than $1 million) and $3 million, respectively; and the Company's net receipts pursuant to the Variable Rate Agreements were $3 million and $1 million, respectively. (continued) I-12 14 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Information concerning TCIC's Variable Rate Agreements at March 31, 1998 is as follows (dollar amounts in millions):
Amount to be paid Expiration Interest rate Notional (received) upon date to be received amount termination (a) ---------- ------------- -------- --------------- September 1998 4.8%-5.4% $ 450 $ 1 April 1999 7.4% 50 (1) September 1999 6.4% 350 (2) February 2000 5.8%-6.6% 300 (2) March 2000 5.8%-6.0% 675 -- September 2000 5.1% 75 2 March 2027 9.7% 300 (18) December 2036 9.7% 200 (7) ------ ------- $2,400 $ (27) ====== =======
- ----------------- (a) The estimated amount that TCIC would pay or receive to terminate the agreements at March 31, 1998, taking into consideration current interest rates and the current creditworthiness of the counterparties, represents the fair value of the Interest Rate Swaps. The Fixed Rate Agreement expires in August 1998. At March 31, 1998, the Company would be required to pay less than $1 million to terminate the Fixed Rate Agreement. In addition to the Fixed and Variable Rate Agreements, TCIC entered into Interest Rate Swaps pursuant to which it pays a variable rate based on the London Interbank Offered Rate ("LIBOR") (6.1% at March 31, 1998) and receives a variable rate based on the Constant Maturity Treasury Index ("CMT") (6.0% at March 31, 1998) on a notional amount of $400 million through September 2000; and pays a variable rate based on LIBOR (6.0% at March 31, 1998) and receives a variable rate based on CMT (6.1% at March 31, 1998) on notional amounts of $95 million through February 2000. During the three months ended March 31, 1998, TCIC's net payments pursuant to such agreements were less than $1 million. At March 31, 1998, TCIC would be required to pay an estimated $3 million to terminate such Interest Rate Swaps. TCIC is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps in the event of nonperformance by the other parties to the agreements. However, TCIC does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. Further, TCIC does not anticipate material near-term losses in future earnings, fair values or cash flows resulting from derivative financial instruments as of March 31, 1998. (continued) I-13 15 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (7) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities of the Company The Trust Preferred Securities are presented together in a separate line item in the accompanying consolidated balance sheets captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of the Company." Dividends accrued on the Trust Preferred Securities aggregated $35 million and $25 million for the three months ended March 31, 1998 and 1997, respectively, and are included in minority interests in earnings of consolidated subsidiaries in the accompanying consolidated financial statements. (8) Related Party Transactions At March 31, 1998, amounts due from related parties include (i) $176 million representing the net amount due from TCI and certain subsidiaries of TCI pursuant to promissory notes, including accrued interest, and (ii) $310 million representing the net amount due from TCI pursuant to a non-interest bearing intercompany account. The net intercompany interest income earned on the promissory notes aggregated $2 million and $3 million during the three months ended March 31, 1998 and 1997, respectively Through June 30, 1997, TCI Starz, Inc. ("TCI Starz"), a subsidiary of TCI, had a 50.1% partnership interest in QE+Ltd. ("QE+"), which distributes STARZ!, a first-run movie premium programming service. Another subsidiary of TCI, Liberty Media Corporation ("Liberty") held the remaining 49.9% partnership interest, and TCIC was a party to an affiliation agreement (the "Old Affiliation Agreement") with QE+ related to the distribution of the STARZ! service. Subsequent to June 30, 1997, Liberty and TCI Starz entered into a series of transactions pursuant to which, among other matters, the business of STARZ! and Encore Media Corporation ("Encore") were contributed to a newly formed limited liability company ("Encore Media Group"). Upon consummation of the transactions, Liberty owned 100% of Encore Media Group. In connection with the formation of Encore Media Group, the Old Affiliation Agreement was canceled, and the Company and a subsidiary of Encore Media Group entered into a new affiliation agreement (the "EMG Affiliation Agreement"). Pursuant to the EMG Affiliation Agreement, the Company pays fixed monthly amounts in exchange for unlimited access to all of the existing Encore and STARZ! services. The fixed annual amounts increase annually from $220 million in 1998 to $315 million in 2003, and will increase with inflation through 2022. Charges to TCIC for programming pursuant to the Old Affiliation Agreement, the EMG Affiliation Agreement and other related party programming agreements with TCI Music, Inc., a subsidiary of TCI ("TCI Music"), and certain other subsidiaries attributed to Liberty Media Group aggregated $56 million and $37 million for the three months ended March 31, 1998 and 1997, respectively. Such charges are based upon customary rates charged to others. (continued) I-14 16 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Certain TCI corporate general and administrative costs are charged to Liberty Media Group and TCI Ventures Group at rates set at the beginning of the year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that approximate the costs Liberty Media Group and TCI Ventures Group would incur for comparable services on a stand-alone basis. During the three months ended March 31, 1998 and 1997, Liberty Media Group was allocated $1 million and less than $1 million, respectively, and TCI Ventures Group was allocated $2 million and $2 million, respectively, in corporate general and administrative costs by TCIC. Such amounts are included in selling, general and administrative expenses in the accompanying consolidated financial statements. During 1996, TCIC transferred, subject to regulatory approval, certain distribution equipment to a subsidiary of TINTA in exchange for a (pound)15 million ($23 million using the applicable exchange rate) principal amount promissory note (the "TVG LLC Promissory Note"). The TVG LLC Promissory Note was contributed by TCIC to TVG LLC on September 10, 1997. The distribution equipment was subsequently leased back to TCIC over a five year term with semi-annual payments of $2 million, plus expenses. Effective October 1, 1997, such distribution equipment was transferred back to TCIC and the related lease and the TVG LLC Promissory Note were canceled. During the three months ended March 31, 1997, (i) the U.S. dollar equivalent of interest income earned with respect to the TVG LLC Promissory Note was less than $1 million and (ii) the U.S. dollar equivalent of the lease expense under the above-described lease agreement aggregated $1 million. Pursuant to an agreement between TCI Music and TCI, certain subsidiaries of TCIC are required to deliver to TCI Music monthly revenue payments aggregating $18 million annually (adjusted annually for inflation) through 2017. During the three months ended March 31, 