-----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, VDGfAw1VmN3/URwpRZZH9tktk1KNUj2MdVMRbcn/OyG7Kj7jofhO4DgtlUw/wrom B69lqC3Jizb9+DgF0/Y99w== 0000950134-99-009898.txt : 19991115 0000950134-99-009898.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950134-99-009898 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELE COMMUNICATIONS INC /CO/ CENTRAL INDEX KEY: 0000925692 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841260157 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20421 FILM NUMBER: 99749145 BUSINESS ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111-3000 BUSINESS PHONE: 3032675500 MAIL ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111-3000 FORMER COMPANY: FORMER CONFORMED NAME: TCI LIBERTY HOLDING CO DATE OF NAME CHANGE: 19940620 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 F O R M 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 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 0-20421 TELE-COMMUNICATIONS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) State of Delaware 84-1260157 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9197 S. Peoria Englewood, Colorado 80112 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (720) 875-4000 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 --- --- 2 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Balance Sheets (unaudited)
New TCI Old TCI ------------- ------------ September 30, December 31, 1999 1998 ------------- ------------ Assets amounts in millions - ------ Cash and cash equivalents $ -- 419 Restricted cash (note 4) 19 185 Trade and other receivables, net 478 653 Prepaid and committed program rights -- 263 Investment in Liberty Media Group and related receivables (note 5) 35,519 -- Investments in affiliates other than Liberty Media Group (the "Other Affiliates"), accounted for under the equity method (notes 6 and 12) 14,393 4,709 Investment in Time Warner, Inc. ("Time Warner") (note 2) 34 7,118 Investment in AT&T Corp. ("AT&T") (notes 2 and 11) -- 3,556 Investment in Sprint Corporation (note 2) -- 2,446 Property and equipment, at cost: Land 119 63 Distribution systems 6,243 10,107 Support equipment and buildings 999 1,769 ---------- ---------- 7,361 11,939 Less accumulated depreciation 492 4,786 ---------- ---------- 6,869 7,153 ---------- ---------- Franchise costs and other intangible assets 32,895 15,782 Less accumulated amortization 508 2,723 ---------- ---------- 32,387 13,059 ---------- ---------- Other assets, net of accumulated amortization 1,462 2,290 ---------- ---------- $ 91,161 41,851 ========== ==========
(continued) I-1 3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Balance Sheets, continued (unaudited)
New TCI Old TCI ------------- ------------ September 30, December 31, 1999 1998 ------------- ------------ Liabilities and Stockholders' Equity amounts in millions Accounts payable $ 276 229 Accrued interest 136 253 Accrued programming expense 327 471 Other accrued expenses 743 1,128 Debt (notes 2 and 8): Due to unaffiliated parties 9,449 14,052 Notes payable to AT&T 8,559 -- Deferred income taxes 18,277 9,749 Other liabilities 1,032 1,819 ---------- ---------- Total liabilities 38,799 27,701 ---------- ---------- Minority interests in equity of consolidated subsidiaries 2,175 1,460 Redeemable securities (note 2) -- 322 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Preferred Securities") holding solely subordinated debt securities (note 9) 1,649 1,500 Stockholders' equity (notes 2 and 10): Class A Series Preferred Stock, $.01 par value. Authorized 700,000 shares -- -- Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value. Authorized 1,675,096 shares; issued 1,552,490 shares -- -- Common stock, $.01 par value. Authorized 3,550,000,000 shares; issued 1,327,985,000 shares in 1999 13 -- Common stock, $1 par value: Series A TCI Group. Authorized 1,750,000,000 shares; issued 610,748,188 shares in 1998 -- 611 Series B TCI Group. Authorized 150,000,000 shares; issued 73,929,229 shares in 1998 -- 74 Series A Liberty Media Group. Authorized 750,000,000 shares; issued 367,890,546 shares in 1998 -- 368 Series B Liberty Media Group. Authorized 75,000,000 shares; issued 35,198,156 shares in 1998 -- 35 Series A TCI Ventures Group. Authorized 750,000,000 shares; issued 377,253,230 shares in 1998 -- 377 Series B TCI Ventures Group. Authorized 75,000,000 shares; issued 45,750,534 shares in 1998 -- 46 Additional paid-in capital 52,531 5,987 Accumulated other comprehensive earnings, net of taxes 2,445 3,749 Retained earnings (accumulated deficit) (2,406) 1,124 ---------- ---------- 52,583 12,371 Investment in AT&T (notes 2 and 11) (4,045) -- Treasury stock and common stock held by subsidiaries, at cost -- (1,503) ---------- ---------- Total stockholders' equity 48,538 10,868 ---------- ---------- Commitments and contingencies (notes 13 and 14) $ 91,161 41,851 ========== ==========
See accompanying notes to consolidated financial statements. I-2 4 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Operations (unaudited)
New TCI Old TCI ------------------ ------------------ Three months Three months ended ended September 30, 1999 September 30, 1998 ------------------ ------------------ amounts in millions, except per share amounts Revenue (note 11) $ 1,442 1,843 Operating costs and expenses: Operating (note 11) 599 754 Selling, general and administrative (note 11) 324 412 Year 2000 costs 16 5 AT&T merger and integration costs 4 1 Stock compensation (2) 11 Depreciation and amortization 461 421 ---------- ---------- 1,402 1,604 ---------- ---------- Operating income 40 239 Other income (expense): Interest expense: Unaffiliated parties (142) (272) AT&T (notes 2 and 8) (106) -- Interest and dividend income 1 33 Share of losses of Liberty Media Group (note 5) (217) -- Share of losses of the Other Affiliates, net (note 6) (412) (397) Minority interests in earnings of consolidated subsidiaries, net (note 9) (45) (30) Gain on issuance of stock by equity investee (note 7) -- 58 Gain on issuance of equity interests by subsidiary (note 6) -- 17 Gains on disposition of assets, net (notes 7 and 11) -- 2,605 Other, net 2 (7) ---------- ---------- (919) 2,007 ---------- ---------- Earnings (loss) before income taxes and extraordinary items (879) 2,246 Income tax benefit (expense) 239 (902) ---------- ---------- Earnings (loss) before extraordinary items (640) 1,344 Extraordinary gain (loss) (net of income taxes of $2 million and $9 million in 1999 and 1998, respectively) (note 8) 4 (4) ---------- ---------- Net earnings (loss) (636) 1,340 Dividend requirements on preferred stocks (2) (5) ---------- ---------- Net earnings (loss) attributable to common stockholders $ (638) 1,335 ========== ==========
(continued) I-3 5 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Operations, continued (unaudited)
New TCI Old TCI ------------------ ------------------ Three months Three months ended ended September 30, 1999 September 30, 1998 ------------------ ------------------ amounts in millions, except per share amounts Net earnings (loss) attributable to common stockholders: TCI Group Series A and Series B common stock $ -- 47 Liberty Media Group Series A and Series B common stock -- (11) TCI Ventures Group Series A and Series B common stock -- 1,299 ---------- ---------- $ -- 1,335 ========== ========== Basic earnings (loss) attributable to common stockholders per common share (note 3): TCI Group Series A and Series B common stock $ -- .09 ========== ========== Liberty Media Group Series A and Series B common stock $ -- (.03) ========== ========== TCI Ventures Group Series A and Series B common stock $ -- 3.07 ========== ========== Diluted earnings (loss) attributable to common stockholders per common and potential common share (note 3): TCI Group Series A and Series B common stock $ -- .08 ========== ========== Liberty Media Group Series A and Series B common stock $ -- (.03) ========== ========== TCI Ventures Group Series A and Series B common stock $ -- 2.88 ========== ========== Comprehensive earnings (loss) $ (202) 1,425 ========== ==========
See accompanying notes to consolidated financial statements. (continued) I-4 6 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Operations, continued (unaudited)
New TCI Old TCI ------------------ --------------------------------------- Seven months Two months Nine months ended ended ended September 30, 1999 February 28, 1999 September 30, 1998 ------------------ ----------------- ------------------ amounts in millions, except per share amounts Revenue (note 11) $ 3,344 1,145 5,563 Operating costs and expenses: Operating (note 11) 1,345 467 2,202 Selling, general and administrative (note 11) 807 322 1,316 Year 2000 costs 47 11 6 AT&T merger and integration costs 31 65 11 Stock compensation 72 366 423 Reserve for loss arising from contingent obligation (note 13) 50 -- -- Write-off of in-process research and development costs (note 2) 594 -- -- Depreciation and amortization 1,143 277 1,289 ---------- ---------- ---------- 4,089 1,508 5,247 ---------- ---------- ---------- Operating income (loss) (745) (363) 316 Other income (expense): Interest expense: Unaffiliated parties (346) (161) (807) AT&T (notes 2 and 8) (212) -- -- Interest and dividend income 7 13 72 Share of losses of Liberty Media Group (note 5) (818) -- -- Share of losses of the Other Affiliates, net (note 6) (789) (161) (986) Minority interests in earnings of consolidated subsidiaries, net (note 9) (103) (26) (95) Gain on issuance of stock by equity investee (note 7) -- -- 259 Gains on issuance of equity interests by subsidiaries (notes 6 and 7) -- 389 55 Gains on disposition of assets, net (notes 6, 7 and 11) -- 144 3,704 Other, net 7 8 (25) ---------- ---------- ---------- (2,254) 206 2,177 ---------- ---------- ---------- Earnings (loss) before income taxes and extraordinary items (2,999) (157) 2,493 Income tax benefit (expense) 589 (119) (1,079) ---------- ---------- ---------- Earnings (loss) before extraordinary items (2,410) (276) 1,414 Extraordinary gain (loss) (net of income taxes of $2 million and $3 million for the seven and two month periods in 1999, respectively, and $17 million in 1998) (note 8) 4 (5) (27) ---------- ---------- ---------- Net earnings (loss) (2,406) (281) 1,387 Dividend requirements on preferred stocks (5) (4) (18) ---------- ---------- ---------- Net earnings (loss) attributable to common stockholders $ (2,411) (285) 1,369 ========== ========== ==========
(continued) I-5 7 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Operations, continued (unaudited)
New TCI Old TCI ------------------ --------------------------------------- Seven months Two months Nine months ended ended ended September 30, 1999 February 28, 1999 September 30, 1998 ------------------ ----------------- ------------------ amounts in millions, except per share amounts Net earnings (loss) attributable to common stockholders: TCI Group Series A and Series B common stock $ -- (226) 130 Liberty Media Group Series A and Series B common stock -- (49) 227 TCI Ventures Group Series A and Series B common stock -- (10) 1,012 ---------- ---------- ---------- $ -- (285) 1,369 ========== ========== ========== Basic earnings (loss) attributable to common stockholders per common share (note 3): TCI Group Series A and Series B common stock $ -- (.42) .25 ========== ========== ========== Liberty Media Group Series A and Series B common stock $ -- (.13) .64 ========== ========== ========== TCI Ventures Group Series A and Series B common stock $ -- (.02) 2.40 ========== ========== ========== Diluted earnings (loss) attributable to common stockholders per common and potential common share (note 3): TCI Group Series A and Series B common stock $ -- (.43) .22 ========== ========== ========== Liberty Media Group Series A and Series B common stock $ -- (.13) .58 ========== ========== ========== TCI Ventures Group Series A and Series B common stock $ -- (.09) 2.24 ========== ========== ========== Comprehensive earnings $ 39 691 2,330 ========== ========== ==========
See accompanying notes to consolidated financial statements. I-6 8 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statement of Stockholders' Equity (unaudited)
Common Stock ------------------------------------------------------------------ Class B TCI Group Liberty Media Group TCI Ventures Group Preferred -------------------- -------------------- -------------------- Stock Series A Series B Series A Series B Series A Series B --------- -------- -------- -------- -------- -------- -------- amounts in millions Old TCI - ------- Balance at January 1, 1999 $ -- 611 74 368 35 377 46 Net loss -- -- -- -- -- -- -- Reclassification of redeemable common stock to equity upon expiration of put obligations -- -- -- -- -- -- -- Proceeds received upon termination of equity swap facilities (note 10) -- -- -- -- -- -- -- Settlement of equity swap transaction in connection with preferred stock exchange (note 10) -- -- -- -- -- -- -- Gain from contribution of cable television systems to joint venture, net of taxes (note 7) -- -- -- -- -- -- -- Issuance of common stock upon exercise of stock options -- -- -- -- -- -- -- Recognition of stock compensation related to restricted stock awards -- -- -- -- -- -- -- Issuance of restricted stock granted pursuant to stock incentive plan -- 3 -- -- -- -- -- Conversion of Series B common stock to Series A common stock -- -- -- -- -- 1 (1) Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Balance at February 28, 1999 $ -- 614 74 368 35 378 45 ======== ======== ======== ======== ======== ======== ========
Treasury stock and Accumulated common other stock Additional comprehensive held by Total paid-in earnings, Retained subsidiaries, stockholders' capital net of taxes earnings at cost equity ---------- ------------- -------- ------------- ------------- amounts in millions Old TCI - ------- Balance at January 1, 1999 5,987 3,749 1,124 (1,503) 10,868 Net loss -- -- (281) -- (281) Reclassification of redeemable common stock to equity upon expiration of put obligations 10 -- -- -- 10 Proceeds received upon termination of equity swap facilities (note 10) 677 -- -- -- 677 Settlement of equity swap transaction in connection with preferred stock exchange (note 10) (29) -- -- -- (29) Gain from contribution of cable television systems to joint venture, net of taxes (note 7) 9 -- -- -- 9 Issuance of common stock upon exercise of stock options 3 -- -- -- 3 Recognition of stock compensation related to restricted stock awards 12 -- -- -- 12 Issuance of restricted stock granted pursuant to stock incentive plan (3) -- -- -- -- Conversion of Series B common stock to Series A common stock -- -- -- -- -- Accreted dividends on all classes of preferred stock -- -- (4) -- (4) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements 2 -- -- -- 2 Foreign currency translation adjustment -- (15) -- -- (15) Change in unrealized holding gains for available-for-sale securities, net of taxes -- 987 -- -- 987 -------- -------- -------- -------- -------- Balance at February 28, 1999 6,668 4,721 839 (1,503) 12,239 ======== ======== ======== ======== ========
(continued) I-7 9 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statement of Stockholders' Equity, continued (unaudited)
Accumulated other Class B Additional comprehensive Preferred Common paid-in earnings, Accumulated Stock Stock capital net of taxes deficit ---------- ---------- ---------- ------------- ----------- amounts in millions New TCI - ------- Balance at March 1, 1999 (note 2) $ -- 13 52,142 -- -- Net loss -- -- -- -- (2,406) Payment of preferred stock dividends -- -- (10) -- -- Issuance of AT&T Common Stock upon conversion of TCI notes payable (note 8) -- -- 40 -- -- Issuance of AT&T Liberty Tracking Stock upon conversion of Liberty Media Group debt (note 5) -- -- 354 -- -- Gain from issuance of common stock by subsidiary and affiliate, net of taxes (note 6) -- -- 484 -- -- Gain from issuance of common stock by attributed subsidiary of Liberty Media Group, net of taxes -- -- 50 -- -- Utilization of net operating loss carryforwards by AT&T (notes 5 and 11) -- -- (580) -- -- Reclassification of liability for stock options upon exercise and cancellation of such options -- -- 42 -- -- Reclassification by Liberty Media Group of redeemable common stock to equity upon expiration of put obligation -- -- 9 -- -- Change in non-interest bearing intercompany account with AT&T -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities, net of taxes (note 5) -- -- -- 2,357 -- Foreign currency translation adjustments, net of taxes (note 5) -- -- -- 88 -- ---------- ---------- ---------- ---------- ---------- Balance at September 30, 1999 $ -- 13 52,531 2,445 (2,406) ========== ========== ========== ========== ==========
Total Investment stockholders' in AT&T equity ------------- ------------- amounts in millions New TCI - ------- Balance at March 1, 1999 (note 2) (4,018) 48,137 Net loss -- (2,406) Payment of preferred stock dividends -- (10) Issuance of AT&T Common Stock upon conversion of TCI notes payable (note 8) -- 40 Issuance of AT&T Liberty Tracking Stock upon conversion of Liberty Media Group debt (note 5) -- 354 Gain from issuance of common stock by subsidiary and affiliate, net of taxes (note 6) -- 484 Gain from issuance of common stock by attributed subsidiary of Liberty Media Group, net of taxes -- 50 Utilization of net operating loss carryforwards by AT&T (notes 5 and 11) -- (580) Reclassification of liability for stock options upon exercise and cancellation of such options -- 42 Reclassification by Liberty Media Group of redeemable common stock to equity upon expiration of put obligation -- 9 Change in non-interest bearing intercompany account with AT&T (27) (27) Change in unrealized holding gains for available-for-sale securities, net of taxes (note 5) -- 2,357 Foreign currency translation adjustments, net of taxes (note 5) -- 88 ---------- ---------- Balance at September 30, 1999 (4,045) 48,538 ========== ==========
See accompanying notes to consolidated financial statements. I-8 10 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Cash Flows (unaudited)
New TCI Old TCI ------------------- ------------------------------------- Seven months Two months Nine months ended ended ended September 30, 1999 February 28, 1999 September 30, 1998 ------------------- ----------------- ------------------ amounts in millions (see note 4) Cash flows from operating activities: Net earnings (loss) before extraordinary items $ (2,410) (276) 1,414 Adjustments to reconcile net earnings (loss) before extraordinary items to net cash provided by (used in) operating activities: Depreciation and amortization 1,143 277 1,289 Stock compensation 72 366 423 Payments of obligation relating to stock compensation (47) (294) (161) Reserve for loss arising from contingent obligation 50 -- -- Payment of amounts relating to contingent obligation (116) -- -- Share of losses of Liberty Media Group 818 -- -- Share of losses of the Other Affiliates, net 789 161 986 Minority interests in earnings of consolidated subsidiaries, net 103 26 95 Gains on issuance of equity interests by subsidiaries -- (389) (55) Gain on issuance of stock by equity investee -- -- (259) Gains on disposition of assets, net -- (144) (3,704) Deferred income tax expense (benefit) (377) 116 1,026 Write-off of in-process research and development costs 594 -- -- Other noncash charges (credits) (53) 1 (3) Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables and prepaids 11 (84) (191) Change in non-interest bearing intercompany account with AT&T (27) -- -- Change in other accruals and payables (23) 44 (112) ---------- ---------- ---------- Net cash provided by (used in) operating activities 527 (196) 748 ---------- ---------- ---------- Cash flows from investing activities: Cash paid for acquisitions and exchanges, net (75) (353) (166) Capital expended for property and equipment (1,910) (297) (1,123) Effect on cash and cash equivalents of deconsolidation of subsidiaries (401) (53) -- Investments in and loans to affiliates (101) (52) (1,346) Collections of loans to affiliates, net 127 709 1,675 Proceeds from disposition of assets 38 344 712 Change in restricted cash 36 112 (335) Other investing activities (28) 65 (73) ---------- ---------- ---------- Net cash provided by (used in) investing activities (2,314) 475 (656) ---------- ---------- ---------- Cash flows from financing activities: Borrowings of debt 3,584 583 4,645 Repayments of debt (2,228) (1,468) (4,213) Payment of dividends on subsidiary preferred stock and Trust Preferred Securities (124) (12) (141) Payment of preferred stock dividends (10) (4) (27) Proceeds received upon termination of equity swap facilities -- 677 -- Prepayment penalties -- (4) (39) Repurchase of common stock -- -- (31) Repurchase of subsidiary common and preferred stock -- (45) (15) Payments for call agreements -- -- (274) Proceeds from issuance of subsidiary stock -- -- 91 Other financing activities (10) 8 (12) ---------- ---------- ---------- Net cash provided by (used in) financing activities 1,212 (265) (16) ---------- ---------- ---------- Net change in cash and cash equivalents (575) 14 76 Cash and cash equivalents at beginning of period 575 419 244 ---------- ---------- ---------- Cash and cash equivalents at end of period $ -- 433 320 ========== ========== ==========
See accompanying notes to consolidated financial statements. I-9 11 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1999 (unaudited) (1) Basis of Presentation The accompanying consolidated financial statements include the accounts of Tele-Communications, Inc. and those of all of its subsidiaries ("TCI" or the "Company"). On March 9, 1999, AT&T acquired TCI in a merger transaction (the "AT&T Merger"). For financial reporting purposes the AT&T Merger and related restructuring transactions described in note 2 are deemed to have occurred on March 1, 1999. The consolidated financial statements for periods prior to March 1, 1999 are referred to herein as "Old TCI", and the consolidated financial statements for periods subsequent to February 28, 1999 are referred to herein as "New TCI." Due to the March 1, 1999 application of purchase accounting in connection with the AT&T Merger, the predecessor consolidated financial statements of Old TCI are not comparable to the successor consolidated financial statements of New TCI. In the following text, "TCI" and "the Company" refer to both Old TCI and New TCI. See note 2. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 TCI's Annual Report on Form 10-K for the year ended December 31, 1998. 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. Prior to the AT&T Merger, TCI generally recognized changes in its proportionate share of the underlying equity of a subsidiary or equity method investee, which resulted from the issuance of additional equity securities by such subsidiary or equity investee, in the consolidated statement of operations. Upon consummation of the AT&T Merger, TCI began to account for such changes in the underlying equity of its subsidiaries and affiliates as equity transactions in order to conform with AT&T's accounting policy. Certain prior period amounts have been reclassified for comparability with the current period presentation. (continued) I-10 12 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Targeted Stock Prior to the AT&T Merger, the Company's assets and operations were included in three separate groups, each of which was tracked separately by public equity securities. These groups were formerly known as the "Liberty Media Group" (referred to herein as the "Old Liberty Group"), the "TCI Ventures Group" and the "TCI Group." Old Liberty Group was intended to reflect the separate performance of TCI's assets which produce and distribute programming services. The TCI Ventures Group was intended to reflect the separate performance of TCI's principal international assets and businesses and substantially all of TCI's non-cable and non-programming assets. The TCI Group was intended to reflect the separate performance of TCI and its subsidiaries and assets not attributed to Old Liberty Group or TCI Ventures Group. Such subsidiaries and assets are comprised primarily of TCI's domestic cable and communications business. TCI Group, Old Liberty Group and TCI Ventures Group individually may be referred to herein as a "Group." The TCI Group was tracked separately through the Tele-Communications, Inc. Series A TCI Group Common Stock (the "TCI Group Series A Stock") and Series B TCI Group Common Stock (the "TCI Group Series B Stock," and together with the TCI Group Series A Stock, the "TCI Group Stock"). The Old Liberty Group was tracked through the Tele-Communications, Inc. Series A Liberty Media Group Common Stock ("Liberty Group Series A Stock") and Series B Liberty Media Group Common Stock ("Liberty Group Series B Stock" and together with the Liberty Group Series A Stock, the "Liberty Group Stock"). The TCI Ventures Group was tracked separately through the Tele-Communications, Inc. Series A TCI Ventures Group Common Stock ("TCI Ventures Group Series A Stock") and Series B TCI Ventures Group Common Stock ("TCI Ventures Group Series B Stock" and together with the TCI Ventures Group Series A Stock, the "TCI Ventures Group Stock"). Upon consummation of the AT&T Merger, each of the separate series of Tele-Communications, Inc. common stock was converted either into shares of AT&T common stock, par value $1.00 per share, ("AT&T Common Stock") or shares of one of two classes of a new AT&T tracking stock designated to track the combined Old Liberty Group and TCI Ventures Group after giving effect to certain asset transfers. See note 2. (continued) I-11 13 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) Merger with AT&T and Related Accounting On March 9, 1999, AT&T acquired TCI in the AT&T Merger, in which Italy Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into TCI, and TCI thereby became a subsidiary of AT&T. As a result of the AT&T Merger, (i) each share of TCI Group Series A Stock was converted into 1.16355 shares of AT&T Common Stock, (ii) each share of TCI Group Series B Stock was converted into 1.27995 shares of AT&T Common Stock, (iii) each share of Liberty Group Series A Stock was converted into 2 shares of a newly created class of AT&T common stock designated as the Class A Liberty Media Group Common Stock, par value $1.00 per share (the "AT&T Liberty Class A Tracking Stock"), (iv) each share of Liberty Group Series B Stock was converted into 2 shares of a newly created class of AT&T common stock designated as the Class B Liberty Media Group Common Stock, par value $1.00 per share (the "AT&T Liberty Class B Tracking Stock" and together with the AT&T Liberty Class A Tracking Stock, the "AT&T Liberty Tracking Stock"), (v) each share of TCI Ventures Group Series A Stock was converted into 1.04 shares of AT&T Liberty Class A Tracking Stock, (vi) each share of TCI Ventures Group Series B Stock was converted into 1.04 shares of AT&T Liberty Class B Tracking Stock, (vii) each share of TCI's Convertible Preferred Stock, Series C-TCI Group (the "Series C-TCI Group Preferred Stock") was converted into 154.589253 shares of AT&T Common Stock, (viii) each share of TCI's Convertible Preferred Stock Series C-Liberty Media Group (the "Series C-Liberty Media Group Preferred Stock") was converted into 112.50 shares of AT&T Liberty Class A Tracking Stock, (ix) each share of TCI's Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G Preferred Stock") was converted into 1.3846245 shares of AT&T Common Stock and (x) each share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H ("Series H Preferred Stock") was converted into 1.18125 shares of AT&T Liberty Class A Tracking Stock. Following the AT&T Merger, each share of Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock ("Class B Preferred Stock") continues to be outstanding as the Class B Preferred Stock of TCI with the same rights and preferences such stock had prior to the AT&T Merger. In general, the holders of shares of AT&T Liberty Class A Tracking Stock and the holders of shares of AT&T Liberty Class B Tracking Stock will vote together as a single class with the holders of shares of AT&T Common Stock on all matters presented to such stockholders, with the holders being entitled to 3/40th of a vote for each share of AT&T Liberty Class A Tracking Stock held, 3/4ths of a vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote per share of AT&T Common Stock held. (continued) I-12 14 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are intended to reflect the separate performance of the businesses and assets attributed to Old Liberty Group and TCI Ventures Group at the time of the AT&T Merger. References herein to "Liberty/Ventures Group" refer to the combined assets and businesses of Old Liberty Group and TCI Ventures Group for periods prior to the AT&T Merger, and subsequent to the AT&T Merger such combined assets and business are referred to as "Liberty Media Group." Pursuant to, and subject to the terms and conditions set forth in the Agreement and Plan of Restructuring and Merger, dated as of June 23, 1998 (the "Merger Agreement"), immediately prior to the AT&T Merger, certain assets previously attributed to TCI Ventures Group (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and Teleport Communications Group, Inc. ("TCG"), the stock of At Home Corporation ("@Home") attributed to TCI Ventures Group, the assets and business of the National Digital Television Center, Inc. ("NDTC") and TCI Ventures Group's equity interest in Western Tele-Communications, Inc. ("WTCI")) were transferred to TCI Group in exchange for approximately $5.5 billion in cash. Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty Media Group and AT&T, Liberty Media Group became entitled to the benefit of approximately $2 billion of net operating loss carryforwards attributable to all entities included in TCI's consolidated federal income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service and are subject to limitations on usage which may affect the ultimate amount utilized. Additionally, certain warrants to purchase shares of General Instruments Corporation ("GI") previously attributed to TCI Group were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. The transfer of certain immaterial assets was also effected. Immediately prior to the AT&T Merger, AT&T and Liberty Media Corporation entered into an agreement relating to the carriage of programming of Liberty Media Group to be distributed over the AT&T cable systems. Pursuant to this agreement, Liberty Media Group will be granted, among other rights, "preferred vendor status" with respect to certain types of new programming services. Liberty Media Group will also be entitled to the use of channel capacity equal to one six megahertz channel to be used for category specific interactive video channels. In addition, such agreement also provided for the extension of existing affiliation agreements between TCI and programming affiliates of Liberty Media Group to a date not less than 10 years from the closing of the AT&T Merger, upon the terms and conditions set forth in such agreement. (continued) I-13 15 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Pursuant to amended corporate governance documents for the entities included in Liberty Media Group and certain agreements among AT&T and TCI, the business of Liberty Media Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T Merger. AT&T will initially designate one third of the directors of such entities and its rights as the sole shareholder of the common stock of such entities following the AT&T Merger will, in accordance with Delaware law, be limited to actions which will require shareholder approval. Therefore, management has concluded that TCI does not have a controlling financial interest (as that term is used in Statement of Financial Accounting Standards No. 94) in the entities comprising the Liberty Media Group following the AT&T Merger, and will account for its ownership interests in such entities under the equity method. Immediately prior to the AT&T Merger, TCI restructured its ownership of certain of its subsidiaries (the "Restructuring"). The Restructuring included merging TCI's cable subsidiary, TCI Communications, Inc. ("TCIC"), into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of TCIC have been assumed by TCI, including TCIC's public debt. In connection with TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred Stock, Series A was converted into 2.119 shares of TCI Group Series A Stock, and such shares of TCI Group Series A Stock were subsequently converted into AT&T Common Stock in connection with the AT&T Merger. All other public securities issued by subsidiaries of TCIC (other than TCI Pacific Communications, Inc. ("Pacific")) otherwise remained unaffected. Furthermore, as part of the Restructuring, (i) AT&T loaned TCI $5.5 billion pursuant to a promissory note, (ii) certain asset transfers were made between TCI and its subsidiaries, (iii) 123,896 shares of the Company's Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock") which were held by subsidiaries of TCI, were converted into 185,428,946 shares of TCI Group Series A Stock (which in turn were converted into 215,755,850 shares of AT&T Common Stock in the AT&T Merger and continue to be held by subsidiaries of TCI), (iv) the remaining 154,411 shares of Series F Preferred Stock which were formerly held by subsidiaries of TCI were distributed to TCI through a series of liquidations and canceled, and (v) 125,728,816 shares of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock, 6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each formerly held by subsidiaries of TCI, were distributed to TCI through a series of liquidations and canceled. Under the terms of the 5% Class A Senior Cumulative Exchangeable Preferred Stock of Pacific (the "Exchangeable Preferred Stock"), each share of that preferred stock is exchangeable, from and after August 1, 2001, for approximately 6.3375 shares of AT&T Common Stock, subject to certain anti-dilution adjustments. Additionally, Pacific may elect to make any dividend, redemption or liquidation payment on the Exchangeable Preferred Stock in cash, by delivery of shares of AT&T Common Stock or by a combination of the foregoing forms of consideration. (continued) I-14 16 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The AT&T Merger has been accounted for using the purchase method of accounting and has been deemed to be effective as of March 1, 1999 for financial reporting purposes. Accordingly, the preliminary allocation of AT&T's purchase price to acquire Old TCI has been reflected in TCI's consolidated financial statements as of March 1, 1999. A final allocation of such purchase price will be made upon resolution of pre-acquisition contingencies and receipt of final third party appraisals. Certain transactions occurring between March 1, 1999 and March 9, 1999 that affected Old TCI's equity and stock compensation have been reflected in the two-month period ended February 28, 1999. The $52.2 billion aggregate value assigned to TCI's net assets as a result of the application of purchase accounting was comprised of the following:
amounts in millions Issuance of AT&T Common Stock $ 26,798 Issuance of AT&T Liberty Tracking Stock 23,360 Assumption of convertible notes 1,593 Assumption of Class B Preferred Stock 154 Estimated merger costs 250 ---------------- $ 52,155 ================
The value assigned to the AT&T Common Stock was based on the average closing price of AT&T Common Stock a few days before and after the AT&T Merger was agreed to and announced. The value assigned to the AT&T Liberty Tracking Stock was based on the average closing price of Liberty Group Stock a few days before and after the AT&T Merger was agreed to and announced. The Liberty Group Stock was used to value the AT&T Liberty Tracking Stock issued in the AT&T Merger because the fair value of Liberty Group Stock was more readily determinable than the fair value of the AT&T Liberty Tracking Stock. (continued) I-15 17 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table reflects the opening summarized balance sheet of New TCI as adjusted to give effect to the Restructuring, the preliminary allocation of AT&T's purchase price to acquire TCI (as adjusted through September 30, 1999), and the deconsolidation of the entities comprising Liberty Media Group following the AT&T Merger:
amounts in millions Assets Cash and cash equivalents $ 575 Restricted cash 55 Receivables and prepaid assets 518 Investment in Liberty Media Group 33,728 Investment in the Other Affiliates 11,919 Property and equipment 5,455 Intangible assets 35,274 Other assets 2,437 -------- $ 89,961 ======== Liabilities and Stockholders' Equity Accounts payable and accrued expenses $ 1,742 Debt 16,844 Deferred income taxes 17,959 Other liabilities 1,053 -------- Total liabilities 37,598 -------- Minority interests in equity of consolidated subsidiaries 2,566 Trust Preferred Securities 1,660 Stockholders' equity 52,155 Investment in AT&T (4,018) -------- Total stockholders' equity 48,137 -------- $ 89,961 ========
The following table reflects the change in cash and cash equivalents as a result of the Restructuring and the deconsolidation of Liberty Media Group:
amounts in millions Cash and cash equivalents of Old TCI at February 28, 1999 $ 433 Cash received from AT&T in Restructuring 5,461 Decrease in cash due to deconsolidation of Liberty Media Group (5,319) -------- Cash and cash equivalents of New TCI at March 1, 1999 $ 575 ========
(continued) I-16 18 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the application of purchase accounting, New TCI has recorded its assets and liabilities at their preliminary fair values on March 9, 1999. During the third quarter of 1999, $19 billion of goodwill recorded in connection with the preliminary allocation of AT&T's purchase price to acquire Old TCI was reclassified to franchise costs. Franchise costs represent the value attributable to the agreements with local franchise authorities that allow access to homes in TCI's service areas. As with goodwill, franchise costs are amortized over 40 years. Generally accepted accounting principles require deferred income taxes to be recorded on the difference between the financial reporting basis and income tax basis of franchise costs, whereas no such requirement exists for goodwill. Accordingly, during the third quarter of 1999, New TCI recorded an increase to its deferred income tax liability of approximately $12 billion, and recorded an equal and offsetting increase to franchise costs. This reclassification and its related deferred income tax effects were given retroactive effect to the March 9, 1999 acquisition date in order to provide for meaningful comparisons. Such retroactive treatment had no impact on New TCI's net loss since the increased amortization of franchise costs was fully offset by the deferred income tax benefit of such amortization. During the second and third quarters of 1999, further refinements were also made to the preliminary allocation of AT&T's purchase price to acquire Old TCI as a result of the appraisal process. Refinements of the allocation of AT&T's purchase price to acquire Old TCI are treated as changes in estimates and accounted for prospectively. As of September 30, 1999, the allocation of AT&T's purchase price to acquire Old TCI had not been finalized. Accordingly, the Company may make additional refinements to the preliminary allocation of AT&T's purchase price to acquire Old TCI in future periods. In addition to the above, certain of the more significant effects of purchase accounting are described below. New TCI's intangible assets in the March 1, 1999 opening consolidated balance sheet also include $594 million of in-process research and development costs. Such amount reflects the value, as of the acquisition date, of the Company's research and development projects which had not yet reached technological feasibility and which had no alternative future use. Such in-process research and development costs were written-off during March 1999. As a result of the application of purchase accounting, the amount assigned to New TCI's other liabilities includes $237 million which represents New TCI's estimated liability for unvested stock appreciation rights as of March 9, 1999. Such unvested stock appreciation rights will vest over remaining periods ranging from 1 to 5 years. The amount assigned to New TCI's minority interests in equity of consolidated subsidiaries includes $2.1 billion which represents the fair value of the redeemable preferred stock of a subsidiary. For additional information regarding the effects of purchase accounting on New TCI's assets and liabilities, see notes 6, 8, 9 and 13. (continued) I-17 19 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following unaudited condensed results of operations for the nine months ended September 30, 1999 and 1998 were prepared assuming the AT&T Merger, the Restructuring and the deconsolidation of Liberty Media Group occurred on January 1, 1998. These pro forma amounts are not necessarily indicative of operating results which would have occurred if the AT&T Merger, the Restructuring and the deconsolidation of Liberty Media Group had occurred on January 1, 1998.
Nine months ended September 30, ------------------------------- 1999 1998 ----------- ----------- amounts in millions Revenue $ 4,285 4,735 Net earnings (loss) before extraordinary items $ (2,958) 885 Net earnings (loss) $ (2,959) 858
(3) Earnings (Loss) Per Common and Potential Common Share Basic earnings per share ("EPS") is measured as the income or loss attributable to common stockholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect are excluded from diluted EPS. Basic and diluted EPS are presented only for periods prior to the AT&T Merger. Subsequent to the AT&T Merger, all shares of common stock of TCI are held by AT&T. See notes 1 and 2. (a) TCI Group Stock The basic earnings (loss) attributable to TCI Group common stockholders per common share for the two months ended February 28, 1999 and the three and nine month periods ended September 30, 1998 was computed by dividing net earnings (loss) attributable to TCI Group common stockholders by the weighted average number of common shares outstanding of TCI Group Stock during the period. The diluted loss attributable to TCI Group common stockholders per common share for the two months ended February 28, 1999 was computed by dividing net loss attributable to TCI Group common stockholders, which is increased by aggregate fees paid on equity swap facilities of $4 million during 1999, by the weighted average number of common shares outstanding of TCI Group Stock during the period. Potential common shares were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (continued) I-18 20 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The diluted earnings attributable to TCI Group common stockholders per common share for the three and nine months ended September 30, 1998 was computed by dividing net earnings attributable to TCI Group common stockholders, which is adjusted by the addition of preferred stock dividends and interest accrued during the three and nine months ended September 30, 1998 to net earnings, assuming conversion of TCI Group convertible securities as of the beginning of the period to the extent that the assumed conversion of such securities would have been dilutive, by the weighted average number of common shares and dilutive potential common shares outstanding of TCI Group Stock during the period. Shares issuable upon conversion of the Series C-TCI Group Preferred Stock, the Convertible Preferred Stock, Series D ("Series D Preferred Stock"), the Series G Preferred Stock, certain stock rights, preferred stock of subsidiaries, convertible notes payable, stock options and other performance awards have been included in the diluted calculation of weighted average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. All of the outstanding shares of Series D Preferred Stock were redeemed effective April 1, 1998. In connection with the March 9, 1999 AT&T Merger, TCI Group Stock was converted into AT&T Common Stock. See note 2. (continued) I-19 21 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Information concerning the reconciliation of basic EPS to diluted EPS with respect to TCI Group Stock is presented below:
Old TCI --------------------------------------------------------- Two months Three months Nine months ended ended ended February 28, 1999 September 30, 1998 September 30, 1998 ----------------- ------------------ ------------------ amounts in millions, except per share amounts Basic EPS: Earnings (loss) attributable to common stockholders $ (226) 47 130 ========== ========== ========== Weighted average common shares 539 523 521 ========== ========== ========== Basic earnings (loss) per share attributable to common stockholders $ (.42) .09 .25 ========== ========== ========== Diluted EPS: Earnings (loss) attributable to common stockholders $ (226) 47 130 Add preferred dividend requirements -- -- -- Add interest expense -- -- -- Less fees paid on equity swap facilities (4) 1 2 ---------- ---------- ---------- Adjusted earnings (loss) attributable to common stockholders assuming conversion of preferred shares $ (230) 48 132 ========== ========== ========== Weighted average common shares 539 523 521 ---------- ---------- ---------- Add dilutive potential common shares: Employee and director options and other performance awards -- 12 10 Stock right -- 1 -- Convertible notes payable -- 24 24 Series C-TCI Group Preferred Stock -- -- -- Series D Preferred Stock -- -- -- Series G Preferred Stock -- -- -- Preferred stock of subsidiaries -- 45 45 ---------- ---------- ---------- Dilutive potential common shares -- 82 79 ---------- ---------- ---------- Diluted weighted average common shares 539 605 600 ========== ========== ========== Diluted earnings (loss) per share attributable to common stockholders $ (.43) .08 .22 ========== ========== ==========
I-20 22 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (b) Liberty Group Stock The basic earnings (loss) attributable to Old Liberty Group common stockholders per common share for the two months ended February 28, 1999 and the three and nine month periods ended September 30, 1998 was computed by dividing net earnings (loss) attributable to Old Liberty Group common stockholders by the weighted average number of common shares outstanding of Liberty Group Stock during the period. The diluted loss attributable to Old Liberty Group common stockholders per common share for the two months ended February 28, 1999 and the three months ended September 30, 1998 was computed by dividing the net loss attributable to Old Liberty Group stockholders by the weighted average number of common shares outstanding of Liberty Group Stock during the period. Potential common shares were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. The diluted earnings attributable to Old Liberty Group common stockholders per common and potential common share for the nine months ended September 30, 1998 was computed by dividing earnings attributable to Old Liberty Group common stockholders by the weighted average number of common and dilutive potential common shares outstanding of Liberty Group Stock during the period. Shares issuable upon conversion of the Series C-Liberty Media Group Preferred Stock, the Series D Preferred Stock, the Series H Preferred Stock, convertible notes payable, stock options and other performance awards have been included in the diluted calculation of weighted average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. All of the outstanding shares of Series D Preferred Stock were redeemed effective April 1, 1998. Numerator adjustments for dividends and interest associated with the convertible preferred shares and convertible notes payable, respectively, were not made to the computation of diluted earnings per share as such dividends and interest were paid by TCI Group. In connection with the AT&T Merger, Liberty Group Stock was converted into AT&T Liberty Tracking Stock. See note 2. (continued) I-21 23 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Information concerning the reconciliation of basic EPS to diluted EPS with respect to Liberty Group Stock is presented below:
Old TCI ------------------------------------------------------------ Two months Three months Nine months ended ended ended February 28, 1999 September 30, 1998 September 30, 1998 ----------------- ------------------ ------------------ amounts in millions, except per share amounts Basic EPS: Earnings (loss) attributable to common stockholders $ (49) (11) 227 ============ ============ ============ Weighted average common shares 367 357 357 ============ ============ ============ Basic earnings (loss) per share attributable to common stockholders $ (.13) (.03) .64 ============ ============ ============ Diluted EPS: Earnings (loss) attributable to common stockholders $ (49) (11) 227 ============ ============ ============ Weighted average common shares 367 357 357 ------------ ------------ ------------ Add dilutive potential common shares: Employee and director options and other performance awards -- -- 8 Convertible notes payable -- -- 19 Series C-Liberty Media Group Preferred Stock -- -- 4 Series D Preferred Stock -- -- -- Series H Preferred Stock -- -- 4 ------------ ------------ ------------ Dilutive potential common shares -- -- 35 ------------ ------------ ------------ Diluted weighted average common shares 367 357 392 ============ ============ ============ Diluted earnings (loss) per share attributable to common stockholders $ (.13) (.03) .58 ============ ============ ============
(c) TCI Ventures Group Stock The basic earnings (loss) attributable to TCI Ventures Group common stockholders per common share for the two months ended February 28, 1999 and the three and nine month periods ended September 30, 1998 was computed by dividing net earnings (loss) attributable to TCI Ventures Group common stockholders by the weighted average number of common shares outstanding of TCI Ventures Group Stock during the period. The diluted loss attributable to TCI Ventures Group common stockholders per common share for the two months ended February 28, 1999 was computed by dividing the net loss attributable to TCI Ventures Group stockholders by the weighted average number of common shares outstanding of TCI Ventures Group during the period. In 1999, the net loss attributable to TCI Ventures Group common stockholders is increased by $29 million for charges recorded directly to equity upon settlement of an equity swap transaction. See note 10. For purposes of computing diluted EPS such amount is assumed to be charged to earnings. Potential common shares were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (continued) I-22 24 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The diluted earnings attributable to TCI Ventures Group common stockholders per common share for the three and nine month periods ended September 30, 1998 was computed by dividing net earnings attributable to TCI Ventures Group common stockholders by the weighted average number of common shares outstanding of TCI Ventures Group Stock during the period. Shares issuable upon conversion of convertible notes payable, stock options and other performance awards have been included in the diluted calculation of weighted average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. Numerator adjustments for interest associated with convertible notes payable were not made to the computation of diluted earnings per share as such interest was paid by TCI Group. In connection with the March 9, 1999 AT&T Merger, TCI Ventures Group Stock was converted into AT&T Liberty Tracking Stock. See note 2. Information concerning the reconciliation of basic EPS to diluted EPS with respect to TCI Ventures Group is presented below:
Old TCI ----------------------------------------------------------- Two months Three months Nine months ended ended ended February 28, 1999 September 30, 1998 September 30, 1998 ----------------- ------------------ ------------------ amounts in millions, except per share amounts Basic EPS: Earnings (loss) attributable to common stockholders $ (10) 1,299 1,012 ============ ============ ============ Weighted average common shares 423 423 422 ============ ============ ============ Basic earnings (loss) per share attributable to common stockholders $ (.02) 3.07 2.40 ============ ============ ============ Diluted EPS: Earnings (loss) attributable to common stockholders $ (10) 1,299 1,012 ============ ============ ============ Weighted average common shares 423 423 422 ------------ ------------ ------------ Add dilutive potential common shares: Employee and director options and other performance awards -- 7 9 Convertible notes payable -- 21 21 ------------ ------------ ------------ Dilutive potential common shares -- 28 30 ------------ ------------ ------------ Diluted weighted average common shares 423 451 452 ============ ============ ============ Diluted earnings (loss) per share attributable to common stockholders $ (.09) 2.88 2.24 ============ ============ ============
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows Cash paid for interest was $395 million, $287 million and $905 million for the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September, 1998, respectively. Cash paid for income taxes was not material during such periods. (continued) I-23 25 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Significant non-cash investing and financing activities and certain supplemental disclosures with respect to the statement of cash flows are reflected below:
New TCI Old TCI ------------------ -------------------------------------- Seven months Two months Nine months ended ended ended September 30, 1999 February 28, 1999 September 30, 1998 ------------------ ----------------- ------------------ amounts in millions Cash paid for acquisitions: Recorded value of assets acquired $ (34) (353) (906) Net liabilities assumed -- -- 79 Deferred tax liability recorded in acquisitions -- -- 105 Change in minority interests in equity of consolidated subsidiaries -- -- (215) Elimination of notes receivable from affiliates -- -- 350 Common stock issued in acquisitions -- -- 376 ------------ ------------ ------------ Cash paid for acquisitions $ (34) (353) (211) ============ ============ ============ Cash received (paid) in exchanges: Recorded value of assets acquired $ (2,243) -- (72) Historical cost of assets exchanged 2,202 -- 87 Gain recorded on exchange of assets -- -- 30 ------------ ------------ ------------ Cash received (paid) in exchanges $ (41) -- 45 ============ ============ ============ Capitalized costs of distribution agreements for @Home $ 79 -- 83 ============ ============ ============
(continued) I-24 26 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company ceased to include TV Guide, Inc. ("TV Guide") in its consolidated financial results and began to account for TV Guide using the equity method of accounting effective February 28, 1999 (see note 7). In addition, during the second quarter of 1999, the Company ceased to include @Home in its consolidated financial results and began to account for @Home using the equity method of accounting (see note 6). The effects of changing the method of accounting for the Company's ownership interests in TV Guide and @Home from the consolidation method to the equity method are summarized below:
Seven months Two months ended ended September 30, 1999 February 28, 1999 ------------------ ----------------- amounts in millions Assets (other than cash and cash equivalents) reclassified to investments in affiliates $ (918) (572) Liabilities reclassified to investments in affiliates 357 190 Minority interests in equity of subsidiaries reclassified to investments in affiliates 474 63 Gain on issuance of equity by subsidiary, net of taxes 488 372 ------------ ------------ Decrease in cash and cash equivalents $ 401 53 ============ ============
For a description of certain additional non-cash transactions, see notes 2, 6 and 7. The Company's restricted cash of $19 million at September 30, 1999, includes amounts held in escrow of $10 million and proceeds received in connection with certain asset dispositions. Such proceeds, which aggregated $9 million, are designated to be reinvested in certain identified assets for income tax purposes. (continued) I-25 27 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Investment in Liberty Media Group As described in note 2, immediately following the AT&T Merger, the entities comprising the Liberty Media Group were deconsolidated. The Company's investment in Liberty Media Group includes non-interest bearing receivables from Liberty Media Group. Summarized unaudited results of operations for Liberty Media Group for the period in which the Company used the equity method to account for Liberty Media Group are as follows:
