EXHIBIT 99.01
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tele-Communications, Inc.:
We have audited the accompanying combined balance sheet of the TCI Century
Systems (as defined in Note 1 to the combined financial statements) as of
December 31, 1998, and the related combined statements of operations and
parent's investment, and cash flows for the year ended December 31, 1998.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the TCI Century
Systems as of December 31, 1998, and the results of their operations and their
cash flows for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Denver, Colorado
February 14, 2000
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Combined Balance Sheet
December 31,
1998
------------
amounts in
thousands
Assets
Cash............................................................... $ 2,507
Trade and other receivables, net................................... 8,276
Property and equipment, at cost:
Land............................................................. 1,781
Distribution systems............................................. 258,688
Support equipment and buildings.................................. 29,406
--------
289,875
Less accumulated depreciation.................................... 123,293
--------
166,582
--------
Franchise costs.................................................... 560,750
Less accumulated amortization.................................... 80,338
--------
480,412
--------
Other assets....................................................... 1,209
--------
$658,986
========
Liabilities and Parent's Investment
Accounts payable................................................... $ 583
Accrued expenses................................................... 6,288
Deferred income taxes (note 3)..................................... 144,919
--------
Total liabilities................................................ 151,790
Parent's investment (note 4)....................................... 507,196
--------
Commitments and contingencies (note 5)
$658,986
========
See accompanying notes to combined financial statements.
2
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Combined Statement of Operations and Parent's Investment
Year ended
December 31,
1998
------------
amounts in
thousands
Revenue............................................................ $159,042
Operating costs and expenses:
Operating (note 4)............................................... 64,356
Selling, general and administrative.............................. 29,715
Management fees (note 4)......................................... 6,846
Depreciation..................................................... 28,499
Amortization..................................................... 13,976
--------
143,392
--------
Operating income............................................... 15,650
Other expense...................................................... (581)
--------
Earnings before income taxes..................................... 15,069
Income tax expense (note 3)........................................ (6,112)
--------
Net earnings..................................................... 8,957
Parent's investment:
Beginning of year................................................ 514,367
Change in due to Tele-Communications, Inc. ("TCI") (note 4)...... (16,128)
--------
End of year...................................................... $507,196
========
See accompanying notes to combined financial statements.
3
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Combined Statement of Cash Flows
Year ended
December 31,
1998
------------
amounts in
thousands
Cash flows from operating activities:
Net earnings.................................................... $ 8,957
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................. 42,475
Deferred income tax benefit................................... (2,432)
Changes in operating assets and liabilities:
Change in receivables....................................... 1,541
Change in other assets...................................... 292
Change in accounts payable and accrued expenses............. (312)
--------
Net cash provided by operating activities................. 50,521
--------
Cash flows from investing activities:
Capital expended for property and equipment..................... (31,948)
Other investing activities...................................... (498)
--------
Net cash used in investing activities......................... (32,446)
--------
Cash flows from financing activities:
Change in due to TCI............................................ (16,128)
--------
Net cash used in financing activities......................... (16,128)
--------
Net increase in cash.......................................... 1,947
Cash:
Beginning of period......................................... 560
--------
End of period............................................... $ 2,507
========
See accompanying notes to combined financial statements.
4
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
For the year ended December 31, 1998
(1)Basis of Presentation
The combined financial statements include the accounts of five of TCI's
cable television systems and one related advertising sales office serving
certain customers within California (collectively, the "TCI Century Systems").
The TCI Century Systems are wholly-owned by various subsidiaries of TCI. On
March 9, 1999, AT&T Corp. ("AT&T") acquired TCI in a merger (the "AT&T
Merger"). In the AT&T Merger, TCI became a subsidiary of AT&T. All significant
inter-entity accounts and transactions have been eliminated in combination.
The combined net assets of TCI Century Systems are referred to as "Parent's
Investment."
The TCI Century Systems were acquired through a series of transactions
whereby TCI acquired various larger cable entities (the "Original Systems").
The TCI Century System's combined financial statements include an allocation
of certain purchase accounting adjustments, including the related deferred tax
effects, from TCI's acquisition of the Original Systems. Such allocation and
the related franchise cost amortization is based on the relative fair market
value of the systems involved. In addition, certain costs of TCI are charged
to the TCI Century Systems based on their number of customers (see note 4).