1998, the aggregate amount paid by TCIC to TCI Music pursuant to such arrangement was $5 million. Such amount is included as a reduction of revenue in the accompanying consolidated statements of operations. Through September 30, 1997, Liberty Media Group leased satellite transponder facilities from a subsidiary of TCIC. Charges by TCIC for such lease arrangements aggregated $2 million for the three months ended March 31, 1997. Since October 1, 1997, TCIC leases satellite transponder facilities and receives video transport services from entities attributed to TCI Ventures Group. Charges by TCI Ventures Group for such arrangements and other related operating expenses for the three months ended March 31, 1998 aggregated $2 million. Such amounts are included in operating costs and expenses in the accompanying consolidated statements of operations. (continued) I-15 17 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements A subsidiary of TCI that is attributed to TCI Ventures Group leased certain equipment under a capital lease. During 1997, such equipment was subleased to TCIC under an operating lease. In January 1998, the Company paid $7 million to TCI Ventures Group in exchange for TCI Ventures Group's assignment of its ownership interest in such subsidiary to TCIC. Due to the related party nature of the transaction, the $50 million total of the cash payment and the historical cost of the net liabilities assumed by TCIC (including capital lease obligations aggregating $176 million) has been reflected as an increase of TCIC's consolidated deficit. In addition, a subsidiary attributed to TCI Ventures Group distributed certain program services to TCIC. Charges to TCIC for such services aggregated $2 million for each of the three months ended March 31, 1998 and 1997, and are included in operating costs and expenses in the accompanying consolidated financial statements. A tax sharing agreement (as amended, the "Old Tax Sharing Agreement") among TCI, the Company and certain other subsidiaries of TCI was implemented effective July 1, 1995. The Old Tax Sharing Agreement formalized certain of the elements of a pre-existing tax sharing arrangement and contains additional provisions regarding the allocation of certain consolidated income tax attributes and the settlement procedures with respect to the intercompany allocation of current tax attributes. Under the Old Tax Sharing Agreement, the Company was responsible to TCI for its share of consolidated income tax liabilities (computed as if TCI were not liable for the alternative minimum tax) determined in accordance with the Old Tax Sharing Agreement, and TCI was responsible to the Company to the extent that the income tax attributes generated by the Company and its subsidiaries were utilized by TCI to reduce its consolidated income tax liabilities (computed as if TCI were not liable for the alternative minimum tax). The tax liabilities and benefits of such entities so determined are charged or credited to an intercompany account between TCI and the Company. Such intercompany account is required to be settled only upon the date that an entity ceases to be a member of TCI's consolidated group for federal income tax purposes. Under the Old Tax Sharing Agreement, TCI retains the burden of any alternative minimum tax and has the right to receive the tax benefits from an alternative minimum tax credit attributable to any tax period beginning on or after July 1, 1995 and ending on or before October 1, 1997. (continued) I-16 18 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Effective October 1, 1997 (the "Effective Date"), the Old Tax Sharing Agreement was replaced by a new tax sharing agreement, as amended by the First Amendment thereto (the "New Tax Sharing Agreement"), which governs the allocation and sharing of income taxes by TCI Group, Liberty Media Group and TCI Ventures Group (each a "Group"). The Company and its subsidiaries are members of TCI Group for purposes of the New Tax Sharing Agreement. Effective for periods on and after the Effective Date, federal income taxes will be computed based upon the type of tax paid by TCI (on a regular tax or alternative minimum tax basis) on a separate basis for each Group. Based upon these separate calculations, an allocation of tax liabilities and benefits will be made such that each Group will be required to make cash payments to TCI based on its allocable share of TCI's consolidated federal income tax liabilities (on a regular tax or alternative minimum tax basis, as applicable) attributable to such Group and actually used by TCI in reducing its consolidated federal income tax liability. Tax attributes and tax basis in assets would be inventoried and tracked for ultimate credit to or charge against each Group. Similarly, in each taxable period that TCI pays alternative minimum tax, the federal income tax benefits of each Group, computed as if such Group were subject to regular tax, would be inventoried and tracked for payment to or payment by each Group in years that TCI utilizes the alternative minimum tax credit associated with such taxable period. The Group generating the unutilized tax benefits would receive a cash payment only if, and when, the unutilized taxable losses of the other Group are actually utilized. If the unutilized taxable losses expire without ever being utilized, the Group generating the utilized tax benefits will never receive payment for such benefits. Pursuant to the New Tax Sharing Agreement, state and local income taxes are calculated on a separate return basis for each Group (applying provisions of state and local tax law and related regulations as if the Group were a separate unitary or combined group for tax purposes), and TCI's combined or unitary tax liability is allocated among the Groups based upon such separate calculation. Notwithstanding the foregoing, items of income, gain, loss, deduction or credit resulting from certain specified transactions that are consummated after the Effective Date pursuant to a letter of intent or agreement that was entered into prior to the Effective Date will be shared and located pursuant to the terms of the Old Tax Sharing Agreement, as amended. (continued) I-17 19 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (9) Commitments and Contingencies On October 5, 1992, the United States Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the Federal Communications Commission ("FCC") adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, TCIC's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. TCIC believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, TCIC's rates for Regulated Services are subject to review by the FCC, if a complaint is filed by a customer, or the appropriate franchise authority, if such authority has been certified by the FCC to regulate rates. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to one year prior to the implementation of the rate reductions. TCIC has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $186 million at March 31, 1998. With respect to TCIC's guarantees of $166 million of such obligations, TCIC has been indemnified for any loss, claim or liability that TCIC may incur, by reason of such guarantees. The Company also has guaranteed the performance of certain affiliates and other parties with respect to such parties' contractual and other obligations. Although there can be no assurance, management of TCIC believes that it will not be required to meet its obligations under such guarantees, or if it is required to fulfill any of such obligations, that they will not be material to TCIC. TCIC is a direct obligor or guarantor of the payment of certain amounts that may be due pursuant to motion picture output, distribution and license agreements. As of March 31, 1998, the amount of such obligations or guarantees was approximately $295 million. The future obligations of TCIC with respect to these agreements is not currently determinable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. As described in note 8, TCIC has agreed to make fixed monthly payments through 2022 to Liberty Media Group pursuant to the EMG Affiliation Agreement. (continued) I-18 20 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements As described in note 5, the Company has significant contingent obligations with respect to certain of its affiliates. The Company is a party to affiliation agreements with several of its programming suppliers. Pursuant to these agreements, the Company is committed to carry such suppliers programming on its cable systems. Several of these agreements provide for penalties and charges in the event the programming is not carried or not delivered to a contractually specified number of customers. TCIC is committed to purchase billing services pursuant to three successive five year agreements. Pursuant to such arrangement, TCIC is obligated at March 31, 1998 to make minimum payments aggregating approximately $1.6 billion through 2012. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. Pursuant to certain agreements between TCI and TCI Music, TCIC is obligated at March 31, 1998 to make minimum revenue payments through 2017 and minimum license fee payments through 2007 aggregating approximately $425 million to TCI Music. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. Certain officers and other key employees of the Company hold options with tandem stock appreciation rights to acquire TCI Group Series A Stock, Liberty Group Series A Stock and TCI Ventures Group Series A Stock as well as restricted stock awards of TCI Group Series A Stock, Liberty Group Series A Stock and TCI Ventures Group Series A Stock. Estimates of (i) compensation relating to stock appreciation rights granted to such employees of the Company and (ii) the Company's allocable portion of compensation with respect to stock appreciation rights held by certain officers and directors of TCI have been recorded in the Company's consolidated financial statements. Such estimates are subject to future adjustment based upon vesting of the related stock options and stock appreciation rights and the market value of TCI Group Series A Stock, Liberty Group Series A Stock and TCI Ventures Group Series A Stock and, ultimately, on the final determination of market value when the rights are exercised. TCIC has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible TCIC may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. (continued) I-19 21 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Effective as of December 16, 1997, National Digital Television Center, Inc. ("NDTC"), a subsidiary of TCI and a member of TCI Ventures Group on behalf of TCIC and other cable operators that may be designated from time to time by NDTC ("Approved Purchasers"), entered into an agreement (the "Digital terminal Purchase Agreement") with General Instrument Corporation (formerly NextLevel Systems, Inc., "GI") to purchase advanced digital set-top devices. The hardware and software incorporated into these devices will be designed and manufactured to be compatible and interoperable with the Open Cable (R) architecture specifications adopted by Cablelabs, the cable television industry's research and development consortium, in November 1997. NDTC has agreed that Approved Purchasers will purchase, in the aggregate, a minimum of 6.5 million set-top devices during calendar years 1998, 1999 and 2000 at an average price of 418 per basic set-top device (including a required royalty payment). GI agreed to provide NDTC and its Approved Purchasers the most favorable prices, terms and conditions made available by GI to any customer purchasing advanced digital set-top devices. In connection with NDTC's purchase commitment, GI agreed to grant warrants to purchase its common stock proportional to the number of devices ordered by each organization, which as of the effective date of the Digital Terminal Purchase Agreement, would have represented at least 10% equity interest in GI (on a fully diluted basis). It is anticipated that the value associated with such equity interest would be attributed to TCI Group upon purchase and deployment of the digital set-top devices. During the three months ended March 31, 1998, TCIC continued its enterprise-wide comprehensive review of its computer systems and related software to ensure systems properly recognize the year 2000 and continue to process business information. The systems being evaluated include all internal use software and devices and those systems and devices that manage the distribution of TCIC's products. TCIC is utilizing both internal and external resources to identify, correct or reprogram, and test systems for year 2000 readiness. As of March 31, 1998, TCIC had inventoried substantially all of its cable systems and began its assessment of the systems that will require remediation or replacement. Inventoried systems include TCIC's financial systems and related software, its business systems, data and voice networks, engineering systems and facilities and related software supporting the distribution of TCIC's products and other equipment and systems potentially impacted by the year 2000. Additionally, TCIC began efforts to assess potential year 2000 issues of its affiliated companies that are not managed by TCIC and continued to have formal communications with its principal vendors to determine their year 2000 readiness. (continued) I-20 22 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements TCIC completed a preliminary assessment of its systems and related software that support TCIC's financial applications. For those financial systems and software which will continue to be utilized by TCIC beyond the year 1999, TCIC has tentatively concluded that such systems are capable of recognizing the year 2000 and therefore will not require material remediation or replacement. One of TCIC's financial applications is externally managed by a third party vendor and such financial application will be replaced with software provided by such vendor. No assurances can be given that as TCIC completes its year 2000 assessment, additional internally managed systems will not be identified as requiring remediation or replacement. TCIC has completed an initial assessment of its business systems, including networks, engineering systems and facilities and related software supporting the distribution of TCIC's products and has tentatively concluded that certain portions of those systems will require remediation or replacement. Although no assurance can be given, management of TCIC anticipates that such systems will be remediated or replaced prior to the year 2000. Significant third party vendors whose systems are critical to TCIC's cable operations have been