UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone - Area Code 212-387-5400
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ..X No ...
At July 31, 1999, the following shares of stock were outstanding:
AT&T common stock - 3,195,678,689 shares Liberty Media Class A tracking
stock - 1,156,716,104 shares Liberty Media Class B tracking stock -
108,430,704 shares
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues................................... $15,691 $13,211 $29,787 $26,042
Operating Expenses
Access and other interconnection........... 3,668 3,894 7,400 7,830
Network and other communications services.. 3,774 2,552 6,646 5,098
Amortization of goodwill and other
purchased intangibles..................... 273 66 430 126
Depreciation and other amortization........ 1,546 1,067 2,850 2,074
Selling, general and administrative........ 3,461 3,348 6,618 6,625
Restructuring and other charges, net....... (29) 2,743 702 3,344
Total operating expenses................... 12,693 13,670 24,646 25,097
Operating income (loss).................... 2,998 (459) 5,141 945
Equity losses from Liberty Media Group..... 543 - 601 -
Other income (expense)..................... (74) 307 75 1,013
Interest expense........................... 459 128 649 208
Income (loss) from continuing operations
before income taxes....................... 1,922 (280) 3,966 1,750
Provision (benefit) for income taxes....... 877 (119) 1,903 626
Income (loss) from continuing operations... 1,045 (161) 2,063 1,124
Income from discontinued operations
(net of taxes of $6)...................... - - - 10
Gain on sale of discontinued operations
(net of taxes of $799).................... - 1,290 - 1,290
Net income................................. $ 1,045 $ 1,129 $ 2,063 $ 2,424
Per AT&T common share - basic:
Income (loss) from continuing operations.. $ 0.50 $ (0.06) $ 0.90 $ 0.42
Income from discontinued operations....... - - - -
Gain on sale of discontinued operations... - 0.48 - 0.48
Total income.............................. $ 0.50 $ 0.42 $ 0.90 $ 0.90
Per AT&T common share - diluted:
Income (loss) from continuing operations.. $ 0.49 $ (0.06) $ 0.88 $ 0.41
Income from discontinued operations....... - - - -
Gain on sale of discontinued operations... - 0.48 - 0.48
Total income.............................. $ 0.49 $ 0.42 $ 0.88 $ 0.89
Dividends declared per AT&T common share... $ 0.22 $ 0.22 $ 0.44 $ 0.44
Liberty Media Group loss per share:
Basic..................................... $ 0.43 $ - $ 0.48 $ -
Diluted................................... $ 0.43 $ - $ 0.48 $ -
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Amounts)
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................... $ 418 $ 3,160
Receivables, less allowances of $1,227 and $1,060.... 10,030 9,055
Deferred income taxes................................ 1,691 1,310
Other current assets................................. 807 593
TOTAL CURRENT ASSETS................................. 12,946 14,118
Property, plant and equipment, net of accumulated
depreciation of $27,580 and $25,374................ 34,994 26,903
Licensing costs, net of accumulated amortization
of $1,372 and $1,266............................... 8,315 7,948
Goodwill, net of accumulated amortization of
$419 and $226...................................... 28,402 2,205
Investment in Liberty Media Group and related
receivables........................................ 35,389 -
Other investments.................................... 16,268 4,434
Prepaid pension costs................................ 2,265 2,074
Other assets......................................... 6,659 1,868
TOTAL ASSETS......................................... $145,238 $59,550
</TABLE>
(CONT'D)
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Share Amounts)
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
LIABILITIES
Accounts payable..................................... $ 5,738 $ 6,226
Payroll and benefit-related liabilities.............. 2,201 1,986
Debt maturing within one year........................ 7,085 1,171
Dividends payable.................................... 703 581
Other current liabilities............................ 5,850 5,478
TOTAL CURRENT LIABILITIES............................ 21,577 15,442
Long-term debt....................................... 22,152 5,556
Long-term benefit-related liabilities................ 4,326 4,255
Deferred income taxes................................ 11,039 5,453
Other long-term liabilities and deferred credits..... 3,895 3,213
TOTAL LIABILITIES ................................... 62,989 33,919
Minority Interest in Equity of Consolidated
Subsidiaries....................................... 2,407 109
Company-Obligated Convertible Quarterly Income
Preferred Securities of Subsidiary Trust Holding
Solely Subordinated Debt Securities of AT&T........ 4,695 -
Subsidiary-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
Subordinated Debt Securities of an AT&T
Subsidiary......................................... 1,659 -
SHAREOWNERS' EQUITY Common Stock:
AT&T Common Stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding
3,196,236,144 shares (net of 286,925,365 treasury
shares) at June 30, 1999 and 2,630,391,784 shares
(net of 80,222,341 treasury shares) at
December 31, 1998.................................. 3,196 2,630
Liberty Media Group Class A Tracking Stock, $1 par
value, authorized 2,500,000,000 shares; issued
and outstanding 1,156,716,104 shares at
June 30, 1999...................................... 1,157 -
Liberty Media Group Class B Tracking Stock, $1 par
value, authorized 250,000,000 shares; issued
and outstanding 108,430,704 shares at
June 30, 1999...................................... 108 -
Additional Paid-in Capital:
AT&T Common Stock.................................. 27,446 15,195
Liberty Media Group Stock.......................... 32,653 -
Guaranteed ESOP obligation........................... (31) (44)
Retained Earnings (Accumulated Deficit):
AT&T Common Stock.................................. 7,594 7,800
Liberty Media Group Stock.......................... (601) -
Accumulated other comprehensive income............... 1,966 (59)
TOTAL SHAREOWNERS' EQUITY............................ 73,488 25,522
TOTAL LIABILITIES & SHAREOWNERS' EQUITY.............. $145,238 $59,550
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
AT&T Form 10-Q - Part I
Consolidated Statements of Shareowners' Equity (Dollars in Millions)
For the six months ended June 30, 1999 (Unaudited)
<CAPTION>
Accumulated Total Total
Additional Guaranteed Other Comp- Share- Compre-
Paid-in ESOP Retained rehensive owners hensive
Common Shares Capital Obligation Earnings Income Equity Income
AT&T Liberty Liberty AT&T Liberty AT&T Liberty
Common Media Group Media Group Common Media Group Common Media Group
Stock Class A Class B Stock Stock Stock Stock
Tracking Tracking
Stock Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
Jan. 1, 1999 $2,630 - - 15,195 - (44) 7,800 - (59) $25,522
Shares issued
(acquired), net:
For employee plans 1 36 37
For acquisitions* 565 1,140 110 11,359 32,265 45,439
Other 17 (2) 339 354
Common stock warrants 306 306
Gain on issuance of
common stock by
affiliates 470 40 510
Amortization 13 13
Net income 2,664 (601) 2,063 $2,063
Dividends
declared (1,401) (1,401)
Treasury shares
issued at less
than cost (1,469) (1,469)
Other 80 9 89
Other
comprehensive
income (net of
taxes of $1,328)** 2,025 2,025 2,025
Balance at June
30, 1999 $3,196 1,157 108 27,446 32,653 (31) 7,594 (601) 1,966 $73,488 $4,088
<FN>
* AT&T accounts for treasury stock as retired stock, and at June 30, 1999,
has 287 million treasury shares of which 216 million shares are owned by TCI
subsidiaries and 70 million shares relate to the purchase of AT&T shares
previously held by Liberty Media Group.
** Includes $1,969 ($3,262 pretax)
of other comprehensive income for Liberty Media Group.