Seven months ended September 30, 1999 ------------------ amounts in millions Revenue $ 506 Operating costs and expenses (408) Stock compensation (432) Depreciation and amortization (394) ------------ Operating loss (728) Interest expense (87) Share of losses of affiliates, net (597) Other, net 189 ------------ Loss before income taxes (1,223) Income tax benefit 405 ------------ Net loss $ (818) ============
During March and April 1999, certain convertible debentures of a subsidiary attributed to the Liberty Media Group were converted into shares of AT&T Liberty Tracking Stock. The $354 million principal amount of such converted debentures has been reflected as an increase to New TCI's "Additional paid-in capital." The accompanying consolidated statement of stockholders' equity for the seven months ended September 30, 1999 includes changes in Liberty Media Group's unrealized holding gains for available-for-sale securities totaling $2,320 million, net of taxes, and Liberty Media Group's foreign currency translation adjustments totaling $88 million, net of taxes. During the third quarter of 1999, AT&T utilized $85 million of Liberty Media Group's net operating loss carryforwards to offset AT&T's current federal income tax liability. Liberty Media Group did not receive any consideration for the utilization of such net operating loss carryforwards. Accordingly, AT&T's utilization of Liberty Media Group's net operating loss carryforwards has been reflected as a decrease to New TCI's "Additional paid-in capital." (continued) I-26 28 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) Investments in the Other Affiliates The Company has various investments in the Other Affiliates accounted for under the equity method. The following table includes the Company's carrying value of its more significant investments in the Other Affiliates as of the indicated dates:
New TCI Old TCI ------------- ------------ September 30, December 31, 1999 1998 ------------- ------------ amounts in millions Cablevision Systems Corporation ("CSC")(a) $ 3,130 945 @Home(b) 2,866 -- Lenfest Communications, Inc. 2,196 (138) Texas Cable Partners, L.P. 1,570 111 Bresnan Communications Group LLC ("Bresnan") 873 -- Falcon Communications, L.P. ("Falcon") 660 189 InterMedia Capital Partners IV, L.P. ("InterMedia IV") and InterMedia Capital Management IV, L.P. ("ICM IV") 641 201 USA Networks, Inc. and related investments(c) -- 1,042 Various foreign equity investments(c) -- 1,492 Other 2,457 867 ------------ ------------ $ 14,393 4,709 ============ ============
----------------- (a) CSC On March 4, 1998, the Company contributed to CSC certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 48.9 million newly issued CSC Class A common shares (the "CSC Transaction"). CSC also assumed and repaid approximately $574 million of debt owed by the Company to external parties and $95 million of debt owed to the Company. As a result of the CSC Transaction, the Company recognized a $506 million gain in the accompanying consolidated statement of operations for the nine months ended September 30, 1998. Such gain represents the excess of the $1,161 million fair value of the CSC Class A common shares received over the historical cost of the net assets transferred by the Company to CSC. (continued) I-27 29 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At September 30, 1999, the Company owned 48,942,172 shares of CSC Class A common stock, which had a closing market price of $72.75 per share on such date. Such shares represented an approximate 32% equity interest in CSC's total outstanding shares and an approximate 9% voting interest in CSC in all matters except for (i) the election of directors, in which case the Company effectively has the right to designate two of CSC's directors, and (ii) any increase in authorized shares, in which case the Company has agreed to vote its interest in proportion with the public holders of CSC Class A common shares. The ability of the Company to sell or increase its investment in CSC is subject to certain restrictions and limitations set forth in a stockholders agreement with CSC. As a result of the deconsolidation of Liberty Media Group, 1,040,400 shares of CSC Class A common stock held by Liberty Media Group are no longer included in the Company's investment in CSC. See note 2. (b) @Home During the second quarter of 1999, the stockholders of @Home approved certain changes in the corporate governance of @Home. As a result of these changes, management concluded that TCI no longer held a controlling financial interest (as that term is used in Statement of Financial Accounting Standards No. 94) in @Home and, accordingly, during the second quarter of 1999, TCI ceased to consolidate @Home and began to account for @Home using the equity method of accounting. On May 28, 1999, @Home consummated a merger agreement with Excite, Inc. ("Excite"), a global Internet media company that offers consumers and advertisers comprehensive Internet navigation services with extensive personalization capabilities. Under the terms of the merger agreement, @Home issued approximately 116 million shares of its common stock for all of the outstanding common stock of Excite based on an exchange ratio of 2.083804 shares of @Home's common stock for each share of Excite's common stock. @Home may issue up to approximately 46 million additional shares of common stock in connection with the assumption of obligations under Excite's stock option and employer stock purchase plans and outstanding warrants. As a result of the merger, TCI's economic interest in @Home decreased from 38% to 26%. Due to the resulting increase in @Home's equity, net of the dilution of TCI's ownership interest in @Home, TCI recorded a $488 million increase to "Additional paid-in capital" and a $312 million increase to "Deferred income tax liability." At September 30, 1999, the Company owned 63,720,000 shares of @Home Class A common stock, which had a closing market price of $41.44 per share on such date. (continued) I-28 30 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During the two months ended February 28, 1999, @Home issued 2.2 million common shares. Due to the resulting increase in @Home's equity, net of the dilution of TCI's ownership interest in @Home, TCI recognized a gain of $17 million. (c) Liberty Media Group Investments As a result of the deconsolidation of Liberty Media Group, the indicated investments are no longer included in the Company's consolidated investments. See note 2. At September 30, 1999, the aggregate carrying value of the Company's investments in the Other Affiliates exceeded the Company's aggregate proportionate share of the Other Affiliates' underlying equity by $14.0 billion, of which $8.4 billion, $4.2 billion and $1.4 billion is being amortized over 40 years, 25 years and 7 years, respectively. TCI has entered into various agreements, which, among other matters, contemplate the disposition of certain of its investments in the Other Affiliates. See note 7. Summarized unaudited combined results of operations for the Other Affiliates for the periods in which the Company used the equity method to account for the Other Affiliates are as follows:
Nine months ended September 30, --------------------------------- Combined Operations 1999 1998 ------------------- ------------ ------------ amounts in millions Revenue $ 7,282 11,198 Operating expenses (5,661) (10,179) Depreciation and amortization (2,110) (2,177) ------------ ------------ Operating loss (489) (1,158) Interest expense (1,052) (1,458) Other, net (149) (33) ------------ ------------ Net loss $ (1,690) (2,649) ============ ============
(7) Acquisitions and Dispositions On May 4, 1999, AT&T and Comcast Corporation ("Comcast") announced that they had signed a letter of intent to exchange various cable systems, including certain cable systems of TCI. In addition, Comcast will receive an option from AT&T to purchase, over the next three years, additional cable systems with a total of approximately 1.25 million subscribers, which may include cable subscribers of TCI. The foregoing letter of intent is subject to completion of definitive agreements, consummation of certain other transactions, and regulatory and legal approvals. (continued) I-29 31 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On July 6, 1999, AT&T and Cox Communications, Inc. ("Cox") signed an agreement whereby AT&T would redeem approximately 50.3 million shares of AT&T Common Stock held by Cox in exchange for cable television systems of TCI serving approximately 316,000 customers and TCI's interest in certain equity method investments. The transaction is subject to receipt of necessary government and regulatory approvals. No assurance can be given that such transaction will be consummated. See note 6. TCI has entered into agreements with Century Communications Corp. ("Century") whereby TCI will contribute cable television systems serving approximately 249,000 customers located in Southern California to a newly formed limited partnership in which TCI will have an approximate 25% partnership interest. TCI will also exchange with the new partnership a cable television system serving approximately 100,000 customers in Southern California for cable television systems in Northern California serving approximately 100,000 customers. The transactions are subject to various closing conditions. No assurance can be given that such transactions will be consummated. On October 1, 1999, a merger was consummated in which Century merged with and into Adelphia Communications Corporation ("Adelphia"). As a result of such merger, Adelphia assumed all of Century's rights and obligations relating to the above described transaction. On October 1, 1999, TCI, InterMedia IV, and InterMedia Partners, a California Limited Partnership and a consolidated subsidiary of the Company ("InterMedia Partners"), entered into a series of transactions with unaffiliated third parties that resulted in the disposition of certain cable television systems, the acquisition by InterMedia IV of all of its partnership interests that were not owned by TCI and the exchange of certain of InterMedia IV's and InterMedia Partners' cable television systems. As a result of such transactions, InterMedia IV became a consolidated subsidiary of TCI. See notes 6 and 12. During the second quarter of 1999, TCI entered into separate agreements to sell the majority of its 50% interest in Bresnan (the "Bresnan Transaction") and its 46% interest in Falcon (the "Falcon Transaction") to Charter. In accordance with the terms of the Bresnan Transaction, TCI would receive consideration of approximately $900 million in the form of cash, and an approximate 4.5% interest in a new entity to be formed by Charter. In accordance with the terms of the Falcon Transaction, TCI would receive cash proceeds of approximately $725 million for its interest in Falcon Communications, L.P. The transactions are subject to various closing conditions. No assurance can be given that such transactions will be consummated. See note 6. (continued) I-30 32 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During the second quarter of 1999, the Company paid $41 million in cash and traded cable television systems serving approximately 618,000 customers located in Florida, Hawaii, Maine, New York, Ohio, Texas and Wisconsin in exchange for cable television systems serving approximately 565,000 customers located in Illinois, New Jersey, Oregon and Pennsylvania (the "1999 Exchange"). The 1999 Exchange was consummated pursuant to an agreement that was executed in November 1998. No gain was recognized on the 1999 Exchange due to the Company's application of purchase accounting in connection with the AT&T Merger. During the two months ended February 28, 1999, the Company completed a transaction whereby the Company contributed cable television systems to Bresnan, an entity in which the Company had an approximate 80% ownership interest. Through a series of transactions, including the contribution of cash by a third party in exchange for an ownership interest in Bresnan, the Company's ownership interest in Bresnan was reduced to a non-controlling 50% ownership interest (the "1999 Contribution Transaction"). In connection with the associated dilution of the Company's ownership interest, the Company deconsolidated assets and liabilities related to cable television systems serving approximately 614,000 customers. The deconsolidated liabilities included $210 million of debt owed to external parties and $709 million of intercompany debt owed to the Company. In connection with the 1999 Contribution Transaction, the Company has agreed to take certain steps to support compliance by Bresnan with its payment obligations under certain debt instruments. See note 13. As a result of the dilution of the Company's ownership interest from 80% to 50%, the Company recorded a $9 million increase (net of deferred income taxes of $5 million) to additional paid-in capital in connection with the 1999 Contribution Transaction. No gain was recognized due to the Company's aforementioned commitment to support the entity's payment obligations under certain debt instruments. During February 1999, the Company sold cable television assets serving approximately 145,000 customers to an unaffiliated third party for approximately $300 million. The Company recorded a $123 million gain on such disposition. During the year ended 1998, the Company completed various transactions in addition to the CSC Transaction described in note 6, wherein the Company contributed cable television systems serving in the aggregate approximately 1.9 million customers to several joint ventures (collectively, the "1998 Joint Ventures") in exchange for non-controlling ownership interests in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998 Joint Ventures of debt owed by the Company to external parties aggregating $323 million and intercompany debt owed to the Company aggregating $2,374 million. In connection with such transactions, the Company has agreed to take certain steps to support compliance by the 1998 Joint Ventures with their payment obligations under certain debt instruments. See notes 6 and 13. (continued) I-31 33 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Effective February 28, 1999, TV Guide (formerly United Video Satellite Group, Inc. ("UVSG")) and The News Corporation Limited ("News Corp.") completed a transaction whereby News Corp.'s TV Guide properties were combined with UVSG to create a platform for offering television guide services to consumers and advertising and the resulting company was named TV Guide. As part of this combination, a unit of News Corp. received consideration consisting of $800 million in cash and 60 million shares of UVSG's stock, including 22.5 million shares of its Class A common stock and 37.5 million shares of its Class B common stock. In addition, News Corp. elected to purchase approximately 6.5 million additional shares of UVSG Class A common stock for $129 million in order to equalize its ownership with that of Liberty/Ventures Group. Prior to such transactions, UVSG was a subsidiary of TCI. Immediately following these transactions, and another transaction completed on the same date, News Corp., Liberty/Ventures Group and TV Guide's public stockholders owned on an economic basis approximately 44%, 44% and 12%, respectively, of TV Guide and News Corp. and Liberty/Ventures Group each had approximately 49% of the voting power of TV Guide's outstanding stock. Due to the resulting increase in TV Guide's equity, net of the dilution of TCI's ownership interest in TV Guide, TCI recognized a $372 million gain (before deducting deferred income tax expense of $147 million). Effective September 1, 1998, Telewest Communications plc ("Telewest") and General Cable PLC ("General Cable") consummated a merger in which General Cable merged with and into Telewest. As a result of such merger, TCI's ownership interest in Telewest decreased to 22%. In connection with such dilution, TCI recognized a gain of $58 million (before deducting deferred income tax expense of $20 million). On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T was consummated. See note 11. On April 22, 1998, TCG completed a merger transaction with ACC Corp. ("ACC") in which ACC shares were exchanged for shares of TCG. As a result of ACC's merger with TCG, Old TCI's interest in TCG was reduced to approximately 26%. In connection with the dilution of Old TCI's interest in TCG, Old TCI recorded a gain of $201 million (before deducting deferred income tax expense of $71 million). Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision") contributed the assets, obligations and operations of its retail C-band satellite business to Superstar/Netlink Group LLC ("Superstar/Netlink") in exchange for an approximate 20% interest in Superstar/Netlink. As a result of this transaction, the Company's ownership interest in Superstar/Netlink decreased from 100% to approximately 80% and the Company recognized a gain of $38 million (before deducting deferred income tax expense of $15 million). Turner Vision's contribution to Superstar/Netlink was accounted for as a purchase, and the $61 million excess of the purchase price over the fair value of the assets acquired was recorded as goodwill. (continued) I-32 34 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (8) Debt Debt is summarized as follows:
New TCI Old TCI ------------- ------------ September 30, December 31, 1999 1998 ------------- ------------ amounts in millions AT&T Notes (a) $ 8,559 -- Other notes payable (b) 9,154 9,412 Bank credit facilities (c) -- 3,773 Commercial paper -- 109 Convertible notes (d) -- 40 Capital lease obligations and other debt 295 718 ------------ ------------ $ 18,008 14,052 ============ ============
(a) Amounts outstanding under the notes payable to AT&T ("AT&T Notes") bear interest at the London Interbank Offered Rate ("LIBOR") plus 15 basis points (6.23% at September 30, 1999) and are due and payable on or before March 9, 2004. Interest on the AT&T Notes is compounded quarterly. (b) During the seven months ended September 30, 1999, the Company redeemed certain notes payable which had an aggregate principal balance of $64.6 million and fixed interest rates ranging from 7.875% to 8.75%. In connection with such redemptions, the Company recognized a pre-tax gain on early extinguishment of debt of $6 million. Such gain related to the excess of the fair value assigned to the debt in purchase accounting over the amount paid to redeem the debt. During the two months ended February 28, 1999, the Company redeemed certain notes payable which had an aggregate principal balance of $21 million and fixed interest rates ranging from 8.75% to 9.25%. In connection with such redemptions, the Company recognized a pre-tax loss on early extinguishment of debt of $4 million. Such loss related to prepayment penalties and the retirement of deferred loan costs. During the nine months ended September 30, 1998, the Company redeemed certain notes payable which had an aggregate principal balance of $352 million and fixed interest rates ranging from 8.67% to 10.25%. In connection with such redemptions, the Company recognized a pre-tax loss on early extinguishment of debt of $44 million in 1998. Such loss related to prepayment penalties amounting to $39 million and the retirement of deferred loan costs. (c) During the two months ended February 28, 1999, the Company repaid a bank credit facility. In connection with such repayment, the Company recognized a pre-tax loss on early extinguishment of debt of $4 million. Such loss related to the retirement of deferred loan costs. (continued) I-33 35 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As security for borrowings under one of Old TCI's credit facilities, Old TCI had pledged a portion of its Time Warner common stock. As a result of the deconsolidation of Liberty/Ventures Group, such borrowings and the associated Time Warner common stock are no longer reflected in the Company's consolidated debt and asset balances. (d) The convertible notes, which were stated net of unamortized discount of $166 million at December 31, 1998, were scheduled to mature on December 12, 2021. The notes required an annual interest payment equal to 1.85% of the face amount of the notes. On March 26, 1999, all of the notes were converted into shares of AT&T Common Stock, AT&T Liberty Class A Tracking Stock and TCI Satellite Entertainment, Inc. Series A common stock, $1.00 par value per share ("Satellite Series A Common Stock") in accordance with the terms of the notes. Following such conversion, none of such notes remain outstanding. Such notes were held by a then director of the Company, as well as several members of his family. In connection with the AT&T Merger, such director resigned. Immediately prior to the AT&T Merger, the notes were convertible, at the option of the holders, into an aggregate of 24,163,259 shares of TCI Group Series A Stock, 19,416,889 shares of Liberty Group Series A Stock, 20,711,364 shares of TCI Ventures Group Series A Stock and 3,451,897 shares of Satellite Series A Common Stock. Pursuant to the terms of the Merger Agreement and a certain stock purchase agreement, dated as of July 9, 1986, among the Company and the holders of such convertible notes, the conversion feature of the convertible notes was adjusted such that as of the March 9, 1999 consummation date of the AT&T Merger, such notes were convertible into an aggregate of 28,632,122 shares of AT&T Common Stock, 60,373,632 shares of AT&T Liberty Class A Tracking Stock and 3,451,897 shares of Satellite Series A Common Stock. Certain debt instruments of a subsidiary of the Company 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 aggregate fair value assigned in purchase accounting to New TCI's debt and related variable and fixed interest rate exchange agreements ("Interest Rate Swaps") exceeded the aggregate recorded value at the date of the AT&T Merger by $938 million. Such excess is being amortized over the respective remaining 1 to 30 year lives of the underlying debt obligations and Interest Rate Swaps. See note 2. The fair value of the Company's debt, exclusive of the AT&T Notes, is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. At September 30, 1999, the fair value of the Company's debt, exclusive of the AT&T Notes, was $9,007 million, as compared to a carrying value of $9,449 million on such date. Due to its related party nature, it is not practical to obtain a reasonable estimate of the fair value of the AT&T Notes. (continued) I-34 36 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In order to achieve the desired balance between variable and fixed rate indebtedness, the Company may enter into Interest Rate Swaps pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") and receives variable interest rates and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates. At December 31, 1998, all of the Company's Fixed Rate Agreements had expired. During the nine months ended September 30, 1998, the Company's payments pursuant to the Fixed Rate Agreements were less than $1 million. During the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September 30, 1998, the Company's net receipts pursuant to the Variable Rate Agreements were $16 million, $1 million and $8 million, respectively. Information concerning the Company's Variable Rate Agreements at September 30, 1999 is as follows:
Amount to be Expiration Interest rate Notional received (paid) upon date to be received amount termination (a) ---------- -------------- -------- -------------------- dollar amounts in millions February 2000 5.8%-6.6% $ 300 $ 1 March 2000 5.8%-6.0% 675 -- September 2000 5.1% 75 (1) March 2027 9.7% 300 2 December 2036 9.7% 200 (3) ---------- ---------- $ 1,550 $ (1) ========== ==========
-------------------- (a) The estimated amount that the Company would receive (pay) to terminate the agreements at September 30, 1999, taking into consideration current interest rates and the current creditworthiness of the counterparties, represents the fair value of the Interest Rate Swaps. In addition to the Variable Rate Agreements, the Company has entered into Interest Rate Swaps pursuant to which it pays a variable rate based on LIBOR (6.4% at September 30, 1999) and receives a variable rate based on the Constant Maturity Treasury Index ("CMT") (6.1% at September 30, 1999) on a notional amount of $400 million through September 2000; and pays a variable rate based on LIBOR (6.3% at September 30, 1999) and receives a variable rate based on CMT (6.2% at September 30, 1999) on notional amounts of $95 million through February 2000. During each of the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September 30, 1998, the Company's net payments pursuant to such agreements were $1 million. At September 30, 1999, the Company would be required to pay less than $1 million to terminate such Interest Rate Swaps. (continued) I-35 37 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. Further, the Company does not anticipate material near-term losses in future earnings, fair values or cash flows resulting from derivative financial instruments as of September 30, 1999. (9) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities The Trust Preferred Securities are presented together in a separate line item in the accompanying consolidated balance sheets captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities." Dividends accrued on the Trust Preferred Securities aggregated $83 million, $23 million and $106 million during the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September 30, 1998, respectively, and are included in minority interests in earnings of consolidated subsidiaries in the accompanying consolidated financial statements. The aggregate fair value assigned to the Trust Preferred Securities in purchase accounting exceeded the aggregate recorded value at the date of the AT&T Merger by $160 million. Such excess is being amortized over the remaining 28 to 46 year terms of such securities. (10) Stockholders' Equity Treasury Stock and Common Stock Held by Subsidiaries, at Cost In conjunction with the AT&T Merger, Old TCI shares held in treasury and Old TCI shares held by subsidiaries were canceled. See note 2. General During 1997, Old TCI entered into certain equity swap facilities. Due to Old TCI's ability to issue shares to settle periodic price fluctuations and fees under the equity swap facilities, Old TCI recorded all amounts received or paid under these arrangements as increases or decreases, respectively, to equity. From February 1, 1999 to March 5, 1999, Old TCI terminated all transactions under the equity swap facilities and the related swap agreements. In connection with the termination of such transactions, the Company received aggregate cash payments of $677 million. Such cash payments are reflected in Old TCI's consolidated financial statements for the two months ended February 28, 1999. (continued) I-36 38 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In July 1998, the Company entered into an equity swap transaction with a commercial bank, which provided the Company with the right but not the obligation to acquire 1,084,056 shares of TCI Group Series A Stock for approximately $45 million on or before April 19, 1999. During the two months ended February 28, 1999, the Company acquired the 1,084,056 shares of TCI Group Series A Stock under the agreement. Such shares were used to satisfy the exchange requirements of a subsidiary's preferred stock. The $29 million excess of the amount paid for the TCI Group Series A Stock over the Company's minority interest in such subsidiary has been reflected as a decrease to stockholders' equity in the accompanying consolidated financial statements for the two months ended February 28, 1999. (11) Transactions with Related Parties On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T, was consummated. As a result of such merger, TCI received in exchange for all of its interest in TCG, 70,429,248 shares of AT&T Common Stock. TCI recognized a $2.3 billion gain on such transaction during the third quarter of 1998 based on the difference between the carrying amount of TCI's interest in TCG and the fair value of the AT&T Common Stock received. Prior to the AT&T Merger, TCI had accounted for its ownership interest in AT&T Common Stock as an available-for-sale security. Such AT&T Common Stock was transferred from Liberty/Ventures Group to TCI Group in connection with the AT&T Merger. See note 2. In addition, immediately prior to the AT&T Merger, certain shares of Series F