identified and/or surveyed and confirmations from such parties have been received indicating that they are either year 2000 ready or have plans in place to ensure readiness. Management of TCIC intends to have further communication with primary vendors identified as having systems that are not year 2000 compliant to assess those vendors' plans for remediating their own year 2000 issues and to assess the impact on TCIC if such vendors fail to remediate their year 2000 issues. TCIC's assessment of the impact of the year 2000 date change should be complete by the end of 1998. TCIC continues to evaluate the level of validation it will require of third parties to ensure their year 2000 readiness. Management of TCIC has not yet determined the cost associated with its year 2000 readiness efforts and the related potential impact on TCIC's results of operations but has identified certain cost elements that, in the aggregate, are not expected to be less than $20 million. Amounts expended to date have not been material, although there can be no assurance that costs ultimately required to be paid to ensure TCIC's year 2000 readiness will not have an adverse effect on TCIC's financial position. Additionally, there can be no assurance that TCIC's systems or the systems of other companies on which TCIC relies will be converted in time or that any such failure to convert by TCIC or other companies will not have an adverse effect on its financial position. I-21 23 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information concerning the results of operations and financial condition of the Company. Such discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto of the Company. Additionally, the following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and consolidated financial statements included in Part II of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The following discussion focuses on material trends, risks and uncertainties affecting the results of operations and financial condition of the Company. Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, some of the statements contained under this caption are forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company (or entities in which the Company has interests), or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others: general economic and business conditions and industry trends; the regulatory and competitive environment of the industries in which the Company, and the entities in which the Company has interests, operate; uncertainties inherent in new business strategies, new product launches and development plans; rapid technological changes; the acquisition, development and/or financing of telecommunications networks and services; the development and provision of programming for new television and telecommunications technologies; future financial performance, including availability, terms and deployment of capital; the ability of vendors to deliver required equipment, software and services; availability of qualified personnel; changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the FCC, and adverse outcomes from regulatory proceedings; changes in the nature of key strategic relationships with partners and joint venturers; competitor responses to the Company's products and services, and the products and services of the entities in which the Company has interests, and the overall market acceptance of such products and services; and other factors. These forward-looking statements (and such risks, uncertainties and other factors) speak only as of the date of this Report, and the Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in the Company's expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based. Year 2000 During the three months ended March 31, 1998, TCIC continued its enterprise-wide comprehensive review of its computer systems and related software to ensure systems properly recognize the year 2000 and continue to process business information. The systems being evaluated include all internal use software and devices and those systems and devices that manage the distribution of TCIC's products. TCIC is utilizing both internal and external resources to identify, correct or reprogram, and test systems for year 2000 readiness. (continued) I-22 24 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) As of March 31, 1998, TCIC had inventoried substantially all of its cable systems and began its assessment of the systems that will require remediation or replacement. Inventoried systems include TCIC's financial systems and related software, its business systems, data and voice networks, engineering systems and facilities and related software supporting the distribution of TCIC's products and other equipment and systems potentially impacted by the year 2000. Additionally, TCIC began efforts to assess potential year 2000 issues of its affiliated companies that are not managed by TCIC and continued to have formal communications with its principal vendors to determine their year 2000 readiness. TCIC completed a preliminary assessment of its systems and related software that support TCIC's financial applications. For those financial systems and software which will continue to be utilized by TCIC beyond the year 1999, TCIC has tentatively concluded that such systems are capable of recognizing the year 2000 and therefore will not require material remediation or replacement. One of TCIC's financial applications is externally managed by a third party vendor and such financial application will be replaced with software provided by such vendor. No assurances can be given that as TCIC completes its year 2000 assessment, additional internally managed systems will not be identified as requiring remediation or replacement. TCIC has completed an initial assessment of its business systems, including networks, engineering systems and facilities and related software supporting the distribution of TCIC's products and has tentatively concluded that certain portions of those systems will require remediation or replacement. Although no assurance can be given, management of TCIC anticipates that such systems will be remediated or replaced prior to the year 2000. Significant third party vendors whose systems are critical to TCIC's cable operations have been identified and/or surveyed and confirmations from such parties have been received indicating that they are either year 2000 ready or have plans in place to ensure readiness. Management of TCIC intends to have further communication with primary vendors identified as having systems that are not year 2000 compliant to assess those vendors' plans for remediating their own year 2000 issues and to asses the impact on TCIC if such vendors fail to remediate their year 2000 issues. TCIC's assessment of the impact of the year 2000 date change should be complete by the end of 1998. TCIC continues to evaluate the level of validation it will require of third parties to ensure their year 2000 readiness. Management of TCIC has not yet determined the cost associated with its year 2000 readiness efforts and the related potential impact on TCIC's results of operations but has identified certain cost elements that, in the aggregate, are not expected to be less than $20 million. Amounts expended to date have not been material, although there can be no assurance that costs