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
AT&T Form 10-Q - Part I
Consolidated Statements of Shareowners' Equity (Dollars in Millions) For the six
months ended June 30, 1998 (Unaudited)
<CAPTION>
Accumulated
AT&T Additional Guaranteed Other Total Total
Common Paid-in ESOP Retained Comprehensive Shareowners' Comprehensive
Stock Capital Obligation Earnings Income Equity Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
Jan. 1, 1998 $2,684 17,121 (70) 3,981 (38) $23,678
Shares issued
(acquired), net:
For employee plans 2 53 55
For acquisition 23 806 829
Amortization 12 12
Net income 2,424 2,424 $2,424
Dividends
declared (1,072) (1,072)
Treasury shares
issued at less
than cost (257) (257)
Other changes 83 (5) 78
Other
comprehensive
income (net of
taxes of $49) (11) (11) (11)
Balance at June
30, 1998 $2,709 18,063 (58) 5,071 (49) $25,736 $2,413
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
<CAPTION>
For the Six
Months Ended
June 30,
1999 1998
<S> <C> <C>
Operating Activities
Net income................................... $ 2,063 $ 2,424
Deduct: Income from discontinued
operations......................... - 10
Gain on sale of discontinued
operations......................... - 1,290
Income from continuing operations............ 2,063 1,124
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Restructuring and other charges........... 778 3,344
Gains on sales............................ (241) (770)
Depreciation and amortization............. 3,280 2,200
Provision for uncollectibles.............. 733 714
Increase in accounts receivable........... (1,462) (872)
(Decrease) increase in accounts payable... (488) 131
Net decrease in other operating assets
and liabilities......................... (1,715) (622)
Equity losses from Liberty Media Group.... 601 -
Other adjustments......................... (148) (1,217)
Net cash provided by operating
activities of continuing operations........ 3,401 4,032
Investing Activities
Capital expenditures....................... (5,129) (3,408)
Proceeds from sale or disposal of
property, plant and equipment............ 162 45
Decrease in other receivables.............. 6 6,404
Net dispositions (acquisitions) of
licenses................................. 5 (55)
Sales of marketable securities............. - 1,239
Purchases of marketable securities......... - (1,055)
Equity investment distributions and sales.. 439 1,202
Equity investment contributions and
purchases................................ (6,054) (58)
(Acquisitions) dispositions of businesses
including cash acquired in acquisitions.. (5,763) 4,172
Other investing activities - net........... (56) (58)
Net cash (used in) provided by investing
activities of continuing operations........ (16,390) 8,428
</TABLE>
(CONT'D)
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
<CAPTION>
For the Six
Months Ended
June 30,
1999 1998
<S> <C> <C>
Financing Activities
Proceeds from long-term debt issuance..... 7,948 2
Retirements of long-term debt............. (1,643) (729)
Issuance of convertible securities........ 4,638 -
Issuance of common shares................. - 29
Acquisition of treasury shares............ (4,320) (244)
Dividends paid............................ (1,306) (1,072)
Increase (decrease) in short-term
borrowings - net........................ 4,506 (3,027)
Other financing activities - net.......... 424 16
Net cash provided by (used in) financing
activities of continuing operations....... 10,247 (5,025)
Net cash provided by discontinued
operations................................ - 92
Net (decrease) increase in cash and
cash equivalents.......................... (2,742) 7,527
Cash and cash equivalents
at beginning of year...................... 3,160 318
Cash and cash equivalents
at end of period.......................... $ 418 $ 7,845
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T
Corp. (AT&T) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and, in the opinion of
management, include all adjustments necessary for a fair statement
of the consolidated results of operations, financial position and
cash flows for each period presented. The consolidated results for
interim periods are not necessarily indicative of results for the
full year. These financial results should be read in conjunction
with AT&T's Form 10-K/A for the year ended December 31, 1998,
AT&T's Form 10-Q for the quarter ended March 31, 1999, (which
includes the financial results of Liberty Media Group for this
period, attached as an exhibit thereto), Tele-Communications,
Inc.'s (TCI) Form 10-K for the year ended December 31, 1998, TCI's
Form 10-Q for the quarter ended March 31, 1999, the financial
statements of Liberty Media Group for the year ended December 31,
1998, included in AT&T's Form 8-K filed on March 22, 1999, and the
financial statements of Liberty Media Group and TCI for the
quarter and year-to-date periods ended June 30, 1999, included as
Exhibits 99.1 and 99.2, respectively, to this AT&T quarterly
report on Form 10-Q.
On May 19, 1999, the Board of Directors of Liberty Media Group
declared a two for one stock split, paid on June 11, 1999, to
shareowners of record on May 28, 1999. All references to number of
shares (except shares authorized or where otherwise indicated) and
per share information for Liberty Media Group in the consolidated
financial statements have been adjusted to reflect the stock split
on a retroactive basis.
We have reclassified certain prior period amounts to conform to
our current presentation and have restated share and per share
information to reflect the first quarter three for two split of
AT&T's common stock.
(b) MERGER WITH TCI
The merger with TCI was completed in the first quarter of 1999 in
an all stock transaction valued at approximately $52 billion. AT&T
issued approximately 664 million shares in the transaction, of
which approximately 149 million were treasury shares. Also in the
first quarter of 1999 in connection with the merger of TCI and the
formation of Liberty Media Group from TCI's former programming
business and technology investments business, AT&T issued a
separate tracking stock designed to reflect the separate economic
performance of Liberty Media Group. A total of 540 million shares
(1,080 million shares on a post-slit basis) of Class A Liberty
Media Group Tracking Stock and 55 million shares (110 million
shares on a post-split basis) of Class B Liberty Media Group
Tracking Stock were issued by AT&T. AT&T also issued 30 million
shares (60 million shares on a post-split basis) of Class A
Liberty Media Group Tracking Stock in connection with the
conversion of certain convertible notes.
<PAGE>
AT&T Form 10-Q - Part I
AT&T does not have a controlling financial interest in Liberty
Media Group, therefore it has been reflected as an equity method
investment in the accompanying consolidated financial statements.
The results attributable to Liberty Media Group are reflected as
separate line items "Equity losses from Liberty Media Group" and
"Investment in Liberty Media Group and related receivables", in
the accompanying consolidated financial statements. As a separate
tracking stock, all of the earnings or losses related to Liberty
Media Group are excluded from the earnings available to the
holders of AT&T common stock. TCI's cable and certain other
operations, including its ownership interest in At Home
Corporation (Excite@Home), became AT&T broadband and Internet
services, and were combined with the existing AT&T operations to
form the AT&T common stock group (AT&T Group).
The merger with TCI was recorded as a purchase. Accordingly, the
operating results of TCI have been included in the accompanying
consolidated financial statements since March 1, 1999, the deemed
effective date of acquisition for accounting purposes. The impact
of the results from March 1, 1999, through March 9, 1999, is
deemed immaterial to our consolidated results. The excess of the
aggregate purchase price of $52.155 billion over the fair value of
net assets acquired was estimated at $24 billion, and is being
amortized on a straight-line basis over seven to 40 years. Also,
approximately $11 billion of goodwill related to Liberty Media
Group was recorded as part of our investment and is being
amortized on a straight-line basis over 20 years as a component of
equity earnings (losses) from Liberty Media Group.
Following is a summary of the noncash impact of the TCI merger:
Dollars in Billions
Fair value of net assets acquired $ 28
Excess purchase price over fair value of
net assets acquired 24
Other* (2)
Issuance of common shares:
AT&T common stock (27)
Liberty Media Group tracking stock (23)
*Other includes assumption of convertible notes and preferred
stock.