Although such allocations are not necessarily indicative of the costs that
would have been incurred by the TCI Century Systems on a stand alone basis,
management believes that the resulting allocated amounts are reasonable.
TCI entered into agreements with Century Communications Corp. ("Century")
whereby TCI would contribute cable television systems serving approximately
249,000 customers located in Southern California to a newly formed limited
partnership in which TCI would have an approximate 25% partnership interest.
Under the agreements, the new partnership would assume $215,000,000 of
intercompany interest bearing notes owed by the TCI Century Systems to TCI and
its affiliates (see note 4). TCI also agreed to 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 TCI Century Systems is comprised
of the systems serving these 349,000 customers. 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 agreements.
The contribution and exchange transactions were consummated on December 7,
1999. The accompanying combined financial statements reflect the financial
position, results of operations and cash flows of the TCI Century Systems
prior to the contribution and exchange transactions, and, therefore, do not
include the effects of such transactions.
(2)Summary of Significant Accounting Policies
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1998 was not significant.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, labor and
applicable overhead related to installations, and interest during construction
are capitalized. During the year ended December 31, 1998, interest capitalized
was not significant.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
5
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements (continued)
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such
property are charged to accumulated depreciation, and salvage, if any, is
credited thereto. Gains or losses are only recognized in connection with the
sales of properties in their entirety.
Franchise Costs
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts allocated to their tangible assets. Such
amounts are generally amortized on a straight-line basis over 40 years. Costs
incurred by the TCI Century Systems in negotiating and renewing franchise
agreements are amortized on a straight-line basis over the life of the
franchise, generally 10 to 20 years.
Impairment of Long-Lived Assets
Management periodically reviews the carrying amounts of property and
equipment and its identifiable intangible assets to determine whether current
events or circumstances warrant adjustments to such carrying amounts. If an
impairment adjustment is deemed necessary, based on an analysis of
undiscounted cash flows, such loss is measured by the amount that the carrying
value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets. Accordingly,
actual results could vary significantly from such estimates. Assets to be
disposed of are carried at the lower of their financial statement carrying
amount or fair value less costs to sell.
Revenue Recognition
Cable revenue for customer fees, equipment rental, advertising and pay-per-
view programming is recognized in the period that services are delivered.
Installation revenue is recognized in the period the installation services are
provided to the extent of direct selling costs. Any remaining amount is
deferred and recognized over the estimated average period that customers are
expected to remain connected to the cable distribution system.
Combined Statement of Cash Flows
Transactions effected through the intercompany account with TCI have been
considered constructive cash receipts and payments for purposes of the
combined statement of cash flows.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(3)Income Taxes
The TCI Century Systems were included in the consolidated federal income tax
return of TCI. Income tax expense for the TCI Century Systems is based on
those items in the consolidated calculation applicable to the TCI Century
Systems. Intercompany tax allocation represents an apportionment of tax
expense or benefit (other than deferred taxes) among subsidiaries of TCI in
relation to their respective amounts of taxable earnings or losses. The
payable or receivable arising from the intercompany tax allocation is recorded
as an increase or
6
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements (continued)
decrease in amounts due to TCI. Deferred income taxes are based on the book
and tax basis differences of the assets and liabilities within the TCI Century
Systems. The income tax amounts included in the accompanying combined
financial statements approximate the amounts that would have been reported if
the TCI Century Systems would have filed a separate income tax return.