ultimately required to be paid to ensure TCIC's year 2000 readiness will not have an adverse effect on TCIC's financial position. Additionally, there can be no assurance that TCIC's systems or the systems of other companies on which TCIC relies will be converted in time or that any such failure to convert by TCIC or other companies will not have an adverse effect on its financial position. (continued) I-23 25 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Results of Operations Revenue The operation of the Company's cable television systems is regulated at the federal, state and local levels. The Cable Television Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996 (collectively, the "Cable Acts") established rules under which the Regulated Services are regulated if a complaint is filed by a customer or if the appropriate franchise authority is certified by the FCC to regulate rates. At March 31, 1998, approximately 68% of the Company's basic customers were served by cable television systems that were subject to such rate regulation. During the three months ended March 31, 1998, 75% of the Company's revenue was derived from Regulated Services. As noted above, any increases in rates charged for Regulated Services are regulated by the Cable Acts. Moreover, competitive factors may limit the Company's ability to increase its service rates. During the first quarter of 1998, TCIC consummated the Q1 1998 Contribution Transactions. Since January 1, 1997, TCIC has also consummated certain other acquisitions and dispositions. Such transactions affect the comparability of TCIC's results of operations for the three months ended March 31, 1998 and 1997. For additional information, see note 5 to the accompanying consolidated financial statements of the Company. TCIC's revenue increased $6 million or less than 1% for the three months ended March 31, 1998, as compared to the corresponding prior year period. Exclusive of the effects of acquisitions, the Q1 1998 Contribution Transactions and other dispositions, revenue increased 2%. Revenue from TCIC's customers accounted for 1% of such increase in revenue, primarily as a result of a 5% increase in basic revenue that was partially offset by a 13% decrease in premium revenue. TCIC experienced a 5% increase in its average basic rate, a decrease in the number of average basic customers of less than 1%, a 2% decrease in its average premium rate and an 11% decrease in the number of average premium subscriptions. Additionally, the December 31, 1997 termination of an agreement pursuant to which TCIC provided fulfillment services to a third party resulted in a 1 % decrease in revenue. Advertising sales and other revenue components accounted for the remaining 2% increase in revenue. Operating Costs and Expenses Operating expenses increased $20 million or 4% for the three months ended March 31, 1998, as compared to the corresponding prior year period. Exclusive of the effects of acquisitions, the Q1 1998 Contribution Transactions and other dispositions, such expenses increased 8%. Programming expenses accounted for the majority of such increase. TCIC cannot determine whether, and to what extent, increases in the cost of programming will affect its future operating costs. However, due to TCIC's obligations under the EMG Affiliation Agreement with Encore Media Group, it is anticipated that TCIC's programming costs with respect to the STARZ! and Encore premium services will increase in 1998 and future periods. See note 8 to the accompanying consolidated financial statements. (continued) I-24 26 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Results of Operations (continued) Selling, general and administrative expenses increased $21 million or 7% for the three months ended March 31, 1998, as compared to the corresponding prior year period. Exclusive of the effects of acquisitions, the Q1 1998 Contribution Transactions and other dispositions, such expenses increased 12%. Such increase is due primarily to lower launch and other incentives from programming suppliers, increased marketing costs relating to the launch of digital products and other initiatives, and other individually insignificant increases in general and administrative expenses. Certain officers and other key employees of the Company hold options with tandem stock appreciation rights to acquire TCI Group Series A Stock, Liberty Group Series A Stock and TCI Ventures Group Series A Stock as well as restricted stock awards of TCI Group Series A Stock, Liberty Group Series A Stock and TCI Ventures Group Series A Stock. Estimates of (i) compensation relating to stock appreciation rights granted to such employees of the Company and (ii) the Company's allocable portion of compensation with respect to stock appreciation rights held by certain officers and directors of TCI have been recorded in the Company's consolidated financial statements. Such estimates are subject to future adjustment based upon vesting of the related stock options and stock appreciation rights and the market value of TCI Group Series A Stock, Liberty Group Series A Stock and TCI Ventures Group Series A Stock and, ultimately, on the final determination of market value when the rights are exercised. Depreciation and amortization expense increased $28 million or 8% for the three months ended March 31, 1998, as compared to the corresponding prior year period. Such increase represents the net effect of decreases due to the Q1 1998 Contribution Transactions and other dispositions that were more than offset by increases attributable to acquisitions and capital expenditures. Other Income and Expenses TCIC's interest expense decreased $7 million or 3% for the three months ended March 31, 1998, as compared to the corresponding prior year period, as TCIC's weighted average interest rate on borrowings and weighted average debt balances were comparable between the periods. TCIC's share of CSC's losses, including amortization of the difference between the recorded value of TCIC's investment in CSC and TCIC's proportionate share of CSC's net deficiency, aggregated $18 million for the period from March 4, 1998 through March 31, 1998. As described in note 5 to the accompanying consolidated financial states of TCIC, TCIC acquired an approximate 18.7% of ownership interest in CSC on March 4, 1998. (continued) I-25 27 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Results of Operations (continued) TCIC's investments in affiliates other than CSC are comprised of limited partnerships and other entities that are primarily engaged in the domestic cable television business. TCIC's share of net earnings (losses) of affiliates was $32 million and $(12 million) during the three months ended March 31, 1998 and 1997, respectively. A significant portion of the change from the 1997 period to the 1998 period is attributable to the Company's share of a 1998 gain recognized by InterMedia Partners on the sale of certain cable television systems. Such gain was recognized by InterMedia Partners prior to the time that the Company began to consolidate InterMedia Partners. See note 4 to the accompanying consolidated financial statements. During the three months ended March 31, 1998, TCIC purchased in the open market certain notes payable which had an aggregate principle balance of $95 million. In connection with such purchases, TCIC recognized a loss