At June 30, 1999, there was $40 of restricted cash included in
cash and cash equivalents in the accompanying consolidated balance
sheet. The restricted cash was comprised primarily of proceeds
received in connection with certain asset dispositions of TCI,
which are designated to be reinvested in certain identified assets
for tax purposes.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
Following is a summary of the pro forma results of AT&T as if the
merger with TCI had closed effective January 1, 1998:
<CAPTION>
Six
Months Ended
June 30,
1999 1998
<S> <C> <C>
Revenues $30,728 $29,193
Income from continuing operations 1,491 356
Income from continuing operations,
available to AT&T Group shareowners 2,304 846
Income from continuing operations,
available to Liberty Media Group
shareowners (813) (490)
Net income 1,491 1,656
Income available to AT&T Group
shareowners 2,304 2,146
Income available to Liberty Media
Group shareowners (813) (490)
Weighted-average AT&T common shares
(millions) 3,153 3,140
Weighted-average AT&T common shares
and potential common shares
(millions) 3,258 3,245
Weighted-average Liberty Media Group
shares (millions) 1,250 1,190
Basic earnings per AT&T common share:
Income from continuing operations $ 0.73 $ 0.27
Total income $ 0.73 $ 0.68
Diluted earnings per AT&T common share:
Income from continuing operations $ 0.71 $ 0.26
Total income $ 0.71 $ 0.66
Basic earnings per Liberty Media
Group share $ (0.65) $ (0.41)
Diluted earnings per Liberty Media
Group share $ (0.65) $ (0.41)
<FN>
Pro forma data may not be indicative of the results that would
have been obtained had these events actually occurred at the
beginning of the periods presented, nor does it intend to be a
projection of future results.
</FN>
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
(c) OTHER MERGERS, ACQUISITIONS, VENTURES AND DISPOSITIONS
On April 30, 1999, AT&T completed its acquisition of the IBM
Global Network (IGN) business and its assets in the United States.
The acquisition is occurring in phases throughout 1999 as legal
and regulatory requirements are met in each of the 59 countries in
which the business operates. In June of 1999, the acquisitions of
the IGN business in Japan, the United Kingdom and Ireland were
completed. The acquisition has been accounted for as a purchase.
Accordingly, the operating results of the IGN business have been
included in the accompanying consolidated financial statements
since the date of acquisition. Intangible assets of approximately
$3.9 billion including customer lists and the excess of the
purchase price over the fair value of net assets acquired are
being amortized on a straight-line basis over periods ranging from
five to 30 years. The pro forma impact of the IGN business results
on historical AT&T results are not material.
On May 3, 1999, AT&T closed the previously announced merger with
Vanguard Cellular Systems, Inc. (Vanguard). Consummation of the
merger resulted in the issuance of approximately 12.6 million AT&T
shares and payment of $485 in cash. In addition, Vanguard had
approximately $550 in debt, which was subsequently repaid by AT&T.
The merger with Vanguard was recorded as a purchase. Accordingly
the operating results of Vanguard have been included in the
accompanying consolidated financial statements since the date of
acquisition. The pro forma impact of Vanguard results on
historical AT&T results are not material.
On June 1, 1999, AT&T Canada completed the announced merger with
MetroNet Communications Corp. (MetroNet), Canada's largest
facilities-based competitive local exchange carrier (CLEC). The
combined companies were renamed AT&T Canada. AT&T owns a 31% stake
in the merged entity, which maintains a national network to
provide Canadian business customers with local and long distance
voice, data, Internet and electronic commerce services as well as
wireless services through Rogers Cantel AT&T.
On June 7, 1999, AT&T signed a definitive agreement with Cox
Communications, Inc. (Cox) whereby Cox will exchange its AT&T
stock for cable television systems that serve approximately
495,000 customers as well as certain other consideration,
including cash. Based on the closing price of AT&T's stock when
the agreement was announced, the transaction is valued at
approximately $2.8 billion. The agreement has been approved by the
boards of both companies and will be subject to necessary
government and regulatory approvals.
On June 29, 1999, the previously announced global venture between
AT&T and British Telecommunications plc (BT) received approval
from the U.S. Justice Department. The venture has already received
approval from the European Commission. The global venture will
combine the transborder assets and operations of each company. The
venture will be equally owned by both companies when it begins
operations. The receipt of certain additional regulatory approvals
is required and the venture is expected to be completed in the
second half of 1999.
<PAGE>
AT&T Form 10-Q - Part I
On May 28, 1999, At Home Corporation 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, At Home
Corporation issued approximately 116 million shares of its common
stock (as adjusted for a June 1999 stock split) for all of the
outstanding common stock of Excite based on an exchange ratio of
2.083804 shares of At Home Corporation's common stock (as adjusted
for a June 1999 stock split) for each share of Excite's common
stock. As a result of the merger, AT&T's economic interest in At
Home Corporation (Excite@Home) decreased from 38.8% to 26.5%. Due
to the resulting increase in Excite@Home's equity, net of the
dilution of AT&T's ownership interest in Excite@Home, AT&T
recorded a $466 increase to additional paid in capital. At June
30, 1999, AT&T owned 63,720,000 shares of Excite@Home Class A
common stock (as adjusted for a June 1999 stock split) and has an
approximate 58% voting interest on certain matters. During the
second quarter of 1999, the stockholders of Excite@Home approved
certain changes in the corporate governance of Excite@Home. As a
result of these changes, management has concluded that AT&T no
longer holds a controlling financial interest in Excite@Home and,
accordingly, during the second quarter of 1999, AT&T ceased to
consolidate Excite@Home and began to account for Excite@Home using
the equity method of accounting. The effect of this
deconsolidation was not material to the consolidated financial
statements of AT&T.
(d) CUMULATIVE QUARTERLY INCOME PREFERRED SHARES AND WARRANTS
On June 16, 1999, AT&T Finance Trust I, a wholly-owned subsidiary
of AT&T established as a Delaware statutory business trust (the
Trust), completed the private placement sale of 100 million shares
of 5.0% cumulative quarterly income preferred securities
(liquidation preference of $50 per security) to Microsoft
Corporation (Microsoft). Proceeds of the issuance were invested in
Junior Subordinated Debentures (the Debentures) issued by AT&T due
2029 which represent the sole assets of the Trust.
The cumulative quarterly income preferred securities are
convertible at any time prior to maturity into 66.667 million
shares of AT&T stock at $75 per share and are subject to mandatory
redemption upon repayment of the Debentures at maturity or their
earlier redemption. The conversion feature can be terminated,
under certain conditions, after three years.
The Debentures will make a quarterly payment of 62.5 cents per
security payable quarterly in arrears on the last day of March,
June, September and December of each year. AT&T has the right to
defer such interest payments up to 20 consecutive quarters; as a
consequence, quarterly dividend payments on the cumulative
quarterly income preferred securities can be deferred by the Trust
during any such interest payment period. If AT&T defers any
interest payments, AT&T may not, among other things, pay any
dividends on its common stock until all interest in arrears is
paid to the Trust.
Distributions on the cumulative quarterly income preferred
securities are reported within other income (expense) in the
accompanying consolidated statements of income.
<PAGE>
AT&T Form 10-Q - Part I
On June 16, 1999, AT&T also issued to Microsoft 40 million
warrants, each to purchase one share of AT&T common stock at a
price of $75 per share at the end of three years. If the warrants
are not exercised on the three-year anniversary of the closing
date, the warrants expire.
A discount on the cumulative quarterly income preferred securities
equal to the value of the warrants of $306 has been recognized and
is being amortized over the 30 year life of the cumulative
quarterly income preferred securities as a component of other
income in the accompanying consolidated statements of income.
(e) RESTRUCTURING AND OTHER CHARGES, NET
Restructuring and other charges, net were a pretax benefit of $29
for the second quarter of 1999. The benefit included a $68 pretax
net gain primarily related to the exit of certain joint ventures
that would have competed directly with the global venture AT&T is
forming with BT. Also included was an $11 pretax gain from the
settlement of pension obligations from AT&T's voluntary retirement
incentive program offer. Partially offsetting these gains was a
$50 pretax charge recorded in the second quarter of 1999 related
to the estimated losses that are expected to result from a
contribution agreement TCI entered into with Phoenixstar, Inc.