Preferred Stock were converted into shares of TCI Group Stock which, in turn, were converted into 215,755,850 shares of AT&T Common Stock. Such converted shares are recorded at Old TCI's historical cost basis. New TCI treats its investment in AT&T Common Stock as an investment in its parent. Accordingly, New TCI's investment in AT&T Common Stock is reflected as a reduction of TCI's equity. Old TCI recognized dividend income of $15.5 million on its AT&T Common Stock during the third quarter of 1998. The Company has not received any dividends on its investment in AT&T Common Stock subsequent to the AT&T Merger. The Company's non-interest bearing intercompany account with AT&T ($27 million at September 30, 1999) is included in TCI's "Investment in AT&T" in the accompanying consolidated balance sheet. Certain entities attributed to Liberty Media Group produce and/or distribute programming to the Company. Charges to the Company aggregated $121 million for the seven months ended September 30, 1999. Such amount is included in operating costs and expenses in the accompanying consolidated statements of operations. AT&T provides long distance service and allocates certain other administrative costs to the Company. During the seven months ended September 30, 1999, such amounts aggregated $29 million and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. (continued) I-37 39 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NDTC leases transponder facilities to entities attributed to Liberty Media Group. Charges by NDTC for such arrangements were $14 million for the seven months ended September 30, 1999 and are included in revenue in the accompanying consolidated statements of operations. During the third quarter of 1999, AT&T utilized $495 million of TCI's net operating loss carryforwards to offset AT&T's current federal income tax liability. TCI did not receive any consideration for the utilization of such net operating loss carryforwards. Accordingly, TCI has reflected AT&T's utilization of the net operating loss carryforwards as a decrease to "Additional paid-in capital" in the accompanying consolidated financial statements. (12) Transactions with Officers and Directors After the Company's stockholders voted to approve the terms of the AT&T Merger, on February 17, 1999, TCI's Board of Directors approved the payment by Liberty/Ventures Group of $1 million to each of two directors of the Company for their services on the Special Committee of TCI's Board of Directors in evaluating the AT&T Merger and the consideration to be received by the stockholders of the Company. In addition, Liberty/Ventures Group paid $10 million to a director and executive officer of TCI, immediately prior to the AT&T Merger, for his services in negotiating the merger agreement and completing the AT&T Merger. Prior to the AT&T Merger, a limited liability company owned by Dr. Malone, a director of the Company and TCI's former Chairman and Chief Executive Officer, acquired, from certain subsidiaries of Old TCI, working cattle ranches located in Wyoming in exchange for $17 million. The purchase price paid by such limited liability company was in the form of a 12-month note in the amount of $17 million having an interest rate of 7%. Such note is payable to an entity attributed to Liberty Media Group at any time without penalty and is personally guaranteed by Dr. Malone. No gain or loss was recognized by TCI on this transaction. As described more fully in note 7, the Company, on October 1, 1999, became the owner of all of the partnership interests in InterMedia IV. An individual who was a director and executive officer of TCI had a .001% special limited partnership interest in ICM IV, which in turn has a 1.19% limited partnership interest in InterMedia IV. Such individual's special limited partnership interest in ICM IV was created in August 1997 in connection with TCI's acquisition of all of the partnership interests (other than a .002% general partnership interest and a .001% special limited partnership interest) in ICM IV. In connection with the transaction described in note 7, such individual, by virtue of his .001% special limited partnership interest in ICM IV, participated in a profit sharing mechanism of InterMedia IV and received cash consideration of approximately $11 million based on the valuation of InterMedia IV. For additional transactions involving the Company's officers and directors, see notes 8 and 13. (continued) I-38 40 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (13) Commitments and Contingencies The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed certain rate regulations on the cable television industry. Under the 1992 Cable Act, all cable systems are subject to rate regulation, unless they face "effective competition," as defined by the 1992 Cable Act and expanded in the Telecommunications act of 1996 (the "1996 Act"), in their local franchise area. Although the Federal Communications Commission (the "FCC") has established regulations required by the 1992 Cable Act, local government units (commonly referred to as local franchising authorities) are primarily responsible for administering the regulation of a cable system's basic service tier ("BST"). The FCC itself directly administered rate regulation of any cable programming service tier ("CPST"). The FCC's authority to regulate CPST rates expired on March 31, 1999. The FCC has taken the position that it will still adjudicate CPST complaints filed after this sunset date (but no later than 180 days after the last CPST rate increase imposed prior to March 31, 1999), and will strictly limit its review (and possible refund orders) to the time period predating the sunset date. Under the FCC's rate regulations, most cable systems were required to reduce their BST and CPST rates in 1993 and 1994, and have since had their rate increases governed by a complicated price structure that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. Operators also have the opportunity to bypass this "benchmark" regulatory structure in favor of the traditional "cost-of-service" regulation in cases where the latter methodology appears favorable. Premium cable services offered on a per-channel or per-program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act and the 1996 Act, including its rate setting provisions. 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 CPST rates would be retroactive to the date of complaint. Any refunds of the excess portion of BST or equipment rates would be retroactive to one year prior to the implementation of the rate reductions. (continued) I-39 41 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company is obligated and/or has guaranteed Liberty Media Group's obligation to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at September 30, 1999, these agreements require minimum payments aggregating approximately $440 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. The Company is a party to affiliation agreements with programming suppliers. Pursuant to certain of such agreements, the Company is committed to carry such suppliers' programming on its cable systems. Additionally, certain of such agreements provide for penalties and charges in the event the programming is not carried or not delivered to a contractually specified number of customers. The Company is committed to purchase billing services from a third party pursuant to three successive five-year agreements. Pursuant to such arrangement, the Company is obligated at September 30, 1999 to make minimum payments aggregating approximately $1.5 billion through 2012. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $47 million at September 30, 1999. The Company also has agreed to take certain steps to support debt compliance with respect to obligations aggregating $1,720 million of certain cable television partnerships in which the Company has non-controlling ownership interests. See note 7. The Company also has guaranteed the performance of certain affiliates and other parties with respect to such parties' contractual and other obligations. Although there can be no assurance, management of the Company believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to the Company. During 1999, a subsidiary of the Company entered into a contribution agreement ("Contribution Agreement") with certain shareholders of Phoenixstar, Inc. (formerly Primestar, Inc.) ("Phoenixstar") pursuant to which the Company would, to the extent it is relieved of $166 million of contingent liabilities then owed to certain creditors of Phoenixstar and its subsidiaries, contribute up to $166 million to Phoenixstar to the extent necessary to satisfy liabilities of Phoenixstar. During the second quarter of 1999 and the fourth quarter of 1998, the Company recorded charges of $50 million and $90 million, respectively, to provide for the estimated losses that were expected to result from the Contribution Agreement. During 1999, the Company contributed approximately $116 million to Phoenixstar in partial satisfaction of its obligation. The Company's remaining obligation under the Contribution Agreement will expire in 2001. An individual who is a director of TCI is also the Chairman of the Board of TCI Satellite Entertainment, Inc. ("TSAT"). TSAT has an approximate 37% ownership interest in Phoenixstar. (continued) I-40 42 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements TCI has agreed to make fixed monthly payments to an entity attributed to Liberty Media Group pursuant to an affiliation agreement. The fixed annual commitments increase annually from $190 million in 1999 to $267 million in 2003, and will increase with inflation through 2022. In addition, TCI is obligated to make minimum revenue payments through 2017 and minimum license fee payments through 2007 aggregating $385 million to an entity attributed to Liberty Media Group. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. Effective as of December 16, 1997, NDTC on behalf of the Company and other cable operators that may be designated from time to time by NDTC ("Approved Purchasers"), entered into an agreement with GI to purchase a minimum of 6.5 million set-top devices during calendar years 1998, 1999 and 2000 at an average price of $318 per set-top device. The 1998 purchase commitment of 1.5 million set-top devices was met. The agreement with GI was amended in the third quarter of 1999 to change the remaining minimum purchase commitment for set-top devices to 1,880,000 devices in 1999 and 2,500,000 devices in 2000. During the nine months ended September 30, 1999, approximately 1.4 million set-top devices had been purchased under the 1999 commitment. 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. In connection with the AT&T Merger, such warrants were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. To the extent such warrants do not vest because TCI fails to meet its purchase commitments, as amended, TCI is required to repay a proportional amount of such cash to Liberty Media Group. NDTC has the right to terminate the agreement if, among other reasons, GI fails to meet a material milestone designated in the agreement with respect to the development, testing and delivery of advanced digital set-top devices. (continued) I-41 43 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On July 17, 1998, the Company acquired 21.4 million shares of common stock of GI in exchange for (i) certain of the assets of NDTC's set-top authorization business, (ii) the license of certain related software to GI, (iii) a $50 million promissory note from the Company to GI, and (iv) a nine-year revenue guarantee from the Company in favor of GI. In connection therewith, NDTC also entered into a services agreement pursuant to which it will provide certain postcontract services to GI's set-top authorization business. As a result of the deconsolidation of Liberty Media Group, the 21.4 million shares of GI common stock are no longer included in the Company's consolidated assets. The excess of the fair value of GI common stock received in 1998 over (i) the book value of certain assets transferred from NDTC to GI, and (ii) the present value of the promissory note due from the Company to GI, was deferred by the Company. As a result of the application of purchase accounting in connection with the AT&T Merger, the deferred amount related to the revenue guarantee was reduced to $61 million and the remaining deferred amount was reduced to $48 million. The Company has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. (14) Year 2000 During the nine months ended September 30, 1999, the Company continued its enterprise-wide, comprehensive efforts to assess and remediate its computer systems and related software and equipment to verify that such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. The Company's year 2000 remediation efforts include an assessment of its most critical systems, such as customer service and billing systems, headends and other cable plant systems that support the Company's programming services, business support operations, and other equipment and facilities. The Company also continued its efforts to verify the year 2000 readiness of its significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess such partners' and affiliates' year 2000 status. (continued) I-42 44 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company has a year 2000 Program Management Office (the "PMO") to organize and manage its year 2000 efforts. The PMO is responsible for overseeing the process and standards of the Company's year 2000 efforts, controlling data, and reporting on the Company's year 2000 efforts. At September 30, 1999, the PMO was comprised of a 133-member, full-time staff, accountable to executive management of the Company. During the nine months ended September 30, 1999, the Company continued its survey of third-party vendors and suppliers whose systems, services or products are important to the Company's operations, and whose year 2000 readiness is critical to continued provision of the Company's cable service. The Company has examined the public disclosures regarding the year 2000 readiness status made by vendors of critical systems products utilized by the Company (such as addressable controllers, accounting systems and other critical hardware and software), and the public disclosures regarding the year 2000 readiness status made by critical suppliers (such as utilities, banking, and similar critical operational services). Verification of the survey results may include, as deemed necessary, conducting functionality tests, reviewing vendors' and suppliers' test data, scripts and certifications, engaging in regular conferences with vendors' and suppliers' year 2000 teams, or re-examining public disclosures for changes in status. The Company generally has required any new vendors to provide assurances that their products and services are year 2000 ready. For those critical vendors that may not be year 2000 ready by year end, contingency plans will be implemented. Significant market value is associated with the Company's investments in certain public and private corporations, partnerships and other businesses. Accordingly, the Company is monitoring the public disclosure of such publicly-held business entities, including CSC and @Home, to determine their year 2000 readiness. In addition, the Company has surveyed and monitored the year 2000 status of certain privately-held business entities in which the Company has significant investments. Year 2000 expenses and capital expenditures incurred during the seven months ended September 30, 1999 were $47 million and $18 million, respectively. Year 2000 expenses and capital expenditures incurred during the two months ended February 28, 1999 were $11 million and $2 million, respectively. Year 2000 expenses and capital expenditures for the seven months ended September 30, 1999 are exclusive of costs attributable to Liberty Media Group, which was deconsolidated as of March 1, 1999. See note 2. Management of the Company currently estimates the remaining costs, exclusive of future costs attributable to the assessment and remediation of year 2000 issues associated with Liberty Media Group, to be not less than $25 million, bringing the total estimated cost associated with the Company's year 2000 remediation efforts to be not less than $117 million (including $36 million for replacement of noncompliant information technology systems). Also included in this estimate is $7 million in future payments to be made pursuant to unfulfilled executory contracts or commitments with vendors for year 2000 remediation services. (continued) I-43 45 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. There can be no assurance that the Company's systems or the systems of other companies on which the Company relies will be converted in time or that any such failure to convert by the Company or other companies will not have a material adverse effect on its financial position, results of operations or cash flows. (15) Information about the Company's Operating Segments Prior to the AT&T Merger, Old TCI had two reportable segments: domestic cable and communications services and domestic programming services. Domestic cable and communications services receive video, audio and data signals from various sources, and amplify and distribute the signals by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. Domestic programming services are produced, acquired, and distributed, through all available formats and media, branded entertainment and informational programming and software, including multimedia products, delivered in both analog and digital form. Old TCI's domestic cable and communications services business and assets were included in TCI Group, and Old TCI's domestic programming business and assets were included in Old Liberty Group. Old TCI's principal international businesses and assets and Old TCI's remaining non-cable and non-programming domestic businesses and assets were included in TCI Ventures Group. As described in note 2, immediately prior to the AT&T Merger, Old TCI purchased certain assets from Liberty/Ventures Group and the net assets attributed to Liberty Media Group were deconsolidated. As a result of these transactions, domestic cable and communications services is the only reportable segment of New TCI. Accordingly, segment information is not provided for New TCI. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Old TCI evaluated performance based on a measure of "Operating Cash Flow" (defined by the Company as operating income before depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger and integration costs and stock compensation). Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flow provided by operating activities, or a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Old TCI generally accounted for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Old TCI's reportable segments were strategic business units that offered different products and services. They were managed separately because each segment required different technology and marketing strategies. (continued) I-44 46 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Old TCI utilized the following interim financial information for purposes of making decisions about allocating resources to a segment and assessing a segment's performance:
Domestic cable Domestic & communications programming All services services other Total ---------------- ------------ ------------ ------------ amounts in millions Two months ended February 28, 1999: External and intersegment revenue $ 902 128 165 1,195 Intersegment revenue $ -- 39 11 50 Segment Operating Cash Flow $ 301 30 25 356 Three months ended September 30, 1998: External and intersegment revenue $ 1,497 176 249 1,922 Intersegment revenue $ (4) 69 14 79 Segment Operating Cash Flow $ 603 31 43 677 Nine months ended September 30, 1998: External and intersegment revenue $ 4,613 498 685 5,796 Intersegment revenue $ (13) 210 36 233 Segment Operating Cash Flow $ 1,882 75 88 2,045
(continued) I-45 47 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A reconciliation of reportable segment Operating Cash Flow to Old TCI's consolidated earnings (loss) before income taxes and extraordinary items is as follows:
Old TCI ------------------------------------------ Two months Nine months ended ended February 28, 1999 September 30, 1998 ------------------ ------------------ amounts in millions Total Operating Cash Flow for reportable segments 331 1,957 Other Operating Cash Flow 25 88 Other items excluded from Operating Cash Flow: Year 2000 costs (11) (6) AT&T merger and integration costs (65) (11) Stock compensation (366) (423) Reserve for loss arising from contingent obligation -- -- Write-off of in-process research and development costs -- -- Depreciation and amortization (277) (1,289) Interest expense (161) (807) Interest and dividend income 13 72 Share of losses of Liberty Media Group -- -- Share of losses of the Other Affiliates, net (161) (986) Minority interest in earnings of consolidated subsidiaries, net (26) (95) Gains on issuance of equity interests by subsidiaries 389 55 Gain on issuance of stock by equity investee -- 259 Gains on disposition of assets, net 144 3,704 Other, net 8 (25) ------------------ ------------------ Earnings (loss) before income taxes and extraordinary items (157) 2,493 ================== ==================
I-46 48 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General 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. 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 financial statements included in Part II of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The following discussion focuses on material trends, risks and uncertainties affecting the results of operations and financial condition of the Company. Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, some of the statements contained under this caption are forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company (or entities in which the Company has interests), or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others: general economic and business conditions and industry trends; the regulatory and competitive environment of the industries in which the Company, and the entities in which the Company has interests, operate; uncertainties inherent in new business strategies; uncertainties inherent in the changeover to the year 2000, including the Company's projected state of readiness, the projected costs of remediation, the expected date of completion of each program or phase, the projected worst case scenarios, and the expected contingency plans associated with such worst case scenarios; new product launches and development plans; rapid technological changes; 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. Any statement contained within Management's Discussion and Analysis of Financial Condition and Results of Operations on this Form 10-Q related to year 2000 are hereby denominated as "Year 2000 Statements" within the meaning of the Year 2000 Information and Readiness Disclosure Act. I-47 49 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) Targeted Stock The Company, through its subsidiaries and affiliates, is principally engaged in the construction, acquisition, ownership, and operation of cable television systems and, through its ownership interests in Liberty Media Group, the provision of satellite-delivered video entertainment, information and home shopping programming services to various video distribution media, principally cable television systems. Liberty Media Group also has investments in cable and telecommunications operations and television programming in certain international markets as well as investments in companies and joint ventures involved in developing and providing programming for new television and telecommunications technologies. Prior to the AT&T Merger, the Company's assets and operations were included in three separate groups, each of which was tracked separately by public equity securities. These groups were formerly known as the Liberty Media Group (referred to herein as the Old Liberty Group), the TCI Ventures Group and the TCI Group. The Old Liberty Group was intended to reflect the separate performance of TCI's assets which produce and distribute programming services. The TCI Ventures Group was intended to reflect the separate performance of TCI's principal international assets and businesses and substantially all of TCI's non-cable and non-programming assets. The TCI Group was intended to reflect the separate performance of TCI and its subsidiaries and assets not attributed to the Old Liberty Group or TCI Ventures Group. Such subsidiaries and assets are comprised primarily of TCI's domestic cable and communications business. For additional information, see note 1 to the accompanying consolidated financial statements. The TCI Group was tracked separately through the TCI Group Series A Stock and the TCI Group Series B Stock. The Old Liberty Group was tracked separately through the Liberty Group Series A Stock and Liberty Group Series B Stock. The TCI Ventures Group was tracked separately through the TCI Ventures Group Series A Stock and TCI Ventures Group Series B Stock. I-48 50 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) AT&T Merger and Restructuring On March 9, 1999, AT&T acquired TCI in the AT&T Merger in which Italy Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into TCI, and TCI thereby became a subsidiary of AT&T. As a result of the AT&T Merger, (i) each share of TCI Group Series A Stock was converted into 1.16355 shares of AT&T Common Stock, (ii) each share of TCI Group Series B Stock was converted into 1.27995 shares of AT&T Common Stock, (iii) each share of Liberty Group Series A Stock was converted into 2 shares of a newly created class of AT&T common stock designated as the AT&T Liberty Class A Tracking Stock, (iv) each share of Liberty Group Series B Stock was converted into 2 shares of a newly created class of AT&T common stock designated as the AT&T Liberty Class B Tracking Stock, (v) each share of TCI Ventures Group Series A Stock was converted into 1.04 shares of AT&T Liberty Class A Tracking Stock, (vi) each share of TCI Ventures Group Series B Stock was converted into 1.04 shares of AT&T Liberty Class B Tracking Stock, (vii) each share of Series C-TCI Group Preferred Stock was converted into 154.589253 shares of AT&T Common Stock, (viii) each share of Series C-Liberty Media Group Preferred Stock was converted into 12.5 shares of AT&T Liberty Class A Tracking Stock, (ix) each share of Series G Preferred Stock was converted into 1.3846245 shares of AT&T Common Stock and (x) each share of Series H Preferred Stock was converted into 1.18125 shares of AT&T Liberty Class A Tracking Stock. Following the AT&T Merger, each share of Class B Preferred Stock continues to be outstanding with the same rights and preferences such stock had prior to the AT&T Merger. In general, the holders of shares of AT&T Liberty Class A Tracking Stock and the holders of shares of AT&T Liberty Class B Tracking Stock will vote together as a single class with the holders of shares of AT&T Common Stock on all matters presented to such stockholders, with the holders being entitled to 3/40th of a vote for each share of AT&T Liberty Class A Tracking Stock held, 3/4ths of a vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote per share of AT&T Common Stock held. I-49 51 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are intended to reflect the separate performance of the businesses and assets attributed to Old Liberty Group and TCI Ventures Group at the time of the AT&T Merger. References herein to Liberty/Ventures Group refer to the combined assets and businesses of Old Liberty Group and TCI Ventures Group for periods prior to the AT&T Merger, and subsequent to the AT&T Merger such combined assets and businesses are referred to as Liberty Media Group. Pursuant to, and subject to the terms and conditions set forth in the Merger Agreement, immediately prior to the AT&T Merger, certain assets previously attributed to TCI Ventures Group (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and TCG, the stock of @Home attributed to TCI Ventures Group, the assets and business of NDTC and TCI Ventures Group's equity interest in WTCI were transferred to TCI Group in exchange for approximately $5.5 billion in cash. Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty Media Group and AT&T, Liberty Media Group became entitled to the benefit of approximately $2.0 billion of net operating loss carryforwards attributable to all entities included in TCI's consolidated federal income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service and are subject to limitations on usage which may affect the ultimate amount utilized. Additionally, certain warrants to purchase shares of GI previously attributed to TCI Group were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. The transfer of certain immaterial assets was also effected. Immediately prior to the AT&T Merger, AT&T and Liberty Media Corporation entered into an agreement relating to the carriage of programming of Liberty Media Corporation and its affiliates to be distributed over the AT&T cable systems. Pursuant to this agreement, Liberty Media Corporation will be granted, among other rights, "preferred vendor status" with respect to certain types of new programming services. Liberty Media Corporation will also be entitled to the use of channel capacity equal to one six megahertz channel to be used for category specific interactive video channels. In addition, such agreement also provided for the extension of existing affiliation agreements between TCI and programming affiliates of Liberty Media Corporation to a date not less than 10 years from the closing of the AT&T Merger, upon the terms and conditions set forth in such agreement. Pursuant to amended corporate governance documents for the entities included in Liberty Media Group and certain agreements among AT&T and TCI, the business of Liberty Media Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T Merger. AT&T will initially designate one third of the directors of such entities and its rights as the sole shareholder of the common stock of such entities following the AT&T Merger will, in accordance with Delaware law, be limited to actions which will require shareholder approval. Therefore, management has concluded that TCI does not have a controlling financial interest (as that term is used in Statement of Financial Accounting Standards No. 94) in the entities comprising the Liberty Media Group following the AT&T Merger, and will account for its ownership interests in such entities under the equity method. I-50 52 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) Accordingly, effective with the AT&T Merger, the results of operations of the entities attributed to Liberty/Ventures Group (exclusive of @Home, NDTC and WTCI which were transferred to TCI Group immediately prior to the AT&T Merger) will no longer be consolidated in the TCI consolidated financial statements. The results of operations for such deconsolidated entities prior to the date of the deconsolidation is discussed further below under the caption "Material Changes in Results of Operations - Adjusted Liberty/Ventures Group." Immediately prior to the AT&T Merger, TCI consummated the Restructuring. The Restructuring included merging TCI's cable subsidiary, TCIC, into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of TCIC have been assumed by TCI, including TCIC's public debt. In connection with TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred Stock, Series A was converted into 2.119 shares of TCI Group Series A Stock, and such shares of TCI Group Series A Stock were subsequently converted into AT&T Common Stock in connection with the AT&T Merger. All other public securities issued by subsidiaries of TCIC (other than Pacific) otherwise remained unaffected. Furthermore, as part of the Restructuring, (i) AT&T loaned TCI $5.5 billion pursuant to a promissory note, (ii) certain asset transfers were made between TCI and its subsidiaries, (iii) 123,896 shares of the Series F Preferred Stock, which were held by subsidiaries of TCI, were converted into 185,428,946 shares of TCI Group Series A Stock (which in turn were converted into 215,755,850 shares of AT&T Common Stock in the AT&T Merger and continue to be held by subsidiaries of TCI), (iv) the remaining 154,411 shares of Series F Preferred Stock which were formerly held by subsidiaries of TCI were distributed to TCI through a series of liquidations and canceled, and (v) 125,728,816 shares of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock, 6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each formerly held by subsidiaries of TCI, were distributed to TCI through a series of liquidations and canceled. Under the terms of the Exchangeable Preferred Stock, each share of that preferred stock is exchangeable, from and after August 1, 2001, for approximately 6.3375 shares of AT&T Common Stock, subject to certain anti-dilution adjustments. Additionally, Pacific may elect to make any dividend, redemption or liquidation payment on the Exchangeable Preferred Stock in cash, by delivery of shares of AT&T Common Stock or by a combination of the foregoing forms of consideration. For information concerning the accounting treatment of the AT&T Merger, see note 2 to the accompanying consolidated financial statements. I-51 53 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) Year 2000 During the nine months ended September 30, 1999, the Company continued its enterprise-wide, comprehensive efforts to assess and remediate its computer systems and related software and equipment to verify that such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. The Company's year 2000 remediation efforts include an assessment of its most critical systems, such as customer service and billing systems, headends and other cable plant systems that support the Company's programming services, business support operations, and other equipment and facilities. The Company also continued its efforts to verify the year 2000 readiness of its significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess such partners and affiliates' year 2000 status. The Company has a year 2000 Program Management Office to organize and manage its year 2000 efforts. The PMO is responsible for overseeing the process and standards of the Company's year 2000 efforts, controlling data and reporting on the Company's year 2000 efforts. At September 30, 1999, the PMO was comprised of a 133-member, full-time staff, accountable to executive management of the Company. The PMO has defined a four-phase approach to determining the year 2000 readiness of the Company's systems, software and equipment. Such approach is intended to provide a detailed method for tracking the evaluation, repair and testing of the Company's critical systems, software and equipment. Phase 1, Assessment, involved the inventory of all critical systems, software and equipment and the identification of any year 2000 issues. Phase 1 also included the preparation of the workplans needed for remediation. Phase 2, Remediation, involved repairing, upgrading and/or replacing any non-compliant critical equipment and systems. Phase 3, Testing, involved testing the Company's critical systems, software, and equipment for year 2000 readiness, or in certain cases, relying on test results provided to the Company. Phase 4, Implementation, involves placing remediated systems, software and equipment into production or service. At September 30, 1999, TCI's overall progress by phase was as follows:
Percentage of Year 2000 Expected Completion Date -- Phase Projects Completed by Phase* All Year 2000 Projects - ----- ---------------------------- ----------------------------- Phase 1-Assessment 100% Completed Phase 2-Remediation 100% Completed Phase 3-Testing 100% Completed Phase 4-Implementation 98% November 1999
- --------------------- *The percentages set forth above were calculated by dividing the number of year 2000 projects that have completed a given phase by the total number of year 2000 projects. Such calculations do not reflect any systems or businesses that may be acquired subsequent to September 30, 1999. See related discussion below. I-52 54 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) The completion information set forth above is based on the Company's current expectations and information, and could be subject to change if circumstances arise which impact the year 2000 readiness of a critical product or service. The information could be subject to change in the event of unforeseen changes in the Company's inventory of products or systems, or unforeseen changes in status information provided by the Company's critical vendors. The information also could change as a result of continuing efforts to verify, validate and audit the program processes and procedures. Further, due to the uncertainties inherent in any year 2000 program, no assurances can be given as to whether Phase 4 will be completed by the date indicated above. The Company has attempted to plan for unforeseen circumstances by implementing (i) contingency plans as described below, (ii) audit and other controls and (iii) processes to monitor the year 2000 readiness status of critical outside parties. The Company has completed the inventory, assessment, testing and implementation of critical systems with embedded technologies that impact its operations. The progress by phase of year 2000 compliance work on such systems is included in the table above. During the nine months ended September 30, 1999, the Company continued its survey of third-party vendors and suppliers whose systems, services or products are important to the Company's operations, and whose year 2000 readiness is critical to continued provision of the Company's cable service. The Company has examined the public disclosures regarding the year 2000 readiness status made by vendors of critical systems products utilized by the Company (such as addressable controllers, accounting systems and other critical hardware and software), and the public disclosures regarding the year 2000 readiness status made by critical suppliers (such as utilities, banking, and similar critical operational services). Verification of the survey results may include, as deemed necessary, conducting functionality tests, reviewing vendors' and suppliers' test data, scripts and certifications, engaging in regular conferences with vendors' and suppliers' year 2000 teams, or re-examining public disclosures for changes in status. The majority of the Company's current vendors are either year 2000 ready, or are expected to be year 2000 ready by year end. The Company generally has required any new vendors to provide assurances that their products and services are year 2000 ready. For those critical vendors that may not be year 2000 ready by year end, contingency plans will be implemented. Significant market value is associated with the Company's investments in certain public and private corporations, partnerships and other businesses. Accordingly, the Company is monitoring the public disclosure of such publicly-held business entities, including CSC and @Home, to determine their year 2000 readiness. For updated information related to the year 2000 programs of CSC and @Home, please refer to their most recent periodic filings with the Securities and Exchange Commission. In addition, the Company has surveyed and monitored the year 2000 status of certain privately-held business entities in which the Company has significant investments. I-53 55 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) Year 2000 expenses and capital expenditures incurred during the seven months ended September 30, 1999 were $47 million and $18 million, respectively. Year 2000 expenses and capital expenditures incurred during the two months ended February 28, 1999 were $11 million and $2 million, respectively. Year 2000 expenses and capital expenditures for the seven months ended September 30, 1999 are exclusive of costs attributable to Liberty Media Group, which was deconsolidated as of March 1, 1999. See "AT&T Merger and Restructuring," above. Management of the Company currently estimates the remaining costs, exclusive of future costs attributable to the assessment and remediation of year 2000 issues associated with Liberty Media Group, to be not less than $25 million, bringing the total estimated cost associated with the Company's year 2000 remediation efforts to be not less than $117 million (including $36 million for replacement of noncompliant information technology ("IT") systems). Also included in this estimate is $7 million in future payments to be made pursuant to unfulfilled executory contracts or commitments with vendors for year 2000 remediation services. Although no assurances can be given, management currently expects that (i) cash flow from operations or advances from AT&T will fund the costs associated with year 2000 compliance and (ii) the total projected cost associated with the Company's year 2000 program will not be material to the Company's financial position, results of operations or cash flows. The Company is a widely distributed enterprise in which allocation of certain resources, including IT support, is decentralized. Accordingly, the Company does not consolidate an IT budget. Therefore, total estimated year 2000 costs as a percentage of an IT budget are not available. There are currently no planned IT projects being deferred due to year 2000 costs. During 1999, the Company has continued to enter into certain strategic acquisition transactions wherein the Company has acquired or will acquire in the future cable systems and other businesses from third parties. To adequately address any year 2000 impact from these acquisitions, the PMO has instituted a mergers and acquisition program whereby members of the PMO evaluate the year 2000 readiness of any cable systems or other businesses which have been or will be acquired in the future to determine the year 2000 readiness of such systems or businesses. The PMO monitors such systems'/businesses' year 2000 readiness from the signing of the letters of intent or definitive agreements through the closing of the proposed transactions. Please note that the information set forth in this section concerning progress by phase and other matters applies only to systems or businesses owned and operated by the Company or its affiliates as of September 30, 1999 and does not include information for systems or equipment acquired after September 30, 1999. I-54 56 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. Management believes that its year 2000 program will significantly reduce the Company's risks associated with the changeover to the year 2000. As part of its year 2000 readiness efforts, the Company has implemented certain contingency plans to minimize the effect of any potential year 2000 related disruptions. The risks and the uncertainties discussed below and the associated contingency plans relate to systems, software, equipment, and services that the Company has deemed critical in regard to customer service, business operations, financial impact or safety. Satellite system failures could prevent the delivery of programming to cable headends and disrupt service to customers. The Company is in the process of securing transponder space on alternate satellites for transmitting programming that originates from the Company in the event of such failures. In addition, the Company has made arrangements for alternative programming that will be broadcast on channels where signal disruption has occurred. The failure of addressable controllers contained in the cable system headends could disrupt the delivery of premium and pay-per-view services to customers and could necessitate crediting customers for failure to receive such services. In this unlikely event, the Company has secured the right to broadcast alternative programming from the NDTC for 48 hours. All alternative programming will be rated "G" for general audience viewing. Customer service networks failure could prevent access to customer account information, hamper installation and service call scheduling and disable the processing of pay-per-view billings. In the event of such failure, the Company would manually schedule service calls and correct billing omissions as soon as the networks are restored. In the event of automated voice response systems failure, the Company plans to have its customer service representatives on hand to answer telephone calls from customers directly. A failure of the services provided by billing systems service providers could disrupt the ability to provide service to and bill customers for a protracted period. The Company's billing system service provider has contingency plans in place to protect customer information and provide for continuation of service to the Company. The Company has set up arrangements to have its billing system service provider on site as part of its PMO during the rollover to the year 2000. The billing system service provider has developed staffing and operations plans that will provide for continuous support to the Company during and subsequent to the rollover to the year 2000. I-55 57 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) Advertising revenue could be adversely affected by the failure of certain equipment which could impede or prevent the insertion of advertising spots in the Company's programming. The Company anticipates that it can minimize such effect by the manual operation of insertion systems for indefinite periods of time, if necessary. The Company owns investments in numerous cable operators and other businesses. The market value of the Company's investment in these entities could be adversely impacted by material failures of such entities to address year 2000 issues (including supplier and vendor issues) related to their services and businesses. Further, due to tax and strategic considerations, the Company has a limited ability to dispose of these investments if year 2000 issues develop. Therefore, as a contingency plan, the Company has undertaken an extensive effort to verify and, in certain cases, assist in the year 2000 remediation efforts of companies in which it has significant investments. The Company has assisted such entities to varying degrees, including sharing program information and results to improve their year 2000 programs. Security and fire protection systems failures could leave facilities vulnerable to intrusion and destruction. The Company expects to return such systems to normal functioning by turning the power off and then on again ("power off/on"). The Company also plans to have additional security staff on site where needed and plans to implement a backup plan for communicating with local fire and police departments. Also, certain personal computers interface with and control elevators, escalators, wireless systems, public access systems and certain telephony systems. In the event such computers do not operate properly, conducting a power off/on is expected to resume normal functioning. If a power off/on does not resume normal functioning, management expects to resolve the problem by resetting the computer to a pre-designated date which precedes the year 2000. Because the Company leases certain of its facilities, it may need to implement the previously mentioned contingency plan with the cooperation and assistance of the lessor of the site. In the event that the local public utilities cannot supply power, the Company expects to supply power for a limited time to the Company's cable headends, the NDTC and select office sites through backup generators. If critical systems related to the Company's cable TV and programming services experience year 2000 problems, the Company could face claims of breach of contract from customers of NDTC, from parties to cable system sale or exchange agreements, from certain programming providers, from advertisers and from other cable TV businesses that rely on the Company's programming services. I-56 58 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES General (continued) The financial impact of any or all of the above worst-case scenarios has not been and cannot be estimated by the Company due to the numerous uncertainties and variables associated with such scenarios. Estimated costs of the Company's year 2000 program and projected completion dates are based on management's best estimates of future events and are forward-looking statements which may be updated as additional information becomes available. The Year 2000 statements set forth herein are Year 2000 Readiness Disclosures, pursuant to the Year 2000 Information and Readiness Disclosure Act, 15 U.S.C. section 1 note. Please note that, for purposes of any action brought under the securities laws, as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), the Year 2000 Information and Readiness and Disclosure Act does not apply to any statements contained in any documents or materials filed with the Securities and Exchange Commission, or with Federal banking regulators, pursuant to section 12(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(i)), or disclosures or writing that when made accompanied the solicitation of an offer or sale of securities. MATERIAL CHANGES IN RESULTS OF OPERATIONS GENERAL As described in notes 1 and 2 to the accompanying consolidated financial statements, for financial reporting purposes the AT&T Merger and the related Restructuring are deemed to have occurred on March 1, 1999. Accordingly, the financial statements for periods prior to March 1, 1999 are referred to herein as Old TCI, and the financial statements for periods subsequent to February 28, 1999 are referred to herein as New TCI. Due to the March 1, 1999 application of purchase accounting in connection with the AT&T Merger, the predecessor consolidated financial statements of Old TCI are not comparable to the successor consolidated financial statements of New TCI. I-57 59 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) Summarized operating data with respect to New TCI and Old TCI is presented below for the indicated periods:
New TCI Old TCI ------------ ------------------------------ Seven months Two months Nine months ended ended ended September 30, February 28, September 30, 1999 1999 1998 ------------- ------------- ------------- amounts in millions Revenue $ 3,344 1,145 5,563 Operating expenses 1,345 467 2,202 Selling, general and administrative expenses 807 322 1,316 Year 2000 costs 47 11 6 AT&T merger costs 31 65 11 Stock compensation 72 366 423 Reserve for loss arising from contingent obligation 50 -- -- Write-off of in-process research and development costs 594 -- -- Depreciation and amortization 1,143 277 1,289 ------------- ------------- ------------- 4,089 1,508 5,247 ------------- ------------- ------------- Operating income (loss) (745) (363) 316 Interest expense (558) (161) (807) Interest and dividend income 7 13 72 Share of losses of Liberty Media Group (818) -- -- Share of losses of the Other Affiliates, net (789) (161) (986) Minority interests in earnings of consolidated subsidiaries, net (103) (26) (95) Gains on issuance of equity interests by subsidiaries -- 389 55 Gain on issuance of stock by equity investee -- -- 259 Gains on disposition of assets, net -- 144 3,704 Other, net 7 8 (25) ------------- ------------- ------------- (2,254) 206 2,177 ------------- ------------- ------------- Earnings (loss) before income taxes and extraordinary items (2,999) (157) 2,493 Income tax benefit (expense) 589 (119) (1,079) ------------- ------------- ------------- Earnings (loss) before extraordinary items (2,410) (276) 1,414 Extraordinary gain (loss), net of income taxes 4 (5) (27) ------------- ------------- ------------- Net earnings (loss) $ (2,406) (281) 1,387 ============= ============= =============
I-58 60 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) Due to the consummation of the AT&T Merger, the Company's 1999 statement of operations includes information reflecting the seven-month period ended September 30, 1999 and the two-month period ended February 28, 1999. Prior to March 1, 1999 the Company consolidated the operations of Liberty/Ventures Group, and subsequent to February 28, 1999 the Company accounted for its ownership interests in Liberty Media Group under the equity method. The following discussion of the Company's results of operations includes a section that addresses the combined operating results of the former TCI Group, @Home (under the consolidated method prior to the second quarter of 1999 and under the equity method thereafter, see note 6 to the accompanying consolidated financial statements), NDTC and WTCI (collectively, the "Adjusted TCI Group") and a section that addresses the combined operating results of Liberty/Ventures Group, exclusive of @Home, NDTC and WTCI (the "Adjusted Liberty/Ventures Group"). I-59 61 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) ADJUSTED TCI GROUP For purposes of the following table and discussion, the combined operating results of Adjusted TCI Group for the seven months ended September 30, 1999 have been combined with the combined operating results of Adjusted TCI Group for the two months ended February 28, 1999 in order to provide a meaningful basis for comparing the nine months ended September 30, 1999 and 1998. Depreciation, amortization and certain other line items included in the operating results of Adjusted TCI Group are not necessarily comparable between periods as the three-month and seven-month successor periods ended September 30, 1999 include the effects of purchase accounting adjustments related to the AT&T Merger, and prior predecessor periods do not. The combining of predecessor and successor accounting periods is not acceptable under generally accepted accounting principles. See note 2 to the accompanying consolidated financial statements. The unaudited combined results of operations for Adjusted TCI Group are as follows:
Adjusted TCI Group ---------------------------------------------------------------------- Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- amounts in millions Revenue $ 1,442 1,549 4,285 4,735 Operating expenses (599) (617) (1,732) (1,802) Selling, general and administrative expenses (324) (322) (1,053) (1,048) Year 2000 costs (16) (4) (58) (5) AT&T merger and integration costs (4) (1) (96) (11) Stock compensation 2 (13) (255) (160) Reserve for loss arising from contingent obligation -- -- (50) -- Write-off of in-process research and development costs -- -- (594) -- Depreciation and amortization (461) (392) (1,398) (1,198) ----------- ----------- ----------- ----------- Operating income (loss) 40 200 (951) 511 Interest expense (248) (239) (694) (745) Share of losses of the Other Affiliates, net (412) (93) (883) (158) Minority interests in earnings of attributed subsidiaries, net (45) (33) (123) (99) Gain on issuance of equity interests by attributed subsidiary -- 17 17 17 Gain on issuance of stock by equity investee -- -- -- 201 Gains on disposition of assets, net -- 2,589 129 3,130 Other, net 3 12 28 10 ----------- ----------- ----------- ----------- Earnings (loss) before income taxes and extraordinary items (662) 2,453 (2,477) 2,867 Income tax benefit (expense) 239 (955) 677 (1,178) ----------- ----------- ----------- ----------- Earnings (loss) before extraordinary items (423) 1,498 (1,800) 1,689 Extraordinary gain (loss), net of income taxes 4 (4) (1) (27) ----------- ----------- ----------- ----------- Net earnings (loss) $ (419) 1,494 (1,801) 1,662 =========== =========== =========== ===========