on early extinguishment of debt of $16 million. Such loss related to prepayment penalties and the retirement of deferred loan costs. Minority interests in earnings of consolidated subsidiaries aggregated $43 million and $26 million for the three months ended March 31, 1998 and 1997, respectively. The majority of such amounts represent the accrual of dividends on the Trust Preferred Securities issued in 1997 and 1996 and the accrual of dividends on certain preferred securities issued in August 1996 by a subsidiary of the Company. See note 7 to the accompanying consolidated financial statements. Gain on disposition of assets of $157 million for the three months ended March 31, 1998 relates primarily to the March 4, 1998 contribution of cable television systems by TCIC to CSC. Such gain represents the excess of the $663 million fair value of CSC Class A common shares received by TCIC over the historical cost of the net assets transferred by TCIC to CSC. See note 5 to the accompanying consolidated financial statements. Net Earnings As a result of the above described fluctuations in the Company's results of operations, TCIC's net earnings (before preferred stock dividend requirements) of $38 million for the three months ended March 31, 1998 changed by $1 million, as compared to TCIC's net earnings (before preferred stock dividend requirements) of $39 million for the corresponding prior year period. (continued) I-26 28 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Financial Condition On March 4, 1998, subsidiaries of TCI (including certain subsidiaries of TCIC) contributed to CSC certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 24.5 million newly issued CSC Class A common shares (as adjusted for a stock dividend). Such shares represent an approximate 32.7% equity interest in CSC's total outstanding shares and an approximate 9% voting interest in CSC in all matters except for the election of directors, in which case TCI has an approximate 47% voting interest in the election of one-fourth of CSC's directors. CSC also assumed and repaid approximately $574 million of debt owed by TCIC to external parties and $95 million of debt owed to TCI. As a part of such transaction, TCIC subsidiaries contributed to CSC cable television systems serving approximately 410,000 customers in exchange for approximately 14.0 million shares (as adjusted for a stock dividend) or 18.7% of CSC's newly issued Class A common shares, and CSC assumed approximately $78 million of intercompany debt owed to TCIC. As a result of this transaction, TCIC recognized a $148 million gain in the accompanying consolidated statement of operations for the three months ended March 31, 1998. Such gain represents the excess of the $663 million fair value of the CSC Class A common shares received over the historical cost of the net assets transferred by TCIC to CSC. TCIC has also entered into letters of intent with CSC which provide for TCIC to acquire a cable system in Michigan and an additional 3% of CSC's Class A common shares and for CSC to (i) acquire cable systems serving approximately 250,000 customers in Connecticut and (ii) assume $110 million of TCIC's debt. The ability of TCIC to sell or increase its investment in CSC is subject to certain restrictions and limitations set forth in a stockholders agreement with CSC. During the first quarter of 1998, TCIC also completed the Q1 Joint Ventures whereby TCIC contributed cable television systems serving in the aggregate approximately 235,000 customers to two separate joint ventures in exchange for non-controlling ownership interests in each of the Q1 Joint Ventures, and the assumption and repayment by the Q1 Joint Ventures of intercompany debt owed to TCIC aggregating $343 million. In connection with the Q1 Joint Ventures, TCIC has agreed to take certain steps to support compliance by the Q1 Joint Ventures with their payment obligations under certain debt instruments, up to an aggregate total contingent commitment of $294 million. In light of such agreement, the $97 million aggregate excess of the TCIC debt assumed by the Q1 Joint Ventures over the historical cost of the remaining net assets contributed to the Q1 Joint Ventures has been reflected as a direct decrease to consolidated deficit (net of related deferred income taxes of $39 million). The Company uses the equity method of accounting to account for its investments in the Q1 Joint Ventures. On April 30, 1998, TCIC contributed certain cable television systems serving in the aggregate approximately 435,000 customers in Kentucky to a joint venture in exchange for a 49% limited partnership interest in such joint venture, and the assumption and repayment by such joint venture of intercompany debt owed to TCIC and debt owed by TCIC to external parties aggregating $812 million. In connection with such transaction, TCIC has agreed to take certain steps to support compliance by the joint venture with its payment obligations under certain debt instruments, up to an aggregate total contingent commitment of $490 million. TCIC will use the equity method of accounting to account for its investment in this joint venture. (continued) I-27 29 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Financial Condition (continued) Including the Q1 1998 Contribution Transactions and the above-described April 30, 1998 transaction, TCIC, as of April 30, 1998, has, since January 1, 1997, contributed, or signed agreements or letters of intent to contribute within the next twelve months, certain cable television systems (the "Contributed Cable Systems") serving approximately 3.5 million customers to joint ventures in which TCIC will retain non-controlling ownership interests (the "Contribution Transactions"). Following the completion of the Contribution Transactions, TCIC will no longer consolidate the Contributed Cable Systems. Accordingly, it is anticipated that the completion of the Contribution Transactions, as currently contemplated, will result in an aggregate estimated reduction (based on actual amounts with respect to the Q1 1998 Contribution Transactions and currently contemplated amounts with respect to the pending Contribution Transactions) to TCIC's debt of $4.2 billion and aggregate estimated reductions (based on 1997 amounts) to TCIC's annual revenue and annual operating income before depreciation, amortization and stock compensation of $1.5 billion and $735 million, respectively. No assurance can be given that any of the pending Contribution Transactions will be consummated. A subsidiary of TCI that is attributed to TCI Ventures Group leased certain equipment under a capital lease. During 1997, such equipment was subleased to TCIC under an operating lease. In January 1998, the Company paid $7 million to TCI Ventures Group in exchange for TCI Ventures Group's assignment of its ownership interest in such subsidiary to TCIC. Due to the related party nature of the transaction, the $50 million total of the cash payment and the historical cost of the net liabilities assumed by TCIC (including capital lease obligations aggregating $176 million) has been reflected as an increase of TCIC's consolidated deficit. At March 31, 1998, subsidiaries of the Company had approximately $1.8 billion of availability in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. Although such subsidiaries were in compliance with the