(Phoenixstar), formerly Primestar, Inc., a previous equity
investment. To the extent necessary, the company is required to
satisfy certain liabilities of Phoenixstar. The remaining
obligation under this contribution agreement which expires in 2001
is $26.
Second quarter 1998 restructuring and other charges, net of $2,743
pretax primarily related to charges associated with AT&T's
voluntary retirement incentive program offer.
Restructuring and other charges, net for the six months ended June
30, 1999, were $702 pretax. Included in this balance was an
in-process research and development charge of $594 pretax related
to the TCI acquisition, a $128 pretax net charge primarily related
to the exit of certain joint ventures that would have competed
directly with the global venture AT&T is forming with BT and a $50
pretax charge related to the Phoenixstar agreement noted above.
These charges were partially offset by a $70 pretax gain related
to the settlement of pension obligations for former employees who
accepted AT&T's voluntary retirement incentive program offer.
Restructuring and other charges, net for the six months ended June
30, 1998, were $3,344 pretax. The charge is comprised of a first
quarter 1998 pretax charge of $601 which resulted from the
decision not to pursue Total Service Resale as a local-service
strategy as well as the second quarter $2,743 net pretax charge
primarily related to AT&T's voluntary retirement incentive program
offer.
<PAGE>
AT&T Form 10-Q - Part I
(f) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Basic earnings per share (EPS) for AT&T Group for the three and
six months ended June 30, 1999 and 1998, were computed by dividing
income attributable to AT&T Group common shareowners by the
weighted-average number of common shares outstanding of AT&T Group
during the period.
Diluted EPS for AT&T Group for the three and six months ended June
30, 1999, and the six months ended June 30, 1998, was computed by
dividing the income attributable to AT&T Group common shareowners
by the weighted-average number of common shares and dilutive
potential common shares outstanding of AT&T Group during the
period, assuming conversion of the potential common shares at the
beginning of the periods presented. Shares issuable upon
conversion of preferred stock of subsidiaries, convertible debt
securities of subsidiary, quarterly income preferred securities,
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. The convertible debt securities were all
converted as of March 31, 1999. Since AT&T had a loss from
continuing operations for the three months ended June 30, 1998,
the impact of any potential shares would have been antidilutive,
and therefore are not factored into the diluted calculation. There
were 13 million potentially dilutive securities outstanding for
this period.
Income from continuing operations for the three and six-month
periods ended June 30, 1999, of $1,045 and $2,063, respectively,
include income from continuing operations attributable to AT&T
Group of $1,588 and $2,664, respectively, as well as losses from
Liberty Media Group of $(543) and $(601) respectively.
A reconciliation of the income and share components for the basic
and diluted EPS calculations with respect to AT&T Group continuing
operations is as follows:
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations attributable to AT&T
Group $1,588 $ (161) $2,664 $1,124
Income impact of assumed conversion:
Preferred stock of subsidiary 10 - 10 -
Quarterly income preferred
securities 7 - 7 -
Income (loss) from continuing
operations attributable to AT&T
Group adjusted for conversion of
securities $1,605 $(161) $2,681 $1,124
AT&T Group weighted-average common
shares (millions) 3,189 2,708 2,970 2,695
Stock options 38 - 40 25
Preferred stock of subsidiary 40 - 25 -
Convertible quarterly income
preferred securities 11 - 5 -
Convertible debt securities of
subsidiary - - 3 -
AT&T Group weighted-average common
shares and potential common
shares (millions) 3,278 2,708 3,043 2,720
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
Basic EPS for Liberty Media Group for the three and six-month
periods ended June 30, 1999, was computed by dividing the income
attributable to Liberty Media Group shareowners by the
weighted-average number of shares outstanding of Liberty Media
Group of 1.264 billion and 1.250 billion, respectively, for these
periods. Since Liberty Media Group had a loss for both periods,
the impact of any potential shares would have been antidilutive,
and therefore are not factored into the diluted calculations.
There were 54 million potentially dilutive securities outstanding
at June 30, 1999.
(g) PREFERRED STOCK
TCI has 1.552 million shares of Class B Preferred Stock
outstanding as of June 30, 1999, net of shares held by a
subsidiary, out of an authorized 1.675 million shares.
Dividends accrue cumulatively (but without compounding) at an
annual rate of 6% of the stated liquidation value of $100 per
share, whether or not such dividends are declared or funds are
legally available for payment of dividends. Accrued dividends are
payable annually on March 1 of each year in cash or AT&T stock, or
any combination of the foregoing at the sole discretion of the
AT&T Board of Directors. Accrued dividends not paid on any
dividend payment date will accumulate.
The amount of Class B Preferred Stock and accumulated dividends
thereon are reflected within "Minority Interest in Equity of
Consolidated Subsidiaries" in the accompanying consolidated
balance sheet and aggregated $147 at June 30, 1999.
TCI Pacific Communications Inc. (Pacific) issued preferred stock
which remains outstanding after the TCI merger. There are 6.258
million shares of Pacific authorized and outstanding at June 30,
1999. Each share of the Pacific 5% Class A Senior Cumulative
Exchangeable 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 in cash, shares of AT&T Common Stock or by a combination
of the foregoing. The amount of Pacific Preferred Stock and
accumulated dividends thereon are reflected within "Minority
Interest in Equity of Consolidated Subsidiaries" in the
accompanying consolidated balance sheet and aggregated $2.1
billion at June 30, 1999.
(h) FINANCIAL INSTRUMENTS
In the normal course of business we use various financial
instruments, including derivative financial instruments, for
purposes other than trading. We do not use derivative financial
instruments for speculative purposes. These instruments include
letters of credit, guarantees of debt, interest rate swap
agreements and foreign currency exchange contracts. Interest rate
swap agreements and foreign currency exchange contracts are used
to mitigate interest rate and foreign currency exposures.
Collateral is generally not required for these types of
instruments.
<PAGE>
AT&T Form 10-Q - Part I
For debt excluding capital leases, the carrying amounts and fair
values were $28.9 billion and $28.3 billion, respectively, at June
30, 1999.
AT&T has a $20 billion commitment from multiple lenders with
credit agreements to be finalized upon consummation of the
proposed merger with the MediaOne Group Inc. (MediaOne).
We have entered into a $1 billion agreement with Convergys
Corporation to extend the term of our current billing agreement
through 2004.
(i) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our
business: business services, consumer services, wireless services
and broadband & Internet services. Our existing segments reflect
certain managerial changes since the publication of our 1998
annual results. The business services segment was expanded to
include the results of Teleport Communications Group Inc. (TCG)
and the business portion of AT&T WorldNet Service; the consumer
services segment was expanded to include the residential portion
of AT&T WorldNet Service and the costs associated with the
development of fixed wireless technology. All prior results have
been restated to reflect these changes. In addition, as a result
of our merger with TCI, we established a new segment called
broadband & Internet services. Broadband & Internet services
includes the results associated with traditional analog video
service as well as new services such as Digital Cable and
AT&T@Home, a high-speed cable Internet service. Also included in
this segment are the operations associated with developing and
refining the infrastructure that will support broadband telephony.
Reflecting the dynamics of our business, we continuously review
our management model and structure, which may result in additional
adjustments to our operating segments in the future.
<TABLE>
REVENUES
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Business services external revenues $ 5,888 $ 5,680 $11,814 $11,238
Business services internal revenues 395 207 683 428
Total business services revenues 6,283 5,887 12,497 11,666
Consumer services external revenues 5,504 5,695 10,990 11,375
Wireless services external revenues 1,878 1,313 3,440 2,477
Broadband & Internet services
external revenues 1,419 - 1,902 -
Total reportable segments 15,084 12,895 28,829 25,518
Other and corporate revenues (a) 607 316 958 524
Total revenues $15,691 $13,211 $29,787 $26,042
<FN>
(a) Included in other and corporate revenues are revenues from
AT&T Solutions, international operations and ventures, other
smaller units and the elimination of internal revenues.