I-60 62 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) Acquisitions and Dispositions Since January 1, 1998, Adjusted TCI Group has contributed cable television systems serving approximately 3,368,000 customers to a number of joint ventures in which Adjusted TCI Group has retained non-controlling ownership interests. Contribution transactions during the nine months ended September 30, 1999 accounted for approximately 614,000 of such contributed customers. In addition, during the second quarter of 1999, the Company discontinued using the consolidation method to account for its ownership interest in @Home and began to account for its ownership interest in @Home under the equity method. Adjusted TCI Group also has completed certain other acquisitions and dispositions since January 1, 1998. The above-described transactions adversely affect the comparability of operating results between periods. Accordingly, in the following discussion, the collective effects of such acquisitions and dispositions are sometimes excluded in order to provide a more meaningful basis of comparison. Revenue and Expenses Adjusted TCI Group's revenue decreased $107 million or 7% for the three months ended September 30, 1999, as compared to the corresponding prior year period. Exclusive of the effects of acquisitions and dispositions, revenue increased $90 million or 7%. Revenue from domestic cable customers accounted for a 6% increase in revenue, primarily due to the net effect of a 6% increase in basic revenue, an increase in revenue from digital products, an increase in pay-per-view revenue and a 7% decrease in traditional premium revenue. The Company experienced a 5% increase in its average basic rate, an increase of 1% in the number of average basic customers, a 14% decrease in its average rate for traditional premium services and an 8% increase in the number of average traditional premium subscriptions. Adjusted TCI Group's revenue decreased $450 million or 10% for the nine months ended September 30, 1999, as compared to the corresponding prior year period. Exclusive of the effects of acquisitions and dispositions, revenue increased $280 million or 7%. Revenue from domestic cable customers accounted for a 6% increase in revenue, primarily due to the net effect of a 5% increase in basic revenue, an increase in revenue from digital products, an increase in pay-per-view revenue and a 5% decrease in traditional premium revenue. The Company experienced a 3% increase in its average basic rate, an increase of 1% in the number of average basic customers, a 10% decrease in its average rate for traditional premium services and a 6% increase in the number of average traditional premium subscriptions. Adjusted TCI Group's operating expenses decreased $18 million or 3% and $70 million or 4% for the three and nine month periods ended September 30, 1999, respectively, as compared to the corresponding prior year periods. Exclusive of the effects of acquisitions and dispositions, operating expenses increased $81 million or 16% and $268 million or 19% for the three and nine month periods, respectively. Higher programming costs accounted for over one-half of such increases. It is anticipated that Adjusted TCI Group's programming costs will continue to increase in future periods. The remaining increases relate primarily to higher labor costs associated with increased levels of customer service, and increased launch and development costs related to the roll-out of Adjusted TCI Group's digital video products and other new service offerings. I-61 63 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) Adjusted TCI Group's selling, general and administrative expenses increased $2 million or 1% and $5 million or less than 1% for the three and nine month periods ended September 30, 1999, respectively, as compared to the corresponding prior year periods. Exclusive of the effects of acquisitions and dispositions, the expenses increased $25 million or 8% and $83 million or 9%, for the three and nine month periods, respectively. The increases are due primarily to higher salaries and benefits associated with increased levels of customer service, and increased launch and development costs related to the roll-out of Adjusted TCI Group's digital video products and other new service offerings. Adjusted TCI Group's year 2000 costs include fees and other expenses incurred directly in connection with Adjusted TCI Group's comprehensive efforts to review and correct computer systems, equipment and related software to ensure readiness for the year 2000. See detailed discussion above. AT&T merger and integration costs incurred by Adjusted TCI Group include investment advisory, legal and accounting fees, and other incremental costs directly related to the AT&T Merger. See note 2 to the accompanying consolidated financial statements Adjusted TCI Group records stock compensation relating to restricted stock awards, options and/or stock appreciation rights granted by the Company to certain employees and directors. The amount of expense associated with stock compensation for Adjusted TCI Group is based on the vesting of the related stock options and stock appreciation rights and the market price of the underlying common stock as of the date of the accompanying consolidated financial statements. The estimated compensation liability relating to vested stock appreciation rights has been recorded as of September 30, 1999, and is subject to future adjustment based primarily upon the market value of AT&T Liberty Tracking Stock and, ultimately, on the final determination of market value when such rights are exercised. See note 2 to the accompanying consolidated financial statements. During the second quarter of 1999, the Company recorded a charge of $50 million to provide for additional estimated losses that were expected to result from the Contribution Agreement. See note 13 to the accompanying consolidated financial statements. I-62 64 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) The write-off of in-process research and development costs of $594 million during March 1999 reflects the value, as of the date of the AT&T Merger, of New TCI's research and development projects which have not yet reached technological feasibility and which have no alternative for future use. Such costs included @Home's in-process research and development projects. During the second quarter of 1999, the Company ceased to consolidate @Home and began to account for its investment in @Home under the equity method of accounting. Accordingly, the Company will no longer report on the in-process research and development projects of @Home. The projects identified for New TCI related to the Company's efforts to offer voice over Internet protocol, cost savings efforts for cable telephony implementation and product integration efforts for advanced set-top devices that would enable the Company to offer next-generation digital services. Although there are significant technological issues to overcome in order to successfully complete the acquired in-process research and development, the Company expects successful completion. The Company currently anticipates that (i) it will deploy equipment to offer voice over Internet protocol to two cities in the year 2001, (ii) field deployable devices will be available by the end of the year with respect to the Company's cost savings efforts for cable telephony implementation, and (iii) field trials will begin in mid-year 2000 for next-generation digital services. If, however, the Company is unable to establish technological feasibility and produce a commercially viable product/service, then anticipated incremental future cash flows attributable to expected profits from such new product/service may not be realized. See note 2 to the accompanying consolidated financial statements. Adjusted TCI Group's depreciation and amortization expense increased $69 million or 18% and $200 million or 17% for the three and nine months ended September 30, 1999, respectively, as compared to the corresponding prior year periods. Such changes include $123 million and $312 million increases in amortization expense and $54 million and $112 million decreases in depreciation expense for the three and nine month periods, respectively. The increase in amortization expense is primarily attributable to the effects of purchase accounting during the three and seven months ended September 30, 1999. Such increase in amortization expense is partially offset by the effects of dispositions. The decrease in depreciation expense includes the net effect of (i) decreases attributable to dispositions and purchase accounting, and (ii) increases attributable to capital expenditures and acquisitions. See note 2 to the accompanying consolidated financial statements. Other Income and Expenses Adjusted TCI Group's interest expense increased $9 million or 4% and decreased $51 million or 7% for the three and nine months ended September 30, 1999, respectively, as compared to the corresponding prior year periods. The increase for the three months ended September 30, 1999 is due to an increase in the average outstanding debt balance which was partially offset by a decrease in the weighted average interest rate. See note 8 to the accompanying consolidated financial statements. The decrease for the nine months ended September 30, 1999 is primarily the result of a decrease in the weighted average interest rate which was partially offset by an increase in the average outstanding debt balance. I-63 65 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) Adjusted TCI Group's investments in the Other Affiliates are comprised of limited partnerships and other entities that are primarily engaged in the domestic cable television business or other communications services businesses. Adjusted TCI Group's share of losses of the Other Affiliates was $412 million and $883 million for the three and nine months ended September 30, 1999, respectively, as compared to $93 million and $158 million for the corresponding prior year periods. Such increases are primarily attributable to (i) increases of $193 million and $363 million during the three and nine months ended September 30, 1999, respectively, in the Company's share of losses of CSC, @Home and certain of the Other Affiliates (exclusive of the effects of purchase accounting) that were formed or otherwise acquired during the twenty-one-month period ended September 30, 1999, (ii) increases of $113 million and $267 million during the three and nine months ended September 30, 1999 in the amortization of the excess carrying value of the Company's investments in the Other Affiliates due to the application of purchase accounting and (iii) increases in the Company's share of losses of certain of the Other Affiliates. For additional information, see notes 2, 6 and 7 to the accompanying consolidated financial statements. Additionally, Adjusted TCI Group's share of the Other Affiliates' losses during the nine months ended September 30, 1998 includes Adjusted TCI Group's share of gains recognized by two affiliates in connection with certain transactions. Minority interests in earnings of consolidated subsidiaries aggregated $45 million and $123 million for the three and nine months ended September 30, 1999, respectively, as compared to $33 million and $99 million in the corresponding prior year periods. Such amounts include dividends on the Trust Preferred Securities and other preferred securities of TCI subsidiaries attributed to Adjusted TCI Group of $45 million during each of the three month periods ended September 30, 1999 and 1998, respectively, and $134 million during each of the nine month periods ended September 30, 1999 and 1998, respectively. See note 9 to the accompanying consolidated financial statements. Through the first quarter of 1999, such dividends were offset in part by the minority interests share of the losses of @Home. As described in note 6 to the accompanying consolidated financial statements, during the second quarter of 1999, the Company ceased to consolidate @Home and began to account for @Home under the equity method of accounting. During the two months ended February 28, 1999, @Home issued 1.1 million common shares. Due to the resulting increase in @Home's equity, net of the dilution of Adjusted TCI Group's ownership interest in @Home, Adjusted TCI Group recognized a gain of $17 million. On April 22, 1998, TCG completed a merger transaction with ACC in which ACC's shares were exchanged for shares of TCG. In connection with the dilution of Adjusted TCI Group's interest in TCG, Adjusted TCI Group recorded a gain of $201 million. See note 7 to the accompanying consolidated financial statements. Gains on disposition of assets during the nine months ended September 30, 1999 includes a $123 million gain related to the February 1999 sale of certain cable television systems serving approximately 145,000 customers. Adjusted TCI Group's gains on disposition of assets of $3,130 million during the nine months ended September 30, 1998 are primarily attributable to TCG's merger with AT&T and the March 4, 1998 contribution of cable television systems to CSC. For additional information, see notes 6, 7 and 11 to the accompanying consolidated financial statements. I-64 66 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) Adjusted TCI Group recognized extraordinary gains (losses) on early extinguishment of debt of $4 million and $(1 million) for the three and nine months ended September 30, 1999, respectively, as compared to $(4 million) and $(27 million) in the corresponding prior year periods. Such amounts are net of taxes and relate to (i) prepayment penalties and the retirement of deferred loan costs prior to the AT&T Merger and (ii) the excess of the fair value assigned to the debt in purchase accounting over the amount paid to redeem the debt during the three months ended September 30, 1999. Net Earnings (Loss) As a result of the above-described fluctuations in Adjusted TCI Group's results of operations, Adjusted TCI Group's net loss of $419 million for the three months ended September 30, 1999 changed by $1,913 million, as compared to Adjusted TCI Group's net earnings of $1,494 million for the three months ended September 30, 1998. Adjusted TCI Group's net loss of $1,801 million for the nine months ended September 30, 1999 changed by $3,463 million, as compared to Adjusted TCI Group's net earnings of $1,662 million for the nine months ended September 30, 1998. I-65 67 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) ADJUSTED LIBERTY/VENTURES GROUP The consolidated operating results of the Company for the two months ended February 28, 1999 and the three and nine months ended September 30, 1998 include the operations of entities attributed to the Liberty/Ventures Group during such periods. For the three and seven months ended September 30, 1999, the Company's investment in Liberty Media Group was accounted for under the equity method. The following table presents certain combined operating information of Adjusted Liberty/Ventures Group (Liberty/Ventures Group exclusive of @Home, NDTC and WTCI) for the periods in which such information was included in the Company's consolidated financial statements:
Adjusted Liberty/Ventures Group ----------------------------------------------------------------------- Two months Three months Nine months ended ended ended February 28, 1999 September 30, 1998 September 30, 1998 ------------------ ------------------ ------------------ amounts in millions Revenue $ 240 362 1,022 Operating costs and expenses: Operating, selling, general and administrative 192 296 863 Stock compensation 183 (2) 263 Depreciation and amortization 22 31 86 ------------------ ------------------ ------------------ 397 325 1,212 ------------------ ------------------ ------------------ Operating income (loss) (157) 37 (190) Other income (expense): Interest expense (25) (34) (71) Dividend and interest income 10 18 50 Share of losses of affiliates, net (67) (307) (829) Minority interests in losses (gains) of attributed subsidiaries (6) 5 (2) Gains on dispositions, net 15 17 574 Gains on issuance of equity by affiliates and attributed subsidiaries 372 58 96 Other, net (4) (4) (4) ------------------ ------------------ ------------------ 295 (247) (186) ------------------ ------------------ ------------------ Earnings (loss) before income taxes 138 (210) (376) Income tax benefit (expense) (206) 54 100 ------------------ ------------------ ------------------ Net loss $ (68) (156) (276) ================== ================== ==================
I-66 68 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) The foregoing results of operations of Adjusted Liberty/Ventures Group are not comparable in that the 1999 year-to-date period includes two months of operations and the 1998 year-to-date period includes nine months of operations. In addition to fluctuations that are attributable to the different lengths of the 1999 and 1998 periods, other factors have contributed to changes between such periods. Such changes are discussed in relative terms below. The combined revenue of Adjusted Liberty/Ventures Group includes programming revenue derived from Adjusted TCI Group and non-affiliates. The relative increase in revenue relates primarily to higher revenue from the distribution of "Encore" premium movie services to cable operators, including Adjusted TCI Group. Changes in Adjusted Liberty/Ventures Group's operating, selling, general and administrative expenses relate primarily to the net effect of decreases in costs due to certain dispositions and increases in costs due to relatively higher costs to acquire programming content from suppliers. Higher costs to acquire programming content are primarily due to an increase in first run movie content as a percent of Encore's total movie content. Such first run movies are generally obtained at higher costs than movies which are not first run. Other miscellaneous increases include higher music rights costs, copyright fees and marketing costs. Adjusted Liberty/Ventures Group recorded stock compensation relating to restricted stock awards, options and/or stock appreciation rights granted by the Company to certain employees and directors of Adjusted Liberty/Ventures Group. The amount of expense associated with stock compensation is based on the vesting of the related stock options and stock appreciation rights and the market price of the underlying common stock as of the end of the periods presented. Adjusted Liberty/Ventures Group's interest and dividend income consisted primarily of (i) dividends received on a series of Time Warner common stock with limited voting rights, (ii) dividends received on preferred stock of Fox Kids Worldwide, Inc. ("FKW Preferred Stock"), and (iii) interest income from cash balances and other interest-earning assets. Dividends received on the Time Warner common stock aggregated $3 million and $15 million, and dividends received on the FKW Preferred Stock aggregated $5 million and $23 million, during the two months ended February 28, 1999 and the nine months ended September 30, 1998, respectively. Investments in affiliates are comprise of limited partnerships and other entities that are primarily engaged in programming and communications services businesses. Adjusted Liberty/Ventures Group's share of losses of affiliates were $67 million and $829 million during the two months ended February 28, 1999 and the nine months ended September 30, 1998, respectively. I-67 69 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Results of Operations (continued) Adjusted Liberty/Ventures Group's share of losses for the two months ended February 28, 1999 included its (i) share of losses of Telewest Communications plc, which aggregated $38 million during the period, and (ii) share of losses of other foreign affiliates, which aggregated $27 million during the period. Adjusted Liberty/Ventures Group's share of losses for the nine months ended September 30, 1998 included its (i) $510 million share of the losses of Sprint Spectrum Holding Company, L.L.P., MinorCo, L.P. and PhillieCo Partnership I, L.P. (the "PCS Ventures"), (ii) $184 million share of the losses of various foreign affiliates and (iii) $76 million share of the losses of Fox/Liberty Networks ("Fox Sports"). As a result of a November 1998 transaction, Adjusted Liberty/Ventures Group no longer accounts for its investment in the PCS Ventures under the equity method. Prior to the first quarter of 1998, Adjusted Liberty/Ventures Group had no obligation, nor intention, to fund Fox Sports. During 1998, Adjusted Liberty/Ventures Group made the determination to provide funding to Fox Sports based on specific transactions consummated by Fox Sports. Consequently, Adjusted Liberty/Ventures Group's share of losses of Fox Sports for 1998 includes previously unrecognized losses of Fox Sports of approximately $64 million. Losses for Fox Sports were not recognized in prior periods due to the fact that Adjusted Liberty/Ventures Group's investment in Fox Sports was less than zero. Adjusted Liberty/Ventures Group's gain on disposition of $574 million during the nine months ended September 30, 1998 is primarily the result of Adjusted Liberty/Ventures Group's sale to Time Warner of the business of Southern Satellite Systems, Inc. and certain of its subsidiaries. Gains on issuance of equity interests by attributed subsidiaries were $372 million and $96 million during the two months ended February 28, 1999 and the nine months ended September 30, 1998, respectively. The 1999 gains relate primarily to the issuance of common stock by UVSG, in connection with its acquisition of the business of TV Guide. The 1998 gains primarily relate to General Cable's merger with and into Telewest and the February 1998 equity issuance by Liberty/Ventures Group's then subsidiary, Superstar/Netlink Group LLC. See note 7 to the accompanying consolidated financial statements. The Company's share of the losses of Liberty Media Group was $818 million for the seven months ended September 30, 1999. If Adjusted Liberty/Ventures Group had been deconsolidated January 1, 1998, the Company's share of Adjusted Liberty/Ventures Group's net losses would have been $886 million and $276 million for the nine months ended September 30, 1999 and 1998, respectively. The increase in such Liberty Media Group losses is primarily attributable to a $352 million increase in Liberty Media Group's stock compensation and higher depreciation and amortization due primarily to the application of purchase accounting in connection with the AT&T Merger. I-68 70 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES MATERIAL CHANGES IN FINANCIAL CONDITION As described in greater detail in note 2 to the accompanying consolidated financial statements, on March 9, 1999, TCI was acquired by AT&T in a merger and TCI thereby became a subsidiary of AT&T. The AT&T Merger also resulted in the deconsolidation of the businesses and assets attributed to Liberty Media Group at the time of the AT&T Merger. Pursuant to the Merger Agreement, immediately prior to the AT&T Merger, certain assets previously attributed to TCI Ventures Group (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and TCG, the stock of @Home attributed to TCI Ventures Group, the assets and business of NDTC and TCI Ventures Group's equity interest in WTCI) were transferred to TCI Group in exchange for approximately $5.5 billion in cash. Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty Media Group and AT&T, Liberty Media Group became entitled to the benefit of approximately $2 billion of net operating loss carryforwards attributable to all entities included in TCI's consolidated federal income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service and are subject to limitations on usage which may affect the ultimate amount utilized. Additionally, certain warrants to purchase shares of GI previously attributed to TCI Group were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. The transfer of certain immaterial assets was also effected. TCI funded the $5.5 billion payment to Liberty/Ventures Group through borrowings from AT&T. Such borrowings are evidenced by a $5.5 billion promissory note. Such promissory note accrues interest at LIBOR, plus 15 basis points, and is due and payable on demand on or before March 9, 2004. Immediately prior to the AT&T Merger, TCI consummated the Restructuring. The Restructuring included merging TCI's cable subsidiary, TCIC, into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of TCIC have been assumed by TCI, including TCIC's public debt. In connection with TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred Stock, Series A, was converted into 2.119 shares of TCI Group Series A Stock, and such shares of TCI Group Series A Stock were subsequently converted into AT&T Common Stock in connection with the AT&T Merger. All other public securities issued by subsidiaries of TCIC (other than Pacific) otherwise remained unaffected. Furthermore, as part of the Restructuring, (I) AT&T loaned TCI $5.5 billion pursuant to a promissory note, (ii) certain asset transfers were made between TCI and its subsidiaries, (iii) 123,896 shares of Series F Preferred Stock, which were held by subsidiaries of TCI, were converted into 185,428,946 shares of TCI Group Series A Stock (which in turn were converted into 215,755,850 shares of AT&T Common Stock in the AT&T Merger and continue to be held by subsidiaries of TCI), (iv) the remaining 154,411 shares of Series F Preferred Stock which were formerly held by subsidiaries of TCI were distributed to TCI through a series of liquidations and canceled, and (v) 125,728,816 shares of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock, 6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each formerly held by subsidiaries of TCI, were distributed to TCI through a series of liquidations and canceled. I-69 71 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Financial Condition (continued) Under the terms of the Exchangeable Preferred Stock of Pacific, each share of that preferred stock is exchangeable, from and after August 1, 2001, for approximately 6.3375 shares of AT&T Common Stock, subject to certain anti-dilution adjustments. Additionally, after the AT&T Merger, Pacific may elect to make any dividend, redemption or liquidation payment on the Exchangeable Preferred Stock in cash, by delivery of shares of AT&T Common Stock or by a combination of the foregoing forms of consideration. As a result of the deconsolidation of Liberty Media Group in connection with the AT&T Merger, Liberty Media Group's liquidity sources (including the $5.5 billion payment from TCI) will be used towards the liquidity requirements of Liberty Media Group and will not represent a source of liquidity to TCI. Conversely, TCI anticipates that Liberty Media Group will not require funds from TCI to satisfy Liberty Media Group's liquidity requirements. The Company's lines of credit were terminated in March 1999 and, accordingly, such lines of credit no longer represent a source of liquidity for the Company. To the extent that funds generated by the Company's operating activities are not sufficient to meet its liquidity needs, the Company anticipates that it would obtain additional financing from AT&T or external sources. No assurance can be given that any such additional financing could be obtained on terms acceptable to the Company. TCI's restricted cash of $19 million at September 30, 1999, includes amounts held in escrow of $10 million and proceeds received in connection with certain asset dispositions. Such proceeds, which aggregated $9 million at September 30, 1999, are designated to be reinvested in certain identified assets for income tax purposes. During the seven months ended September 30, 1999, the two months ended February 28, 1999, and the nine months ended September 30, 1998 the Company had Operating Cash Flow of $1,192 million, $356 million and $2,045 million, respectively. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Operating Cash Flow, as defined, does not take into consideration substantial costs of doing business, such as interest expense, and should not be considered in isolation to other measures of performance. The Company's operating activities provided (used) cash of $527 million, $(196 million) and $748 million during the seven months ended September 30, 1999, the two months ended February 28, 1999, and the nine months ended September 30, 1998, respectively. Net cash provided by operating activities generally reflects net cash from operations of TCI available for TCI's liquidity needs after taking into consideration the aforementioned additional substantial costs of doing business not reflected in Operating Cash Flow. Following the deconsolidation of Liberty Media Group in connection with the AT&T Merger and the deconsolidation of @Home during the second quarter of 1999, Liberty Media Group's and @Home's operating activities are no longer included in the Company's consolidated statements of cash flows. I-70 72 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Financial Condition (continued) Cash provided by (used in) the Company's investing activities aggregated $(2,314 million), $475 million and $(656 million) during the seven months ended September 30, 1999, the two months ended February 28, 1999, and the nine months ended September 30, 1998, respectively. Following the deconsolidation of Liberty Media Group in connection with the AT&T Merger and the deconsolidation of @Home during the second quarter of 1999, Liberty Media Group's and @Home's investing activities are no longer included in the Company's consolidated statements of cash flows. The Company's investing activities include a reduction in the Company's cash and cash equivalents of $401 million during the seven months ended September 30, 1999 resulting from the deconsolidation of @Home. The amount of capital expended by TCI for property and equipment was $1,910 million, $297 million and $1,123 million during the seven months ended September 30, 1999, the two months ended February 28, 1999, and the nine months ended September 30, 1998, respectively. Such expenditures relate primarily to TCI's cable distribution systems. TCI estimates that total capital expenditures will be approximately $3.5 billion and $2.4 billion in 1999 and 2000, respectively. No assurance can be given that actual capital costs will not exceed such estimated capital costs. Additionally, the foregoing estimate does not include customer specific capital costs required to deliver local telephony services. TCI cannot reasonably estimate such costs since the actual capital costs will be largely dependent upon the extent of customer penetration and the average per-unit-cost to install customer premise equipment. During the two months ended February 28, 1999, the Company completed a transaction whereby the Company contributed cable television systems to Bresnan, an entity in which the Company had an approximate 80% ownership interest. Through a series of transactions, including the contribution of cash by a third party in exchange for an ownership interest, the Company's ownership interest in Bresnan was diluted to a non-controlling 50% ownership interest. In connection with the associated dilution of the Company's ownership interest, the Company deconsolidated assets and liabilities related to cable television systems serving approximately 614,000 customers. The deconsolidated liabilities included $210 million of debt owed to external parties and $709 million of intercompany debt owed to the Company. In connection with such transaction, the Company has agreed to take certain steps to support compliance by such entity with its payment obligations under certain debt instruments. See note 7 to the accompanying consolidated financial statements. During February 1999, the Company sold cable television assets serving approximately 145,000 customers to an unaffiliated third party for approximately $300 million. Several agreements have been announced which may result in the acquisition and disposition of cable television systems by TCI. In addition, the Company has entered into agreements to sell certain of its investments in the Other Affiliates. See notes 6 and 7 to the accompanying consolidated financial statements. I-71 73 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Financial Condition (continued) During the second quarter of 1999, @Home consummated a merger agreement with Excite. Under the terms of the merger agreement, @Home issued approximately 116 million shares of its common stock for all of the outstanding common stock of Excite. As a result of the merger, the Company's economic interest in @Home decreased from 38% to 26%. Due to the resulting increase in @Home's equity, net of the dilution of the Company's ownership interest in @Home, the Company recorded a $488 million increase to "Additional paid-in capital" and a $312 million increase to "Deferred income tax liability." For additional information see note 6 to the accompanying consolidated financial statements. During February and March, 1999, Old TCI terminated certain equity swap facilities. In connection with the termination of such transactions, Old TCI received aggregate cash payments of $677 million. For additional information see note 10 to the accompanying consolidated financial statements. Many of the Company's subsidiaries operate in the telecommunications industry which has experienced and is expected to continue to experience (i) rapid and significant changes in technology, (ii) ongoing improvements in the capacity and quality of such services, (iii) frequent and new product and service introductions, and (iv) enhancements and changes in end-user requirements and preferences. The degree to which these changes will affect such entities and the ability of such entities to compete in their respective businesses cannot be predicted. If markets fail to develop, develop more slowly than expected, or become highly competitive, the Company's operating results and financial condition may be materially adversely affected. TCI is committed to purchase billing services from a third party pursuant to three successive five year agreements. Pursuant to such arrangement, TCI is obligated at September 30, 1999 to make minimum payments aggregating approximately $1.5 billion through 2012. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. TCI has agreed to make fixed monthly payments to an entity attributed to Liberty Media Group pursuant to an affiliation agreement. The fixed annual commitments increase annually from $190 million in 1999 to $267 million in 2003, and will increase with inflation through 2022. In addition, pursuant to certain agreements between TCI and an entity attributed to Liberty Media Group, TCI is obligated at September 30, 1999 to make minimum revenue payments through 2017 license fee payments through 2007 aggregating approximately $385 million to such attributed entity. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. I-72 74 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Financial Condition (continued) The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $47 million at September 30, 1999. The Company also has agreed to take certain steps to support debt compliance with respect to obligations aggregating $1,720 million of certain cable television partnerships in which the Company has non-controlling ownership interests. See notes 7 and 13 to the accompanying consolidated financial statements. The Company also has guaranteed the performance of certain affiliates and other parties with respect to such parties' contractual and other obligations. Although there can be no assurance, management of the Company believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to the Company. Following the deconsolidation of Liberty Media Group in connection with the AT&T Merger, notes payable and other obligations guaranteed by entities attributed to Liberty Media Group are no longer included with those of TCI. During 1999, a subsidiary of the Company entered into a Contribution Agreement with certain shareholders of Phoenixstar pursuant to which the Company would, to the extent it is relieved of $166 million of contingent liabilities currently owed to certain creditors of Phoenixstar and its subsidiaries, contribute up to $166 million to Phoenixstar to the extent necessary to satisfy liabilities of Phoenixstar. During the second quarter of 1999 and the fourth quarter of 1998, the Company recorded charges of $50 million and $90 million, respectively, to provide for the estimated losses that were expected to result from the Contribution Agreement. During 1999, the Company contributed approximately $116 million to Phoenixstar as partial satisfaction of this obligation. The Company's remaining obligation under the Contribution Agreement will expire in 2001. The Company is obligated and/or has guaranteed Liberty Media Group's obligation to pay fees for the rights to exhibit certain films that are released by various producers through 2017. Based on customer levels at September 30, 1999, these agreements require minimum payments aggregating approximately $440 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. TCI is a party to affiliation agreements with programming suppliers. Pursuant to certain of such agreements, TCI is committed to carry such suppliers' programming on its cable systems. Additionally, certain of such agreements provide for penalties and charges in the event the programming is not carried or not delivered to a contractually specific number of customers. I-73 75 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Financial Condition (continued) Effective as of December 16, 1997, NDTC, on behalf of the Company and other cable operators that may be designated from time to time by NDTC, entered into an agreement with GI to purchase a minimum of 6.5 million set-top devices during calendar years 1998, 1999 and 2000 at an average price of $318 per set-top device. The 1998 purchase commitment of 1.5 million set-top devices was met. The agreement with GI was amended in the third quarter of 1999 to change the remaining purchase commitment for set-top devices to 1,880,000 devices in 1999 and 2,500,000 devices in 2000. During the nine months ended September 30, 1999, approximately 1.4 million set-top devices had been purchased under the 1999 commitment. 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. In connection with the AT&T Merger, such warrants were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. To the extent that such warrants do not vest because TCI fails to meet its purchase commitments, as amended, TCI is required to repay a proportional amount of such cash to Liberty Media Group. NDTC has the right to terminate the agreement if, among other reasons, GI fails to meet a material milestone designated in the agreement with respect to the development, testing and delivery of advanced digital set-top devices. On July 17, 1998, the Company acquired 21.4 million shares of common stock of GI in exchange for (i) certain of the assets of NDTC's set-top authorization business, (ii) the license of certain related software to GI, (iii) a $50 million promissory note from the Company to GI, and (iv) a nine-year revenue guarantee from the Company in favor of GI. In connection therewith, NDTC also entered into a services agreement pursuant to which it will provide certain postcontract services to GI's set-top authorization business. As a result of the deconsolidation of Liberty Media Group, the 21.4 million shares of GI common stock are no longer included in the Company's consolidated assets. The excess of the fair value of GI common stock received in 1998 over (i) the book value of certain assets transferred from NDTC to GI, and (ii) the present value of the promissory note due from the Company to GI, was deferred by the Company. As a result of the application of purchase accounting in connection with the AT&T Merger, the deferred amount related to the revenue guarantee was reduced to $61 million and the remaining deferred amount was reduced to $48 million. The Company leases business offices, has entered into converter lease agreements, pole rental agreements, transponder lease agreements and uses certain equipment under lease arrangements. 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, through net cash provided by their own operating activities and, in certain circumstances, through required capital contributions from their partners. I-74 76 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Material Changes in Financial Condition (continued) In order to achieve the desired balance between variable and fixed rate indebtedness, the Company may enter into Interest Rate Swaps pursuant to which it (i) pays fixed interest rates and receives variable interest rates and (ii) pays variable interest rates and receives fixed interest rates. At December 31, 1998, all of the Company's Fixed Rate Agreements had expired. During the nine months ended September 30, 1998, the Company's net payments pursuant to the Fixed Rate Agreements were less than $1 million. The Company's net receipts pursuant to the Variable Rate Agreements during the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September 30, 1998, were $16 million, $1 million and $8 million, respectively. At September 30, 1999, the Company would have had to pay $1 million to terminate the Variable Rate Agreements. In addition to the Variable Rate Agreements, the Company entered into fixed Interest Rate Swaps pursuant to which it pays a variable rate based on LIBOR (6.4% at September 30, 1999) and receives a variable rate based on CMT (6.1% at September 30, 1999) on a notional amount of $400 million through September 2000; and pays a variable rate based on LIBOR (6.3% at September 30, 1999) and receives a variable rate based on CMT (6.2% at September 30, 1999) on notional amounts of $95 million through February 2000. During each of the four months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September 30, 1998, the Company's net payments pursuant to such agreements were $1 million. At September 30, 1999, the Company would be required to pay less than $1 million to terminate such Interest Rate Swaps. The Company is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. Further, as of September 30, 1999, the Company does not anticipate material near-term losses in future earnings, fair values or cash flows resulting from derivative financial instruments. See note 8 to the accompanying consolidated financial statements for additional information regarding Interest Rate Swaps. At September 30, 1999, after considering the net effect of the aforementioned Interest Rate Swaps, the Company had $7.6 billion (or 80%) of fixed rate debt due to non-affiliates and $1.8 billion (or 20%) of variable-rate debt due to non-affiliates. In addition, at September 30, 1999, the Company had outstanding variable rate indebtedness under the AT&T Notes of $8.6 billion. TCI's interest rate exposure is primarily to changes in LIBOR rates. I-75 77 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 September 30, 1999 to which TCI or any of its consolidated subsidiaries is a party or of which any of its property is the subject, except as follows: James Dalton, et al. V. Tele-Communications, Inc., et al. As previously reported, on February 24, 1997, James Dalton, et al. filed suit in District Court for Arapahoe County, Colorado, Case No. 97-CV421, against TCI and certain current and former officers of TCI and its subsidiary, TCIC (John C. Malone, Brendan R. Clouston, Barry P. Marshall, Camille K. Jayne, Sadie N. Decker, Bruce W. Ravenel, Gerald W. Gaines, Bernard W. Schotters, II) and Daniel L. Ritchie and Donne F. Fisher, in their capacity as co-personal representatives of the estate of Bob Magness. This case was settled in August 1999 for an amount that will not have a material adverse effect upon the financial condition of the Company. This case will not be reported on in the future. Tele-Communications International, Inc. Stockholder Litigation. As previously reported, on July 13, 1998, two putative class action complaints were filed by certain stockholders of Tele-Communications International, Inc. in the Delaware Chancery Court. The actions, which have identical claims and allegations, are styled as Berkowitz v. Tele-Communications, Inc., et al., C.A. No. 16533, and Chetkov v. Tele-Communications, Inc., et al., C.A. No. 16534, respectively. This case was settled and dismissed in July 1999. 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. 78 TELE-COMMUNICATIONS, INC. Item 6. Exhibit and Reports on Form 8-K. (a) Exhibits 10 - Material Contracts 10.1 Amendment to Employment Agreement, effective as of March 9, 1999, between Liberty Media Corporation and John C. Malone 10.2 Employment Agreement between Tele-Communications, Inc. and Marvin Jones, dated as of July 14, 1999. 10.3 Employment Agreement between AT&T Corp. and Stephen M. Brett, dated as of April 1, 1999. 27 - Tele-Communications, Inc. Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended September 30, 1999: None. 79 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELE-COMMUNICATIONS, INC. Date: November 12, 1999 By: /s/ Daniel E. Somers ---------------------------------- Daniel E. Somers President and Chief Executive Officer Date: November 12, 1999 By: /s/ Stephen M. Brett ---------------------------------- Stephen M. Brett Senior Executive Vice President Date: November 12, 1999 By: /s/ Ann M. Koets ---------------------------------- Ann M. Koets Executive Vice President and Chief Financial Officer (Chief Accounting Officer) 80 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 - Amendment to Employment Agreement, effective as of March 9, 1999, between Liberty Media Corporation and John C. Malone 10.2 - Employment Agreement between Tele-Communications, Inc. and Marvin Jones, dated as of July 14, 1999. 10.3 - Employment Agreement between AT&T Corp. and Stephen M. Brett, dated as of April 1, 1999. 27 - Tele-Communications, Inc. Financial Data Schedule
EX-10.1 2 AMENDED/RESTATED EMPLOYMENT AGREEMENT 1 EXHIBIT 10.1 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement (this "Amendment"), effective as of March 9, 1999, is between Liberty Media Corporation, a Delaware corporation (the "Company"), and John C. Malone ("Executive"). RECITALS Executive and Tele-Communications, Inc. ("TCI") are parties to a Restated and Amended Employment Agreement (the "Employment Agreement") dated as of November 1, 1992, setting forth various terms applicable to Executive's employment by TCI. A copy of the Employment Agreement is attached as Appendix A to this Amendment. In connection with the acquisition of TCI by AT&T Corp. on March 9, 1999, the Company assumed the obligations of TCI under the Employment Agreement. The Company and Executive desire to amend the Employment Agreement in various respects. AGREEMENT In consideration of the mutual covenants set forth in this Amendment and the Employment Agreement, the parties, intending to be legally bound, agree as follows: 1. Definitions. As used in this Amendment, all terms with initial capital letters that are not defined in this Amendment will have the meaning ascribed to them in the Employment Agreement. 2. Services to be Rendered by Executive. The first sentence of Section 2 of the Employment Agreement is amended in its entirety to read as follows: "Executive agrees to serve the Company as the Chairman of the Company's Board of Directors." 3. Time to be Devoted by Executive. Section 3 of the Employment Agreement is amended in its entirety to read as follows: "Executive will use his best efforts to promote the interests of the Company and will devote such of his business time, attention, efforts and abilities as reasonably may be required to perform the duties contemplated hereby." 4. Compensation Payable to Executive. The first sentence of Section 4(a) of the Employment Agreement is amended in its entirety to read as follows: 2 "Effective as of March 1, 1999, and thereafter during the Employment Term, the Company will pay to Executive a salary at the rate of $2,600 per annum." 5. Executive Benefit Plans; Use of Company Aircraft. (a) The first sentence of Section 7(b) of the Employment Agreement is amended by changing the reference in that sentence to "35,000 per year" to "$200,000 per year." (b) The following will be added as subsection (c) to Section 7 of the Employment Agreement: "(c) The Company will pay, or will reimburse Executive for, all fees and other costs for professional services reasonably incurred by Executive in obtaining estate or tax planning advice or services, up to a maximum amount of $50,000 per year." 6. Notices. The address for notices to Executive set forth in Section 14 of the Employment Agreement is amended to read as follows: Mr. John C. Malone 12750 Pine Drive Parker, CO 80134 This Agreement has been signed on June 30, 1999, but will be effective as of the date first written above. LIBERTY MEDIA CORPORATION By: /s/ ROBERT R. BENNETT ------------------------------------- Robert R. Bennett, President /s/ JOHN C. MALONE ------------------------------------- John C. Malone -2- EX-10.2 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT AGREEMENT by and between Tele-Communications, Inc., a Delaware corporation (the "Company" or "TCI), and Marvin Jones (the "Executive"), dated as of the 14th day of July, 1999 (the "Effective Date"). WHEREAS, the Executive is employed as of the Effective Date by the Company; and WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to employ the Executive and the Executive desires to serve in that capacity; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. The Company shall employ the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for the Employment Period (as defined in the next sentence). The "Employment Period" shall mean the period beginning on the Effective Date and ending on March 31, 2000, unless earlier terminated as set forth herein. 2. Position and Duties. (a) During the Employment Period, the Executive shall serve in the position and have the duties and responsibilities set forth on Exhibit A hereto. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive under this Agreement, use the Executive's reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the 2 performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. (c) The Executive's services shall be performed primarily at the principal office location where the Executive performed his duties immediately prior to the Effective Date (or otherwise within 35 miles of such office), subject to any travel requirements necessary to perform his duties hereunder. 3. Compensation. (a) Base Salary. During the Employment Period, the Executive shall be paid an annual base salary ("Annual Base Salary") at a rate equal to the rate set forth on Exhibit B hereto, payable pursuant to the Company's normal payroll practices. (b) Benefits. During the Employment Period, the Executive shall be entitled to participate in savings and welfare benefit plans, practices, policies and programs of the Company that are provided generally to similarly situated employees of the Company. (c) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive in accordance with the Company's policies, practices and procedures. (d) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company. (e) TCI Equity Awards. Effective as of the Effective Date, the Company shall accelerate the vesting of the Executive's outstanding unvested stock options and shares of restricted stock that are set forth on Exhibit C hereto (the "Exhibit C Grants"). All remaining stock options and restricted stock initially granted to the Executive with respect to the Company or Liberty Media Corporation prior to the Effective Date, which do not become vested pursuant to the immediately preceding sentence ("Remaining TCI Awards"), shall continue to vest during the Employment Period pursuant to their scheduled vesting terms and, if not previously vested, shall become immediately vested on March 31, 2000. In the event the Executive exercises a stock option or sells a share of stock that had been restricted stock (in -2- 3 each case, that was an Exhibit C Grant or Remaining TCI Award) within 60 days after the earlier of (i) the vesting of such stock option or share of restricted stock pursuant to the terms of such award or (ii) March 31, 2000 (or any earlier vesting date under this Agreement), the Company shall pay the Executive, with respect to each such stock option or share, a cash payment (the "Equity Payment"), within 10 days following the exercise of the stock option or sale of stock, equal to the excess, if any, of: (A) with respect to Exhibit C Grants or Remaining TCI Awards denominated in AT&T Corp. common stock, $57.81 over the average of the high and low price of AT&T Corp. common stock on the New York Stock Exchange on the date of such exercise or sale, as applicable, and (B) with respect to Exhibit C Grants or Remaining TCI Awards denominated in "AT&T Liberty Tracking Shares," $26.67 over the average of the high and low price of AT&T Liberty Tracking Shares on the New York Stock Exchange on the date of such exercise or sale, as applicable. Each Equity Payment amount shall be subject to equitable adjustment in the event of any adjustment in the capitalization of AT&T Corp. (e.g., stock split, spin-off, extraordinary dividend, reorganization or similar corporate transaction, including any adjustments relating to the AT&T Liberty Tracking Shares) which occurs following the Effective Date and prior to the date of any such exercise or sale. (f) Supplemental Payment. Except as otherwise provided in Section 5(b) of this Agreement, the Company shall pay the Executive a lump sum cash payment equal to the amount set forth on Exhibit D hereto (the "Supplemental Payment") within 30 days following the expiration of the Employment Period or pursuant to the provisions of Section 5 of this Agreement. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive is unable to perform the Executive's duties under this Agreement for a period of not less than 180 consecutive days, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and acceptable to the Executive or the -3- 4 Executive's legal representative, has determined that the Executive's incapacity is total and permanent. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive or the Executive's legal representative by written notice, and shall be effective on the 10th day after receipt of such notice by the Executive or the Executive's legal representative (the "Disability Effective Date"). (b) By the Company. The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" shall mean illegal conduct or gross misconduct by the Executive, in either case that is willful and results in material and demonstrable damage to the business or reputation of the Company or any of its affiliates. (c) By the Executive. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means, without the Executive's written consent: A. the Company's assignment to the Executive of any duties inconsistent in any material respect with the duties described in Exhibit A of this Agreement; provided, that a diminution or reduction in the Executive's duties, responsibilities or authority shall not be a basis for Good Reason; B. any failure by the Company to comply with any material provision of Section 3 of this Agreement; C. any requirement by the Company that the Executive's services be rendered primarily at a location or locations other than that provided for in Section 2(c) of this Agreement; or D. any failure by the Company to comply with Section 10(c) of this Agreement. -4- 5 An isolated, insubstantial and inadvertent failure or action by the Company that is not taken in bad faith and is remedied by the Company promptly after receipt of notice thereof from the Executive shall not be a basis for Good Reason. A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement upon which the Executive is relying. A termination of employment by the Executive for Good Reason shall be effective (unless disputed by the Company) on the fifth business day following the date when the Notice of Termination for Good Reason is received by the Company, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is received by the Company). (d) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company or by the Executive for Good Reason is effective, or the last day the Executive provides services under this Agreement, in the case of the Executive's termination of employment without Good Reason, as the case may be. 5. Obligations of the Company upon Termination. Following the Executive's Date of Termination, the Company shall have the obligations to the Executive set forth in this Section 5, and shall have no further obligations under this Agreement, other than, if applicable, any obligations to reimburse expenses due to the Executive under Section 3(c) or to make an Equity Payment to the Executive under Section 3(e). (a) Other Than for Cause; Death or Disability; Good Reason. If, during the Employment Period, the Company terminates the Executive's employment, other than for Cause, or the Executive's employment is terminated because of death or Disability, or the Executive terminates employment for Good Reason, the Company shall make the payments and provide the benefits set forth in (i) and (ii) below. In addition, if the Executive's employment is terminated by the Company other than for Cause or Disability, or by the Executive for Good Reason, the Company shall provide the Executive with reasonable -5- 6 outplacement services. The payments and benefits provided pursuant to this Section 5(a) are intended as liquidated damages for a termination of the Executive's employment by the Company other than for Cause, or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason, or for the Executive's termination of employment as a result of death, and shall be the sole and exclusive remedy therefor. (i) The Company shall pay the Executive the amounts set forth below in a lump sum in cash within 30 days following the Date of Termination: The sum of (1) the Executive's Annual Base Salary through the Date of Termination, (2) the value of the Executive's accrued, but unused, vacation days, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations") and (3) the Supplemental Payment; and (ii) All unvested Remaining TCI Awards shall become immediately vested. In the event of the Executive's death or Disability, the payments under this Section 5(a) may be made to the Executive's estate or legal representatives, if applicable. (b) Cause; Other than for Good Reason. If, during the Employment Period, the Executive's employment is terminated by the Company for Cause or the Executive voluntarily terminates employment other than for Good Reason, the Company shall pay the Executive the Accrued Obligations in a lump sum in cash within 30 days following the Date of Termination and, notwithstanding anything in this Agreement to the contrary, the Company shall have no obligation to make the Supplemental Payment, and the Remaining TCI Awards that are not vested as of the Date of Termination shall be forfeited immediately. 