Income tax benefit (expense) for the year ended December 31, 1998 consists
of:
Current Deferred Total
-------- -------- --------
amounts in thousands
Intercompany allocation........................ $ (8,544) $ -- $ (8,544)
Federal........................................ -- 1,904 1,904
State and local................................ -- 528 528
-------- ------- --------
$(8,544) $ 2,432 $ (6,112)
======== ======= ========
Income tax benefit (expense) differs from the amounts computed by applying
the federal income tax rate of 35% for the year ended December 31, 1998 as a
result of the following:
amounts in
thousands
Computed "expected" tax expense.................................. $(5,274)
Amortization not deductible for tax purposes..................... (1,154)
State and local income taxes, net of federal income tax benefit.. 343
Other............................................................ (27)
-------
$(6,112)
=======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liabilities at December
31, 1998 are presented below:
amounts in
thousands
Deferred tax asset--principally due to non-deductible accruals.. $ 71
--------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation................................................. 30,031
Franchise costs, principally due to differences in
amortization and initial basis............................... 114,959
--------
Total gross deferred tax liabilities........................ 144,990
--------
Net deferred tax liability.................................. $144,919
========
(4)Parent's Investment
Parent's investment in the TCI Century Systems at December 31, 1998 is
summarized as follows:
amounts in
thousands
Due to TCI........................................................ $581,956
Accumulated deficit............................................... (74,760)
--------
$507,196
========
7
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements (continued)
The non-interest bearing amount due to TCI includes TCI's equity in acquired
systems, advances for operations, acquisitions and construction costs, as well
as, the amounts owed as a result of the allocation of certain costs from TCI.
As a result of TCI's 100% ownership of the TCI Century Systems, the non-
interest bearing amounts due to TCI have been classified as a component of
Parent's investment in the accompanying combined balance sheet. Such amounts
are due on demand.
The TCI Century Systems purchase, at TCI's cost, substantially all of their
pay television and other programming from affiliates of TCI. Charges for such
programming are included in operating expenses in the accompanying combined
financial statements.
Certain subsidiaries of TCI provide administrative services to the TCI
Century Systems and have assumed managerial responsibility of the TCI Century
Systems' cable television system operations and construction. As compensation
for these services, the TCI Century Systems pay a monthly fee calculated on a
per-subscriber basis.
The intercompany advances and expense allocation activity in amounts due to
TCI consists of the following:
Year ended
December 31,
1998
------------
amounts in
thousands
Beginning of year............................................... $598,084
Programming charges........................................... 41,227
Management fees............................................... 6,846
Tax allocations............................................... 8,544
Cash transfers................................................ (72,745)
--------
End of year..................................................... $581,956
========
As described in note 1, on March 9, 1999, AT&T acquired TCI in a merger. In
connection with the AT&T Merger, AT&T's purchase price to acquire TCI was
allocated to TCI's net assets based on their preliminary fair values at March
9, 1999. TCI Century System's portion of the preliminary allocation resulted
in an increase in parent's investment.
On November 1, 1999, TCI caused the TCI Century Systems to effect a dividend
from the TCI Century Systems to TCI aggregating $215,000,000. Such dividend
resulted in an increase to intercompany notes owed to TCI and a corresponding
increase to accumulated deficit.
(5)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
8
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements (continued)
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. There are no pending CPST complaints remaining at the FCC
regarding the TCI Century Systems.
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.
Management believes that the TCI Century Systems have 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.
Certain plaintiffs have filed or threatened separate class action complaints
against cable systems across the United States alleging that the systems'
practice of assessing an administrative fee to subscribers whose payments are
delinquent constitutes an invalid liquidated damage provision, a breach of
contract, and violates local consumer protection statutes. Plaintiffs seek
recovery of all late fees paid to the subject systems as a class purporting to
consist of all subscribers who were assessed such fees during the applicable
limitation period, plus attorney fees and costs. In December 1999, a
settlement was reached with respect to one of the late fee class action
complaints, which involves certain of the TCI Century Systems. The settlement
did not have a material impact on TCI Century Systems' financial condition or
results of operations.
The TCI Century Systems have contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of business.
Although it is possible the TCI Century Systems may incur losses upon
conclusion of the matters referred to above, an estimate of any loss or range
of loss cannot presently be made. Based upon the facts available, management
believes that, although no assurance can be given as to the outcome of these
actions, the ultimate disposition should not have a material adverse effect
upon the combined financial condition of the TCI Century Systems.
The TCI Century Systems lease business offices, have entered into pole
rental agreements and use certain equipment under lease arrangements. Rental
expense under such arrangements amounted to $2,624,000 for the year ended
December 31, 1998.
9
TCI CENTURY SYSTEMS
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements (continued)
Future minimum lease payments under noncancellable operating leases for each
of the next five years are summarized as follows (amounts in thousands):
Years ending
December 31,
------------
1999.................................. $1,820
2000.................................. 1,437
2001.................................. 1,049
2002.................................. 779
2003.................................. 648
Thereafter............................ 3,479
------
$9,212
======
10