</FN>
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
RECONCILIATION OF EBIT TO INCOME (LOSS) BEFORE INCOME TAXES
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Business services $1,459 $1,119 $ 3,026 $ 2,243
Consumer services 1,851 1,540 3,717 2,845
Wireless services 52 199 24 214
Broadband & Internet services (475) - (1,121) -
Total reportable segments' EBIT 2,887 2,858 5,646 5,302
Other and corporate EBIT 37 (3,010) (430) (3,344)
Liberty Media Group equity losses 543 - 601 -
Interest expense 459 128 649 208
Total income (loss) before income
taxes $1,922 $ (280) $3,966 $1,750
ASSETS
<CAPTION>
At June 30, At Dec. 31,
1999 1998
<S> <C> <C>
Business services $ 22,394 $21,415
Consumer services 6,687 6,561
Wireless services 21,388 19,115
Broadband & Internet services 42,837 -
Total reportable segments 93,306 47,091
All other segments 9,209 4,165
Corporate assets:
Investment in Liberty Media
Group 35,389 -
Prepaid pension costs 2,265 2,074
Deferred taxes 1,245 1,156
Other corporate assets 3,824 5,064
Total assets $145,238 $59,550
</TABLE>
(j) SUBSEQUENT EVENTS
On August 2, 1999, AT&T completed its acquisition of Honolulu
Cellular Telephone Company from BellSouth.
On August 5, 1999, AT&T and BT announced that they will jointly
acquire a 33% stake in Rogers Cantel Mobile Communications Inc.
(Rogers Cantel) for approximately $934 in cash. The investment
will be owned equally by AT&T and BT. AT&T and BT also announced
that BT will acquired 30% of AT&T's 31% ownership interest in AT&T
Canada for approximately $402. In addition, Rogers Cantel and AT&T
Canada will accelerate the bundling and joint marketing of wired
and wireless services for Canadian business customers. The closing
of these transactions is expected to take place in late August
1999.
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The merger with Tele-Communications, Inc. (TCI) was completed in the first
quarter of 1999 in an all stock transaction valued at approximately $52 billion.
AT&T issued approximately 664 million shares in the transaction, of which
approximately 149 million were treasury shares. Also in connection with the
merger of TCI in the first quarter of 1999, and the formation of Liberty Media
Group from TCI's former programming business and technology investments
business, AT&T issued a separate tracking stock designed to reflect the separate
economic performance of Liberty Media Group. A total of 540 million shares
(1,080 million shares on a post-split basis) of Class A Liberty Media Group
Tracking Stock and 55 million shares (110 million shares on a post-split basis)
of Class B Liberty Media Group Tracking Stock were issued by AT&T. AT&T also
issued 30 million Class A Liberty Media Group tracking shares (60 million shares
on a post-split basis) in connection with the conversion of certain convertible
notes. AT&T does not have a controlling financial interest in Liberty Media
Group, therefore it has been reflected as an equity method investment in the
accompanying consolidated financial statements. The results attributable to
Liberty Media Group are reflected as separate line items "Equity losses from
Liberty Media Group" and "Investment in Liberty Media Group and related
receivables" in the accompanying consolidated financial statements. As a
separate tracking stock, all of the earnings or losses related to Liberty Media
Group are excluded from the earnings available to the holders of AT&T common
stock.
The merger with TCI was recorded as a purchase. Accordingly, the operating
results of TCI have been included in the accompanying consolidated financial
statements since the date of acquisition. For accounting purposes the deemed
effective date of the acquisition is March 1, 1999, since the impact of thr
results from March 1, 1999, through March 9, 1999, is deemed immaterial to our
consolidated results. TCI's cable and certain other operations, including its
ownership interest in At Home Corporation (Excite@Home), but excluding Liberty
Media Group, became AT&T broadband & Internet services (AB&IS), and were
combined with the existing operations of AT&T to form the AT&T Common Stock
Group (AT&T Group).
We segment our results based on how we manage our business. The following
businesses comprise AT&T Group: business services, consumer services, broadband
& Internet services and wireless services. A fifth category, other and
corporate, includes the results of AT&T Solutions, international operations and
ventures, other corporate operations, overhead and eliminations. Results are
discussed for these five categories as well as for combined AT&T Group. The
discussion for the other and corporate category is further broken out to include
information for AT&T Solutions (which includes the results of the Solutions
outsourcing unit, the internal AT&T Information Technology Services unit, and
the results of the IBM Global Network which was acquired in the second quarter
of 1999 and renamed the AT&T Global Network Services business or AGNS), and
international operations and ventures.
Operating results are discussed separately for AT&T Group and Liberty Media
Group. All lines of the accompanying consolidated statements of income except
for "Equity losses from Liberty Media Group", "Income from continuing
operations" and "Net income" reflect the results of AT&T Group only. All lines
of the accompanying consolidated balance sheet, except for the "Investment in
Liberty Media Group and related receivables" and the components of shareowners'
equity labeled as relating to Liberty Media Group are attributable to AT&T Group
only. The liquidity, financial condition, risk management and year 2000
discussion pertain to consolidated AT&T, including Liberty Media Group.
<PAGE>
AT&T Form 10-Q - Part I
FORWARD-LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Any Form 10-K/A, Annual
Report to Shareowners, Form 10-Q or Form 8-K of AT&T may include forward-looking
statements, including statements concerning future operating performance, year
2000 compliance, AT&T's share of new and existing markets, AT&T's short- and
long-term revenue and earnings growth rates, general industry growth rates and
AT&T's performance relative thereto. These forward-looking statements rely on a
number of assumptions concerning future events, including the adoption and
implementation of balanced and effective rules and regulations by the Federal
Communications Commission (FCC) and the state public regulatory agencies, and
AT&T's ability to achieve a significant market penetration in new markets. These
forward-looking statements are subject to a number of uncertainties and other
factors, many of which are outside AT&T's control, that could cause actual
results to differ materially from such statements.
For a more complete discussion of the factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion
thereof contained under the heading "Forward-Looking Statements" in AT&T's Form
10-K/A for the year ended December 31, 1998. Readers should also consider the
factors discussed under the headings "Results of Operations" and "Financial
Condition" included in this Form 10-Q. AT&T disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED RESULTS OF OPERATIONS
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Dollars in millions
(except per share amounts)
Income (loss) from continuing operations
attributable to common shareowners:
AT&T Group......................... $1,588 $ (161) $2,664 $1,124
Liberty Media Group................ (543) - (601) -
Income attributable to common shareowners:
AT&T Group......................... $1,588 $1,129 $2,664 $2,424
Liberty Media Group................ (543) - (601) -
Per AT&T common share - basic:
Income (loss) from continuing
operations......................... $ 0.50 $(0.06) $ 0.90 $ 0.42
Income from discontinued operations. - - - -
Gain on sale of discontinued
operations......................... - 0.48 - 0.48
Total income........................ $ 0.50 $ 0.42 $ 0.90 $ 0.90
Per AT&T common share - diluted:
Income (loss) from continuing
operations........................ $ 0.49 $(0.06) $ 0.88 $ 0.41
Income from discontinued operations. - - - -
Gain on sale of discontinued
operations......................... - $ 0.48 - 0.48
Total income........................ $ 0.49 $ 0.42 $ 0.88 $ 0.89
Liberty Media Group loss per share:
Basic............................... $ 0.43 $ - $ 0.48 $ -
Diluted............................. $ 0.43 $ - $ 0.48 $ -
</TABLE>
Earnings per share from continuing operations attributable to AT&T common
shareowners were $0.49 on a diluted basis for the second quarter of 1999, up
from a loss of $0.06 in the second quarter of 1998. Earnings per share from
continuing operations attributable to AT&T common shareowners were $0.88 on a
diluted basis in the first half of 1999, compared with $0.41 on a diluted basis
in the first half of 1998. The increases were due to lower restructuring and
other charges, net and increased income from operations attributable to higher
revenues and an improved cost structure.