6. Full Settlement. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek -6- 7 other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 7. Confidential Information; Noncompetition; Nonsolicitation. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company and its respective businesses that the Executive obtains during the Executive's employment by the Company (before and after the Effective Date) and that is not public knowledge (other than as a result of the Executive's violation of this Section 7(a)) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process. (b) For purposes of Sections 7(b), (c) and (d) the "Noncompetition Period" means the period during which the Executive is employed by the Company pursuant to this Agreement and 24 months after the first to occur (i) the Executive's Date of Termination or (ii) the end of the scheduled Employment Period. During the Noncompetition Period, the Executive shall not solicit any business of the type engaged in by the Company from any clients, customers, former clients or customers, or prospects of the Company who were solicited directly by the Executive when the Executive was an employee of the Company or with respect to which the Executive supervised, directly or indirectly, in whole or in part, the solicitation activities related to any such persons when the Executive was an employee of the Company. (c) During the Noncompetition Period, the Executive shall not solicit any business of the type engaged in by the Company from any person whatsoever if such solicitation involves a product of the Company which the Board deems, in its reasonable judgment, to be proprietary to the Company and otherwise non-public. (d) During the Noncompetition Period, the Executive shall not induce or solicit any employee of the Company to terminate his or her employment. -7- 8 (e) The provisions of Sections 7(b), (c) and (d) shall remain in full force and effect until the expiration of the Noncompetition Period notwithstanding the earlier termination of the Executive's employment hereunder. In the event of a breach of the Executive's covenants under this Section 7, it is understood and agreed that the Company shall be entitled to injunctive relief, as well as any other legal remedies. For purposes of Section 7, the "Company" shall include all entities controlling, controlled by or under common control with the Company ("affiliates"). 8. Dispute Resolution. At the option of the Executive or the Company, any dispute, controversy, or question arising under, out of or relating to this Agreement or the breach thereof, other than that for injunctive relief to this Agreement or the breach thereof, other than that for injunctive relief under Section 7(e), shall be referred for decision by arbitration in the State of Colorado by a neutral arbitrator selected by the parties hereto. The proceeding shall be governed by the Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence). If the parties are unable to agree upon such a neutral arbitrator within 30 days after either party has given the other written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for an appointment of a neutral arbitrator, or if such Association is not then in existence or does not act in the matter within 30 days of application, either party may apply to the Presiding Judge of the District Court of any county in Colorado for an appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such Judge is hereby authorized to make such appointment. In the event that either party exercises the right to submit a dispute arising hereunder to arbitration, the decision of the neutral arbitrator shall be final, conclusive and biding on all interested persons and no action at law or equity shall be instituted or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. The award of the neutral arbitrator may be entered in any court that has jurisdiction. In the event that the Executive is successful in pursuing any material claim(s) or dispute(s) arising out of this Agreement, the Company shall pay the Executive's attorney and expenses of any Arbitrator in connection with such claims or -8- 9 disputes. In any other case, the Executive and the Company shall each bear all their own costs and attorneys fees, except the Company shall in all events pay the costs of any arbitrator appointed hereunder. 9. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business and/or assets expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. Except as specifically provided, herein, as used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 10. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: -9- 10 If to the Executive: Mr. Marvin Jones 16 Parkway Drive Englewood, CO 80110. If to the Company: Telecommunications, Inc. c/o AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 Attention: Executive Vice President, Human Resources and Executive Vice President, Merger and Joint Venture Integration of AT&T Corp. or to such other address as either party furnishes to the other in writing in accordance with this Section 10(b). Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) Except as to (i) the "Special Continuees benefit program letter" to the Executive, dated March 8, 1999, as clarified by the letter to the Executive dated June 23, 1999, and (ii) the Tax Protection Agreement between the Executive and the Company, dated -10- 11 as of March 1, 1999, the Executive and the Company acknowledge that this Agreement supersedes any other agreement between them or between the Executive and AT&T Corp. and/or any Company plan or practice (or plan or practice of Liberty Media Corporation) concerning the subject matter hereof, including the Company's Severance Pay Plan or any other severance policy of the Company, AT&T Corp. or any of their affiliates (collectively, the "Severance Plans"). The Executive hereby irrevocably waives any rights to severance benefits under the Severance Plans or to acceleration of equity awards under the Severance Plans or any equity award plan of the Company, Liberty Media Corporation or AT&T Corp., except as may be provided in this Agreement. (g) The Executive shall be covered under the indemnification policies of the Company applicable to similarly situated officers of the Company. (h) This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand, and the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. /s/ MARVIN JONES ---------------------------------------- [Executive] TELE-COMMUNICATIONS, INC. By: /s/ Stephen M. Brett ------------------------------------ -11- 12 EXHIBIT A JOB DESCRIPTION MARVIN JONES EXECUTIVE VICE PRESIDENT PRIMARY DUTIES & RESPONSIBILITIES: Mr. Jones will serve as Executive Vice President - AT&T Broadband & Internet Services. His duties include advising Leo Hindery on operational issues and implementation of Digital and @Home. He will also assist Bill Fitzgerald on budget, planning and special projects. 13 EXHIBIT B Marvin Jones Annual Base Salary of $612,346 14 EXHIBIT C 15 SCHEDULE B MARVIN JONES The following stock options will be accelerated upon the Effective Date as defined herein: July 23, 1997, grant (AT&T) (formerly TCOMA) May 15, 1997, grant (AT&T) (formerly TCOMA) July 23, 1997, grant (Liberty Media) (formerly TCIVA) The following restricted stock grants will be accelerated upon the Effective Date as defined herein: None. 16 GRANTS NOT ACCELERATED MARVIN JONES The following stock options will not be accelerated upon the Effective Date: May 15, 1997, grant (Liberty Media) (formerly TCIVA) The following restricted stock grants will not be accelerated upon the Effective Date: December 10, 1998, grant (AT&T) (formerly TCOMA) September 3, 1998, grant (AT&T) (formerly TCOMA) 17 EXHIBIT D Marvin Jones 2 times annual base salary ($612,346) for an amount equal to $1,224,692 EX-10.3 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT AGREEMENT by and between AT&T Corp., a New York corporation (the "Company"), and Stephen M. Brett (the "Executive"), dated as of the 1st day of April, 1999 (the "Effective Date"). WHEREAS, the Executive is employed as of the Effective Date by the Company; and WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to employ the Executive and the Executive desires to serve in that capacity; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. The Company shall employ the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for the Employment Period (as defined in the next sentence). The "Employment Period" shall mean the period beginning on the Effective Date and ending on March 31, 2000, unless extended or earlier terminated as set forth herein. Effective on April 1, 2000, the Employment Period shall be extended until either party provides the other party with 45 days written notice to terminate the Employment Period. 2. Position and Duties. (a) During the Employment Period, the Executive shall serve in the position and have the duties and responsibilities set forth on Exhibit A hereto. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive under this Agreement, use the Executive's reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver 2 lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. (c) The Executive's services shall be performed primarily at the principal office location where the Executive performed his duties immediately prior to the Effective Date (or otherwise within 35 miles of such office), subject to any travel requirements necessary to perform his duties hereunder. 3. Compensation. (a) Base Salary. During the Employment Period, the Executive shall be paid an annual base salary ("Annual Base Salary") at a rate equal to $900,000, payable pursuant to the Company's normal payroll practices. (b) Benefits. During the Employment Period, the Executive shall be entitled to participate in savings and welfare benefit plans, practices, policies and programs of the Company that are provided generally to similarly situated employees of the Company. (c) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive in accordance with the Company's policies, practices and procedures. (d) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company. (e) TCI Equity Awards. Effective as of June 23, 1999, the Company shall accelerate the vesting of the Executive's outstanding unvested stock options and shares of restricted stock that are set forth on Exhibit B hereto (the "Exhibit B Grants"). All remaining stock options and restricted stock initially granted to the Executive with respect to Tele-Communications, Inc. ("TCI") or Liberty Media Corporation prior to the Effective Date, which do not become vested pursuant to the immediately preceding sentence ("Remaining TCI Awards"), shall continue to vest during the Employment Period pursuant to their scheduled -2- 3 vesting terms and, if not previously vested, shall become immediately vested upon the expiration of the Employment Period. In the event the Executive exercises a stock option or sells a share of stock that had been restricted stock (in each case, that was an Exhibit B Grant or Remaining TCI Award) within 60 days after the earlier of (i) the vesting of such stock option or share of restricted stock pursuant to the terms of such award or (ii) the expiration of the Employment Period (or any earlier vesting date under this Agreement), the Company shall pay the Executive, with respect to each such stock option or share, a cash payment (the "Equity Payment"), within 10 days following the exercise of the stock option or sale of stock, equal to the excess, if any, of: (A) with respect to Exhibit B Grants or Remaining TCI Awards denominated in Company common stock, $57.81 over the average of the high and low price of Company common stock on the New York Stock Exchange on the date of such exercise or sale, as applicable, and (B) with respect to Exhibit B Grants or Remaining TCI Awards denominated in "AT&T Liberty Tracking Shares", $26.67 over the average of the high and low price of AT&T Liberty Tracking Shares on the New York Stock Exchange on the date of such exercise or sale, as applicable. Each Equity Payment shall be subject to equitable adjustment in the event of any adjustment in the capitalization of the Company (eg., stock split, spin-off, extraordinary dividend, reorganization or similar corporate transaction, including any adjustments relating to the AT&T Liberty Tracking Shares) which occurs following June 23, 1999 and prior to the date of any such exercise or sale. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive is unable to perform the Executive's duties under this Agreement for a period of not less than 180 consecutive days, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and acceptable to the Executive or the Executive's legal representative, has determined that the Executive's incapacity is total and permanent. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive or the Executive's legal representative by written notice, -3- 4 and shall be effective on the 10th day after receipt of such notice by the Executive or the Executive's legal representative (the "Disability Effective Date"). (b) By the Company. The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" shall mean illegal conduct or gross misconduct by the Executive, in either case that is willful and results in material and demonstrable damage to the business or reputation of the Company or any of its affiliates. (c) By the Executive. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means (without, as to subparagraphs, (A) through (D) below, the Executive's written consent): A. the Company's assignment to the Executive of any duties inconsistent in any material respect with the duties described in Exhibit A of this Agreement; B. any failure by the Company to comply with any material provision of Section 3 of this Agreement; C. any requirement by the Company that the Executive's services be rendered primarily at a location or locations other than that provided for in Section 2(c) of this Agreement; D. any failure by the Company to comply with Section 9(c) of this Agreement; or E. any termination of employment by the Executive on or after March 31, 2000 on 45 days written notice. An isolated, insubstantial and inadvertent failure or action by the Company that is not taken in bad faith and is remedied by the Company promptly after receipt of notice thereof from the Executive shall not be a basis for Good Reason. A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of -4- 5 Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement upon which the Executive is relying. A termination of employment by the Executive for Good Reason shall be effective (unless disputed by the Company) on the fifth business day (except as otherwise provided in Section 4(c)(E)) following the date when the Notice of Termination for Good Reason is received by the Company, unless the notice sets forth a later date (which date shall in no event (except as otherwise provided in Section 4(c)(E)) be later than 30 days after the notice is received by the Company). (d) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company or by the Executive for Good Reason is effective, or the last day the Executive provides services under this Agreement, in the case of the Executive's termination of employment without Good Reason, as the case may be. 5. Obligations of the Company upon Termination. Following the Executive's Date of Termination, the Company shall have the obligations to the Executive set forth in this Section 5, and shall have no further obligations under this Agreement, other than, if applicable, any obligations to reimburse expenses due to the Executive under Section 3(c) or to make an Equity Payment to the Executive under Section 3(e). (a) Other Than for Cause; Death or Disability; Good Reason. If, during the Employment Period, the Company terminates the Executive's employment, other than for Cause, or the Executive's employment is terminated because of death or Disability, or the Executive terminates employment for Good Reason, the Company shall make the payments and provide the benefits set forth in (i) and (ii) below. In addition, if the Executive's employment is terminated by the Company other than for Cause or Disability, or by the Executive for Good Reason, the Company shall provide the Executive with reasonable outplacement services. The payments and benefits provided pursuant to this Section 5(a) are intended as liquidated damages for a termination of the Executive's employment by the Company other than for Cause, or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason, or for the Executive's -5- 6 termination of employment as a result of death or Disability, and shall be the sole and exclusive remedy therefor. (i) The Company shall pay the Executive the amounts set forth below in a lump sum in cash within 30 days following the Date of Termination: The sum of (1) the Executive's Annual Base Salary through the Date of Termination, (2) the value of the Executive's accrued, but unused, vacation days, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations") and (3) an amount equal to five times Executive's Annual Base Salary (the "Supplemental Payment"). (ii) All unvested Remaining TCI Awards shall become immediately vested. In the event of the Executive's death or Disability, the payments under this Section 5(a) may be made to the Executive's estate or legal representatives, if applicable. (b) Cause; Other than for Good Reason. If, during the Employment Period, the Executive's employment is terminated by the Company for Cause or the Executive voluntarily terminates employment other than for Good Reason, the Company shall pay the Executive the Accrued Obligations in a lump sum in cash within 30 days following the Date of Termination and, notwithstanding anything in this Agreement to the contrary, the Company shall have no obligation to make the Supplemental Payment, and the Remaining TCI Awards that are not vested as of the Date of Termination shall be forfeited immediately. 6. Full Settlement. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the -6- 7 Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 7. Confidential Information; Noncompetition; Nonsolicitation. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company and its respective businesses that the Executive obtains during the Executive's employment by the Company (before and after the Effective Date) and that is not public knowledge (other than as a result of the Executive's violation of this Section 7(a)) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process. (b) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Executive Vice President-Human Resources of the Company or the Executive Vice President, Merger and Joint-Venture Integration of the Company, directly or indirectly, as principal or agent, or in any other capacity, own, manage, operate, participate in or be employed by or otherwise be interested in, or connected in any manner with, any person, firm, corporation or other enterprise which directly competes in a material respect with the telecommunications or cable businesses (including broadband and internet services) of the Company as it is conducted while the Executive is employed by the Company. Nothing herein contained shall be construed as denying the Executive the right to own securities of any such corporation which is listed on a national securities exchange or quoted in the NASDAQ System to the extent of an aggregate of 5% of the amount of such securities outstanding. For purposes of this Section 7(b), the "Noncompetition Period" means the period during which the Executive is employed by the Company pursuant to this Agreement and 24 months after the first to occur (i) the Executive's Date of Termination or (ii) the end of the Employment Period. (c) During the Noncompetition Period, the Executive shall not solicit any business of the type engaged in by the Company from any clients, customers, former clients or customers, or prospects of the Company who were solicited directly by the Executive when -7- 8 the Executive was an employee of the Company or with respect to which the Executive supervised, directly or indirectly, in whole or in part, the solicitation activities related to any such persons when the Executive was an employee of the Company. (d) During the Noncompetition Period, the Executive shall not solicit any business of the type engaged in by the Company from any person whatsoever if such solicitation involves a product of the Company which the Board deems, in its reasonable judgment, to be proprietary to the Company and otherwise non-public. (e) During the Noncompetition Period, the Executive shall not induce or solicit any employee of the Company to terminate his or her employment. (f) The provisions of Sections 7(b), (c), (d) and (e) shall remain in full force and effect until the expiration of the Noncompetition Period notwithstanding the earlier termination of the Executive's employment hereunder. In the event of a breach of the Executive's covenants under this Section 7, it is understood and agreed that the Company shall be entitled to injunctive relief, as well as any other legal remedies. For purposes of Section 7, the "Company" shall include all entities controlling, controlled by or under common control with the Company ("affiliates"). 8. Dispute Resolution. At the option of the Executive or the Company, any dispute, controversy, or question arising under, out of or relating to this Agreement or the breach thereof, other than that for injunctive relief to this Agreement or the breach thereof, other than that for injunctive relief under Section 7(f), shall be referred for decision by arbitration in the State of Colorado by a neutral arbitrator selected by the parties hereto. The proceeding shall be governed by the Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence). If the parties are unable to agree upon such a neutral arbitrator within 30 days after either party has given the other written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for an appointment of a neutral arbitrator, or if such Association is not then in existence or does not act in the matter within 30 days of application, either party may apply to the -8- 9 Presiding Judge of the District Court of any county in Colorado for an appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such Judge is hereby authorized to make such appointment. In the event that either party exercises the right to submit a dispute arising hereunder to arbitration, the decision of the neutral arbitrator shall be final, conclusive and biding on all interested persons and no action at law or equity shall be instituted or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. The award of the neutral arbitrator may be entered in any court that has jurisdiction. In the event that the Executive is successful in pursuing any material claim(s) or dispute(s) arising out of this Agreement, the Company shall pay the Executive's attorney and expenses of any Arbitrator in connection with such claims or disputes. In any other case, the Executive and the Company shall each bear all their own costs and attorneys fees, except the Company shall in all events pay the costs of any arbitrator appointed hereunder. 9. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business and/or assets expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. Except as specifically provided, herein, as used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. -9- 10 10. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: The most recent address on file for the Executive at the Company. If to the Company: AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 Attention: Executive Vice President, Human Resources and Executive Vice President, Merger and Joint Venture Integration of the Company or to such other address as either party furnishes to the other in writing in accordance with this Section 10(b). Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. -10- 11 (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) Except as to (i) the "Special Continuees benefit program letter" to the Executive, dated March 8, 1999, as clarified by TCI's letter to the Executive dated June 23, 1999, and (ii) the Tax Protection Agreement between the Executive and TCI, dated as of March 1, 1999, attached hereto as Exhibits C and D, respectively, the Executive and the Company acknowledge that this Agreement supersedes any other agreement between them or between TCI and the Executive and/or any Company or TCI plan or practice (or plan or practice of Liberty Media Corporation) concerning the subject matter hereof, including TCI's Severance Pay Plan or any other severance policy of TCI, the Company or any of their affiliates (collectively, the "Severance Plans"). The Executive hereby irrevocably waives any rights to severance benefits under the Severance Plans or to acceleration of equity awards under the Severance Plans or any equity award plan of TCI, Liberty Media Corporation or the Company except as may be provided in this Agreement. (g) The Executive shall be covered under the indemnification policies of the Company applicable to similarly situated officers of the Company. (h) This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. - 11 - 12 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. /s/ STEPHEN M. BRETT ---------------------------- Stephen M. Brett AT&T CORP. By: /s/ [ILLEGIBLE] ------------------------ -12- 13 EXHIBIT A Position. The Executive shall be the Senior Executive Vice President of Strategic Development of TCI, and the Executive shall report directly and exclusively to the Chief Executive Officer of TCI. Duties. The Executive shall devote his full business efforts to strategic development, and other business and affairs, of TCI and the Company's cable, broadband and internet services business unit. SCHEDULE B STEPHEN BRETT The following stock options will be accelerated upon the Effective Date as defined herein: November 17, 1994, grant (AT&T) (formerly TCOMA) August 4, 1995, grant (AT&T) (formerly TCOMA) August 4, 1995, grant (Liberty Media) (formerly TCIVA) July 23, 1997, grant (Liberty Media) (formerly TCIVA) November 17, 1994, grant (Liberty Media) (formerly LBTYA) August 4, 1995, grant (Liberty Media) (formerly LBTYA) July 23, 1997, grant (Liberty Media) (formerly LBTYA) The following restricted stock grants will be accelerated upon the Effective Date as defined herein: None. GRANTS NOT ACCELERATED STEPHEN BRETT The following stock options will not be accelerated upon the Effective Date. July 23, 1997, grant (AT&T) (formerly TCOMA) July 23, 1997, grant (Liberty Media) (formerly LBTYA) November 17, 1994, grant (Liberty Media) (formerly TCIVA) The following restricted stock grants will not be accelerated upon the Effective Date. December 31, 1995, grant (AT&T) (formerly TCOMA) June 23, 1998, grant (AT&T) (formerly TCOMA) December 13, 1995, grant (Liberty Media) (formerly TCIVA) September 3, 1998, grant (AT&T) (formerly TCOMA) December 13, 1995, grant (Liberty Media) (formerly LBTYA) EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN TELE-COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE SUMMARY FINANCIAL INFORMATION FOR THE TWO MONTH PERIOD ENDED FEBRUARY 28, 1999 IS FOR OLD TCI PRIOR TO THE AT&T MERGER. THE SUMMARY FINANCIAL INFORMATION FOR THE SEVEN MONTH PERIOD ENDED SEPTEMBER 30, 1999 IS FOR NEW TCI SUBSEQUENT TO THE AT&T MERGER. 1,000,000 2-MOS 7-MOS DEC-31-1999 DEC-31-1999 JAN-01-1999 MAR-01-1999 FEB-28-1999 SEP-30-1999 0 0 0 0 0 478 0 0 0 0 0 0 0 7,361 0 492 0 91,161 0 0 0 9,449 0 0 0 0 0 52,544 0 (4,006) 0 91,161 0 0 1,145 3,344 0 0 467 1,345 277 1,143 0 0 161 558 (157) (2,999) 119 (589) (276) (2,410) 0 0 (5) 0 0 0 (281) (2,410) (.42) 0 (.43) 0 PRIMARY AND DILUTED EARNINGS PER SHARE REPRESENT EARNINGS PER SHARE OF TCI GROUP STOCK.
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