restrictive covenants contained in its credit facilities at said date, additional borrowings under the credit facilities are subject to the subsidiaries' continuing compliance with such restrictive covenants after giving effect to such additional borrowings. Such restrictive covenants require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. See note 6 to the accompanying consolidated financial statements for additional information regarding the Company's debt. (continued) I-28 30 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Financial Condition (continued) One measure of liquidity is commonly referred to as "interest coverage." Interest coverage, which is measured by the ratio of "Operating Cash Flow" (operating income before depreciation, amortization and stock compensation) ($644 million and $679 million during the three months ended March 31, 1998 and 1997, respectively) to interest expense ($265 million and $272 million during the three months ended March 31, 1998 and 1997, respectively), is determined by reference to the consolidated statements of operations. The Company's interest coverage ratio was 243% and 250% during the three months ended March 31, 1998 and 1997, respectively. Management of the Company believes that the foregoing interest coverage ratio is adequate in light of the relative predictability of its cable television operations and interest expense. However, the Company's current intent is to continue to reduce its outstanding indebtedness such that its interest coverage ratio could be increased. There is no assurance that the Company will be able to achieve such objective. In the event the Company is unable to achieve such objective, management believes that net cash provided by operating activities, the ability of the Company and its subsidiaries to obtain additional financing (including the subsidiaries available lines of credit and access to public debt markets), issuances and sales of equity of its subsidiaries and proceeds from disposition of assets will provide adequate sources of short-term and long-term liquidity in the future. See the Company's consolidated statements of cash flows included in the accompanying consolidated financial statements. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Operating Cash Flow, as defined, does not take into consideration substantial costs of doing business, such as interest expense, and should not be considered in isolation to other measures of performance. Another measure of liquidity is net cash provided by operating activities, as reflected in the accompanying consolidated statements of cash flows. Net cash provided by operating activities ($258 million and $218 million during the three months ended March 31, 1998 and 1997, respectively) generally reflects net cash from the operations of the Company available for the Company's liquidity needs after taking into consideration the aforementioned additional substantial costs of doing business not reflected in Operating Cash Flow. The amount of capital expended by TCIC for property and equipment was $198 million, $80 million and $571 million during the three months ended March 31, 1998 and 1997, and the year ended December 31, 1997, respectively. In light of TCIC's plans to upgrade the capacity of its cable distribution systems, and its plans to increase the number of customers who subscribe to digital video services, TCIC anticipates that its annual capital expenditures during the next several years will significantly exceed the amount expended during 1997. In this regard, TCIC estimates that it will expend approximately $1.7 billion to $1.9 billion over the next three years to expand the capacity of its cable distribution systems. TCIC expects that the actual amount of capital that will be required in connection with its plans to increase the number of digital video service customers will be significant. However, TCIC cannot reasonably estimate such actual capital requirement since such actual capital requirement is dependent upon the extent of any customer increases and the average installed per-unit cost of digital set-top devices. As described below, TCI is obligated to purchase a significant number of digital set-top devices over the next three years. (continued) I-29 31 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Financial Condition (continued) TCIC has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $186 million at March 31, 1998. With respect to TCIC's guarantees of $166 million of such obligations, TCIC has been indemnified for any loss, claim or liability that TCIC may incur, by reason of such guarantees. The Company also has guaranteed the performance of certain affiliates and other parties with respect to such parties' contractual and other obligations. Although there can be no assurance, management of TCIC believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to TCIC. TCIC has significant contingent obligations with respect to certain of its affiliates. See note 5 to the accompanying consolidated financial statements. TCIC's fixed annual commitments pursuant to the EMG Affiliation Agreement increase annually from $220 million in 1998 to $315 million in 2003, and will increase with inflation through 2022. The Company is a party to affiliation agreements with several of its programming suppliers. Pursuant to these agreements, the Company is committed to carry such suppliers programming on its cable systems. Several of these agreements provide for penalties and charges in the event the programming is not carried or not delivered to a contractually specified number of customers. TCIC is committed to purchase billing services pursuant to three successive five year agreements. Pursuant to such arrangement, TCIC is obligated at March 31, 1998 to make minimum payments aggregating approximately $1.6 billion through December 2012. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. Pursuant to certain agreements between TCI and TCI Music, TCIC is obligated at March 31, 1998 to make minimum revenue payments through 2017 and minimum license fee payments through 2007 aggregating approximately $425 million to TCI Music. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. TCIC is a direct obligor or guarantor of the payment of certain amounts that may be due pursuant to motion picture output, distribution and license agreements. As of March 31, 1998, the amount of such obligations or guarantees was approximately $295 million. The future obligations of TCIC with respect to these agreements is not currently determinable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. (continued) I-30 32 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Financial Condition (continued) Effective as of December 16, 1997, NDTC, on behalf of TCIC and other Approved Purchasers that may be designated from time to time by NDTC, entered into the Digital Terminal Purchase Agreement with GI to purchase advanced digital set-top devices. The hardware and software incorporated into these devices will be designed and manufactured to be compatible and interoperable with the OpenCable(TM) architecture specifications adopted by CableLabs, the cable television industry's research and development consortium, in November 1997. NDTC has agreed that Approved Purchasers will purchase, in the aggregate, a minimum of 6.5 million set-top devices during