AT&T Group's operational earnings were $0.49 per diluted share for the second
quarter of 1999, a decrease of 9.3%, or $0.05, over the prior year period.
Operational EPS for the second quarter excludes:
..Net restructuring and other charges of $0.62 in 1998
..Gains on sales of business of $.02 in 1999 and 1998
..A $0.02 benefit in 1999 from changes in tax rules with respect to the
utilization of acquired net operating losses ..A loss of $0.04 reflecting the
earnings impact of our investment in Excite@Home and Cablevison Systems Corp.
(Cablevision)
The decrease in operational earnings for the second quarter is due primarily to
the impact of our merger with TCI.
<PAGE>
AT&T Form 10-Q - Part I
Excluding the impacts of both TCI and AGNS, operational EPS for the second
quarter of 1999 was $0.75, an increase of 38.9%, or $0.21, compared with the
second quarter of 1998. The increase was primarily due to higher revenues and
improving margins.
AT&T Group's operational earnings were $1.09 per diluted share for the first
half of 1999, an increase of 9.0%, or $0.09, over the prior year period.
Operational EPS for the first half excludes:
..Net restructuring and other charges of $0.22 in 1999 and $0.76 in 1998 ..Gains
on sales of businesses of $0.05 in 1999 and $0.17 in 1998
..A $0.02 benefit in 1999 from changes in tax rules with respect to the
utilization of acquired net operating losses ..A loss of $0.06 reflecting the
earnings impact of our investment in Excite@Home and Cablevison.
The increase in operational earnings for the first half is due primarily to
higher revenues and improving margins, partially offset by the impact of our
merger with TCI.
Excluding the impacts of both TCI and AGNS, operational EPS for the six months
ended June 30, 1999, was $1.42, an increase of 42.0%, or $0.42, compared with
the prior year period primarily due to higher revenues and improving margins.
Liberty Media Group's loss per share was $0.43 for the quarter ended June 30,
1999, and $0.48 for the period from the date of acquisition through June 30,
1999.
The results of AT&T Group and Liberty Media Group are discussed in further
detail below.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
AT&T GROUP RESULTS OF OPERATIONS
<CAPTION>
REVENUES
For the Three Months
Ended June 30, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Dollars in millions
Business services.......................... $ 6,283 $ 5,887 $ 396 6.7%
Consumer services.......................... 5,504 5,695 (191) (3.4)%
Wireless services.......................... 1,878 1,313 565 43.1%
Broadband & Internet services.............. 1,419 - 1,419 -
Other and corporate........................ 607 316 291 91.7%
Total revenues............................. $15,691 $13,211 $2,480 18.8%
<CAPTION>
For the Six Months
Ended June 30, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Dollars in millions
Business services.......................... $12,497 $11,666 $ 831 7.1%
Consumer services.......................... 10,990 11,375 (385) (3.4)%
Wireless services.......................... 3,440 2,477 963 38.9%
Broadband & Internet services.............. 1,902 - 1,902 -
Other and corporate........................ 958 524 434 82.8%
Total revenues............................. $29,787 $26,042 $3,745 14.4%
</TABLE>
Total revenues on a reported basis increased 18.8% to $15,691 million and
increased 14.4% to $29,787 million for the three and six-month periods ended
June 30, 1999, respectively, compared with the respective prior year periods.
Excluding AB&IS and AGNS, revenues increased 6.4% to $14,057 million for the
second quarter of 1999 and increased 6.3% to $27,670 million for the first half
of 1999 compared with the comparable prior year periods. The increases for both
periods were due to growth in wireless services, business data services and AT&T
Solution's outsourcing services, partially offset by lower consumer services
revenues. Revenues on a pro forma basis, which include the results of AB&IS
(adjusted to exclude all closed cable partnerships and Excite@Home) and the
impact of the closed portions of AGNS for a full period in both 1999 and 1998,
increased 6.7% for the second quarter of 1999 and increased 6.5% for the first
half of 1999 compared with the corresponding prior year periods.
<TABLE>
OPERATING EXPENSES
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Access and other interconnection..... $3,668 $3,894 $7,400 $7,830
</TABLE>
Access and other interconnection expenses decreased $226 million, or 5.8%, to
$3,668 million in the second quarter of 1999 compared with the second quarter of
1998. Access and other interconnection expenses decreased $430 million, or 5.5%,
to $7,400 million in the first half of 1999 compared with the first half of
1998. The declines primarily relate to FCC-mandated access reform, lower
negotiated international settlement rates and more efficient use of the network.
Business long distance volume growth partially offset the decreases.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Network and other communications
services........................... $3,774 $2,552 $6,646 $5,098
</TABLE>
Network and other communications services expenses increased $1,222 million, or
47.9%, to $3,774 million in the second quarter of 1999 compared with the same
period last year. Network and other communications services expenses increased
$1,548 million, or 30.4%, to $6,646 million in the first half of 1999 compared
with the same period last year. Excluding the impacts of AB&IS and AGNS, network
and other communications services expenses increased 11.6% and 7.6% for the
three and six-month periods ended June 30, 1999, respectively, compared with the
same periods last year. These increases were primarily associated with the
growing wireless subscriber base largely attributable to the success of AT&T
Digital One Rate service which has resulted in higher off-network roaming
charges and higher costs and volume of handsets. A portion of the increase was
also due to growth in AT&T Solutions. For the year-to-date period, these
increases were partially offset by lower nonincome taxes, lower per-call
compensation expense due to a favorable FCC ruling in the first quarter of 1999
and a lower provision for uncollectibles for business and consumer services.
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Amortization of goodwill and other
purchased intangibles............... $ 273 $ 66 $ 430 $ 126
</TABLE>
Amortization of goodwill and other purchased intangibles increased $207 million,
or 315.2%, from the second quarter of 1998 and increased $304 million, or
241.5%, for the six months ended June 30, 1999, compared with the same periods
last year. The increases were primarily driven by the TCI acquisition. Other
purchased intangibles arising from business combinations primarily include
customer lists, franchise costs and licenses. AT&T also has amortization of
goodwill associated with nonconsolidated investments recorded as a component of
other income (expense) amounting to $152 million and $192 million for the three
and six-month periods ended June 30, 1999, respectively, and $14 million and $29
million for the three and six-month periods ended June 30, 1998, respectively.
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Depreciation and other amortization.. $1,546 $1,067 $2,850 $2,074
</TABLE>
Depreciation and other amortization expenses increased $479 million, or 44.8%,
in the second quarter of 1999 and increased $776 million, or 37.4%, in the first
half of 1999 compared with the corresponding prior year periods. Excluding AB&IS
and AGNS, depreciation and other amortization expenses increased 22.1% and 21.7%
for the three and six-month periods ended June 30, 1999, respectively, compared
with the respective prior year periods. The increases were primarily due to
growth in AT&T Group's depreciable asset base resulting from continued
infrastructure investment throughout 1998. Capital expenditures were $3.0
billion for the three months ended June 30, 1999, and $4.4 billion for the six
months ended June 30, 1999. The capital expenditures for both periods focused on
data, cable operations, wireless services and business local services.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Selling, general and administrative.. $3,461 $3,348 $6,618 $6,625
</TABLE>
Selling, general and administrative (SG&A) expenses increased $113 million, or
3.4%, to $3,461 million in the second quarter of 1999 and decreased $7 million,
or 0.1%, to $6,618 million for the first half of 1999 compared with the
respective prior year periods. Excluding AB&IS and AGNS, SG&A expenses declined
8.2% for the second quarter of 1999 and declined 6.6% for the first half of
1999, versus the respective year-ago periods. These decreases were primarily due
to savings from headcount reductions and other cost control initiatives.
Including AB&IS and AGNS, SG&A expenses as a percentage of revenues were 22.1%
and 22.2% for the three and six-month periods ended June 30, 1999, respectively,
compared with 25.3% and 25.4% in the year-ago periods. SG&A expenses excluding
wireless services and the consumer local business as a percentage of revenues
were 20.1% and 20.2% for the three and six-month periods ended June 30, 1999.
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Restructuring and other charges, net. $ (29) $2,743 $ 702 $3,344
</TABLE>
Restructuring and other charges, net were a pretax benefit of $29 million for
the second quarter of 1999. The benefit included a $68 million pretax net gain
primarily related to the exit of certain joint ventures that would have competed
directly with the global venture AT&T is forming with British Telecommunications
plc (BT). Also included was an $11 million pretax gain from the settlement of
pension obligations from AT&T's voluntary retirement incentive program offer.
Partially offsetting these gains was a $50 million pretax charge recorded in the
second quarter of 1999 related to the estimated losses that are expected to
result from a contribution agreement TCI entered into with Phoenixstar, Inc.
(Phoenixstar), formerly Primestar, Inc., a previous equity investment. To the
extent necessary, the company is required to satisfy certain liabilities of
Phoenixstar. The remaining obligation under this contribution agreement which
expires in 2001 is $26 million.
Second quarter 1998 restructuring and other charges, net of $2,743 million
pretax, or a reduction of approximately $0.62 per diluted share, primarily
related to charges associated with AT&T's voluntary retirement incentive program
offer.
Restructuring and other charges, net for the six months ended June 30, 1999,
were $702 million pretax, or a reduction of approximately $0.22 per diluted
share. Included in this balance was an in-process research and development
charge of $594 million pretax related to the TCI acquisition, a $128 million
pretax net charge primarily related to the exit of certain joint ventures that
would have competed directly with the global venture AT&T is forming with BT and
the $50 million pretax charge related to the Phoenixstar agreement noted above.
These charges were partially offset by a $70 million pretax gain related to the
settlement of pension obligations for former employees who accepted AT&T's
voluntary retirement incentive program offer.
The in-process research and development projects related to TCI'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 TCI 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, AT&T expects successful
completion. AT&T 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
<PAGE>
AT&T Form 10-Q - Part I
AT&T'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, AT&T is unable to establish technological feasibility and produce a
commercially viable product/service, then anticipated incremental future cash
flows attributable to expected profits from such new product/service may not be
realized.
Restructuring and other charges, net for the six months ended June 30, 1998,
were $3,344 million pretax, or a reduction of approximately $0.76 per diluted
share. The charge is comprised of a first quarter 1999 pretax charge of $601
million which resulted from the decision not to pursue Total Service Resale as a
local-service strategy as well as the second quarter $2,743 million net pretax
charge primarily related to AT&T's voluntary retirement incentive program offer.
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Other income (expense)............... $ (74) $ 307 $ 75 $1,013
</TABLE>
For the three months ended June 30, 1999, other income (expense) decreased $381
million, or 124.2%, to an expense of $74 million compared with $307 million of
income in the second quarter of 1998. The decrease primarily resulted from
equity losses and goodwill amortization associated with our nonconsolidated
investments in Excite@Home and Cablevision. Also contributing to the decrease
was a 1998 second quarter pretax gain of $103 million on the sale of SmarTone
Telecommunications Holdings Limited (SmarTone) and higher interest income in
1998 on the proceeds received from the sale of Universal Card Services (UCS).
These decreases were partially offset by an $88 million pretax gain on the sale
of WOOD-TV in the second quarter of 1999.
Other income (expense) decreased $938 million, or 92.6%, to $75 million of
income for the six months ended June 30, 1999, compared with $1,013 million of
income in the first six months of 1998. The decrease was due primarily to 1998
pretax gains on the sales of AT&T Solutions Customer Care (ASCC) and LIN
Television Corp. (LIN-TV) of $350 million and $317 million, respectively, and a
pretax gain on the sale of SmarTone of $103 million. Also contributing to the
decrease were equity losses and goodwill amortization associated with our
nonconsolidated investments in Excite@Home and Cablevision. Partially offsetting
these decreases was a 1999 first quarter gain on the sale of the AT&T Language
Line Services business (Language Line) of $153 million pretax, and a 1999 second
quarter gain on the sale of WOOD-TV of $88 million pretax.
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest expense..................... $ 459 $ 128 $ 649 $ 208
</TABLE>
Interest expense increased $331 million, or 258.3%, in the second quarter of
1999 compared with the second quarter of 1998. For the six months ended June 30,
1999, interest expense increased $441 million, or 212.6%, compared with the six
months ended June 30, 1998. These increases were primarily driven by a higher
level of average debt outstanding associated with our acquisitions, partially
offset by a lower average interest rate.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Provision (benefit) for income taxes. $ 877 $ (119) $1,903 $ 626
</TABLE>
The provision for income taxes for the second quarter of 1999 increased $996
million compared with the second quarter of 1998. The effective tax rate for the
quarter was 35.6%, down from 42.9% in the second quarter of 1998. During the
second quarter of 1999 a change in the net operating loss utilization tax rules
resulted in a $75 million reduction in the current quarter income tax provision.
Excluding the impacts of this change, as well as the second quarter 1998
restructuring charges, the effective tax rates in the second quarter of 1999 and
1998 were 38.6% and 37.7%, respectively. The increase in the rate was due
primarily to higher non-tax deductible goodwill amortization in 1999 as well as
the tax impacts of certain 1998 asset dispositions and foreign legal entity
restructurings.
The provision for income taxes for the six months ended June 30, 1999, increased
$1,277 million compared with the same period 1998. The effective tax rate for
the six months ended June 30, 1999, was 41.7%, up from 35.7% for the first six
months of 1998. In the first quarter of 1999, AT&T Group recorded a non-tax
deductible in-process research and development charge, and accordingly, no tax
benefit was recorded. Excluding the impacts of this charge, the change in the
net operating loss utilization tax rules as well as the 1998 restructuring and
other charges, the effective tax rates were 38.3% and 37.4% for the six months
ended June 30, 1999 and 1998, respectively. The increase in the rate was due
primarily to higher non-tax deductible goodwill amortization in 1999.
In April 1998 AT&T sold UCS for $3,500 million, resulting in an after-tax gain
of $1,290 million, or $0.48 per share, reflected as "Gain on Sale of
Discontinued Operations" in the accompanying consolidated statements of income.
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
Dollars in millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Income available to AT&T shareowners. $1,588 $1,129 $2,664 $2,424
</TABLE>
Income available to AT&T shareowners increased $459 million, or 40.5%, to $1,588
million in the second quarter of 1999, driven by lower restructuring and other
charges, increased income from operations attributable to higher revenues and an
improved cost structure and the positive impact of changes in net operating loss
utilization tax rules. These were partially offset by the gain on sale of
discontinued operations in 1998 and the equity losses during the current period
related to Excite@Home and Cablevision. Income available to AT&T shareowners
increased $240 million, or 9.9%, to $2,664 million for the first half of 1999
driven by lower restructuring and other charges, increased income from
operations attributable to higher revenues and an improved cost structure and
the positive impact of changes in net operating loss utilization tax rules.
These were partially offset by the gain on sale of discontinued operations in
1998, lower gains on sales of businesses in 1999 and the equity losses for the
first half of the year related to Excite@Home and Cablevision.