calendar years 1998, 1999 and 2000 at an average price of $318 per basic set-top device (including a required royalty payment). GI agreed to provide NDTC and its Approved Purchasers the most favorable prices, terms and conditions made available by GI to any customer purchasing advanced digital set-top devices. In connection with NDTC's purchase commitment, GI agreed to grant warrants to purchase its common stock proportional to the number of devices ordered by each organization, which as of the effective date of the Digital Terminal Purchase Agreement, would have represented at least a 10% equity interest in GI (on a fully diluted basis). It is anticipated that the value associated with such equity interest would be attributed to TCI Group upon purchase and deployment of the digital set-top devices. The Company's various partnerships and other affiliates accounted for by the equity method generally fund their acquisitions, required debt repayments and capital expenditures through borrowings under and refinancing of their own credit facilities (which are generally not guaranteed by the Company), through net cash provided by their own operating activities and in certain circumstances through required capital contributions from their partners. In order to achieve the desired balance between variable and fixed rate indebtedness, the Company has entered into Interest Rate Swaps pursuant to which it (i) pays fixed interest rates of 6.2% and receives variable interest rates on a notional amount of $10 million at March 31, 1998 and (ii) pays variable interest rates and receives fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,400 million at March 31, 1998. During the three months ended March 31, 1998 and 1997, the Company's net receipts (payments) pursuant to the Fixed Rate Agreements were (less than $1 million) and $3 million, respectively; and the Company's net receipts pursuant to the Variable Rate Agreements were $3 million and $1 million, respectively. The Fixed Rate Agreement expires in August 1998. At March 31, 1998, the Company would be required to pay less than $1 million to terminate the Fixed Rate Agreement. (continued) I-31 33 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Material Changes in Financial Condition (continued) In addition to the Fixed and Variable Rate Agreements, TCIC entered into Interest Rate Swaps pursuant to which it pays a variable rate based on LIBOR (6.1% at March 31, 1998) and receives a variable rate based on CMT (6.0% at March 31, 1998) on a notional amount of $400 million through September 2000; and pays a variable rate based on LIBOR (6.0% at March 31, 1998) and receives a variable rate based on CMT (6.1% at March 31, 1998) on notional amounts of $95 million through February 2000. During the three months ended March 31, 1998, TCIC's net payments pursuant to such agreements were less than $1 million. At March 31, 1998, TCIC would be required to pay an estimated $3 million to terminate such Interest Rate Swaps. The Company is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. Further, TCIC does not anticipate material near-term losses in future earnings, fair values of cash flows resulting from derivative financial instruments as of March 31, 1998. See note 6 to the accompanying consolidated financial statements for additional information regarding Interest Rate Swaps. At March 31, 1998, after considering the net effect of the aforementioned Interest Rate Swaps, TCIC has $6,452 million (or 48%) of fixed rate debt and $6,971 million (or 52%) of variable-rate debt. Accordingly, in an environment of rising interest rates, TCIC expects that it would experience an increase in interest expense. I-32 34 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) PART II - OTHER INFORMATION Item 1. Legal Proceedings. There were no new material legal proceedings or material developments in previously reported legal proceedings during the quarter ended March 31, 1998 to which the Company or any of its consolidated subsidiaries is a party or to which any of its property is subject, except as follows: As previously reported, on February 9, 1994, Les Dunnaville and Jay Sharrieff, former employees of United Cable Television of Baltimore Limited Partnership, filed an amended complaint in the Circuit Court for Baltimore City against United Cable Television of Baltimore Limited Partnership, TCI Cablevision of Maryland, Tele-Communications, Inc. and three company employees, Roy Harbert, Tony Peduto, and Richard Bushey. This case was settled in April of 1998. The settlement did not have a material adverse effect upon the financial condition of the Company. This case will not be reported on in the future. As previously reported, on December 9, 1996, C. Lamont Smith and The Black Movie Channel, LLC filed suit in the District Court for the City and County of Denver against subsidiaries of Tele-Communications, Inc. (TCI Communications, Inc.; Mile Hi Cable Partners, LP; Liberty Media Corporation and Encore Media Corporation); Black Entertainment Television; Steve Santamaria; Media Management Group, Inc. and Virginia Butler. On August 5, 1997, the trial court entered an Order dismissing all of plaintiffs' claims against defendants Liberty and Encore as well as plaintiffs' first, second, fifth, and a portion of the twelfth claim for relief against the remaining Company defendants. The partnership's motion for judgment on the pleadings was denied with respect to plaintiffs' remaining claims. The trial court certified its rulings for an immediate appeal, which was filed by plaintiffs and will take from 12 to 18 months for a decision from the appellate court. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of this action, the ultimate disposition should not have a material adverse effect upon the financial condition of the Company. II-1 35 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Item 6. Exhibit and Reports on Form 8-K. (a) Exhibit - (27) TCI Communications, Inc. Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended March 31, 1998:
Date of Item Report Reported Financial Statements Filed ------ -------- -------------------------- February 24, 1998 Item 5 None.
II-2 36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TCI COMMUNICATIONS, INC. Date: May 13, 1998 By: /s/ Leo J. Hindery, Jr. ------------------------------------ Leo J. Hindery, Jr. President and Chief Executive Officer Date: May 13, 1998 By: /s/ Stephen M. Brett ------------------------------------ Stephen M. Brett Executive Vice President, General Counsel and Secretary Date: May 13, 1998 By: /s/ Bernard W. Schotters ------------------------------------ Bernard W. Schotters Executive Vice President (Principal Financial Officer) Date: May 13, 1998 By: /s/ Gary K. Bracken ------------------------------------ Gary K. Bracken Executive Vice President and Controller (Principal Accounting Officer) II-3 37 EXHIBIT INDEX The following exhibits are filed herewith or are incorporated by reference herein (according to the number assigned to them in Item 601 of Regulation S-K) as noted: (27) TCI Communications, Inc. Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN TCI COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 0 0 326 0 0 0 10,943 4,456 21,928 0 13,423 232 0 1 (680) 21,928 0 1,511 0 564 359 0 265 77 39 38 0 0 0 38 0 0
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