<PAGE>
AT&T Form 10-Q - Part I
AT&T GROUP SEGMENT RESULTS
Business Services
The business services segment results reflect sales of long distance and local
voice and data services to business customers, including domestic and
international, inbound and outbound, intra-LATA toll, calling card and
operator-handled services and other network enabled services. This segment also
includes electronic commerce and Internet-protocol (IP) for business customers
such as Web site hosting and AT&T WorldNet business Internet access.
Consumer Services
The consumer services segment includes the results of providing
telecommunications services to residential customers including domestic and
international long distance services, intra-LATA toll services, calling-card and
operator-handled calling services, and prepaid calling cards. In addition, this
segment includes AT&T WorldNet residential Internet access service, noncable
local services provided to residential customers and the costs associated with
the development of fixed wireless technology.
Wireless Services
The results of this segment are comprised primarily of sales of wireless
services and products to customers in AT&T Group's 850 MHz (cellular) and 1900
MHz (PCS) markets. The results of AT&T's former messaging business are included
in 1998 results through October 2, when the unit was sold.
Broadband & Internet Services
This segment reflects operations associated with providing services through the
broadband network acquired as a result of AT&T's merger with TCI. This includes
the results associated with traditional analog video service, as well as new
services, such as Digital Cable and AT&T@Home, a high-speed cable Internet
access service. AT&T@Home, along with several other large cable operators, has a
contract with Excite@Home, the operator of an Internet "backbone", over which we
can provide high-speed cable Internet service. Also included in this segment are
the operations associated with developing and refining the infrastructure that
will support broadband telephony.
Other and Corporate
This group includes the results of AT&T Solutions (including AGNS),
international operations and ventures, other corporate operations, overhead and
eliminations.
The above segments reflect certain changes since the publication of our annual
results due to changes in the way we manage our business. The business services
segment was expanded to include the results of Teleport Communications Group
Inc. (TCG) and the business portion of AT&T WorldNet Service; the consumer
services segment was expanded to include the residential portion of AT&T
WorldNet Service and the costs associated with the development of fixed wireless
technology. All prior results have been restated to reflect these changes.
<PAGE>
AT&T Form 10-Q - Part I
The discussion of segment results for AT&T Group generally includes revenues;
earnings before interest and taxes, including other income (EBIT); earnings
before interest, taxes, depreciation and amortization, including other income
(EBITDA); capital additions and total assets. The discussion of EBITDA for AT&T
Group's wireless services and broadband & Internet services segments is modified
to exclude other income.
AT&T calculates EBIT as operating income plus other income and is a measure used
by our chief operating decision-makers to measure AT&T's consolidated operating
results and to measure segment profitability. Interest and taxes are generally
not allocated to our segments because debt is managed and serviced and taxes are
managed and calculated on a centralized basis. Trends in interest and taxes are
discussed separately on a consolidated basis. Management believes EBIT is a
meaningful measure to disclose to investors because it provides investors with
an analysis of operating results using the same measures used by the chief
operating decision-makers of AT&T, provides a return on total capitalization
measure, and allows investors a means to evaluate the financial results of each
segment in relation to consolidated AT&T. Our calculation of EBIT may or may not
be consistent with the calculation of EBIT by other public companies, and EBIT
should not be viewed by investors as an alternative to generally accepted
accounting principles (GAAP) measures of income as a measure of performance or
to cash flows from operating, investing and financing activities as a measure of
liquidity.
EBITDA is also used by management as a measure of segment performance and is
defined as EBIT plus depreciation and amortization. We believe it is meaningful
to investors as a measure of each segment's liquidity and allows investors to
evaluate a segment's liquidity using the same measure that is used by the chief
operating decision-makers of AT&T. Consolidated EBITDA is also provided for
comparison purposes. Our calculation of EBITDA may or may not be consistent with
the calculation of EBITDA by other public companies and should not be viewed by
investors as an alternative to GAAP measures of income as a measure of
performance or to cash flows from operating, investing and financing activities
as a measure of liquidity. In addition, EBITDA does not take into effect changes
in certain assets and liabilities which can affect cash flow.
Total assets for each segment include all assets, except inter-entity
receivables. Deferred taxes, prepaid pension assets, and corporate-owned or
leased real estate are generally held at the corporate level and therefore are
included in the other and corporate group. Shared network assets are allocated
to the segments and reallocated each January, based on the prior two years'
volumes of minutes used.
Capital additions for each segment include additions to property, plant and
equipment and other long-lived assets including licenses, investments, franchise
costs and capitalized software.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
BUSINESS SERVICES
<CAPTION>
Three months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
External revenues................... $ 5,888 $ 5,680 $ 208 3.6%
Internal revenues................... 395 207 188 91.4%
Total revenues...................... 6,283 5,887 396 6.7%
EBIT................................ 1,459 1,119 340 30.4%
EBITDA.............................. 2,202 1,712 490 28.7%
OTHER ITEMS
Capital additions................... $ 1,603 $ 1,216 $ 387 31.7%
<CAPTION>
Six months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
External revenues................... $11,814 $11,238 $ 576 5.1%
Internal revenues................... 683 428 255 59.7%
Total revenues...................... 12,497 11,666 831 7.1%
EBIT................................ 3,026 2,243 783 34.9%
EBITDA.............................. 4,458 3,363 1,095 32.6%
OTHER ITEMS
Capital additions................... $ 2,495 $ 2,176 $ 319 14.6%
<CAPTION>
At June 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $22,394 $21,415 $ 979 4.6%
</TABLE>
REVENUES
Business services revenues increased 6.7% in the second quarter of 1999, and
increased 7.1% for the first six months of 1999 compared with the prior year.
The increase for the quarter was primarily driven by continued strength in data
services and local voice services. The increase for the year-to-date period was
primarily driven by data services, domestic long distance voice services and
local voice services. Total calling volumes for both periods, including local
services, increased about 25% over the prior year; excluding local services,
volumes maintained a mid-teens growth rate for both periods.
Data services revenues increased by more than 20% for the quarter and
year-to-date periods led by continued growth in frame relay and high-speed
private line services partly due to continued customer demand for high-bandwidth
(OC-X) capabilities. The data services growth was augmented by significant
growth in IP services such as WorldNet and virtual private network services to
business customers. Data growth was approximately 20% for the second quarter of
1999 compared with the prior year second quarter when adjusted for AT&T's frame
relay service interruption in April 1998.
<PAGE>
AT&T Form 10-Q - Part I
Long distance voice revenues grew at a low-single-digit rate for the second
quarter and for the first six months of 1999. Strong volume increases were
partially offset by a declining average price per minute. Average price per
minute has been negatively impacted by the competitive forces within the
industry which we expect to continue. In addition, price per minute has been
negatively impacted by changes in product mix.
Local voice service revenues, which included domestic ACC revenues since its
acquisition in April, 1998, grew over 45% in the second quarter and grew over
65% for the first half of 1999, compared with the corresponding prior year
periods. AT&T's integrated business local operations, including AT&T Digital
Link, added approximately 105 thousand access lines in the second quarter,
bringing total access lines in service to approximately 868 thousand as of June
30, 1999. AT&T serves 26,723 buildings in 87 metropolitan statistical areas
(MSAs), up from 16,537 a year ago, with over 20% of the buildings on-net.
Internal revenues increased 91.4% and 59.7% for the three and six months ended
June 30, 1999, respectively. The increases were due to higher sales of business
long distance services to other AT&T units, primarily AT&T Solutions and
wireless services, for resale to AT&T Solutions and wireless services customers.
EBIT/EBITDA
EBIT and EBITDA for business services increased to $1,459 million, or 30.4%, and
to $2,202 million, or 28.7%, respectively, in the second quarter of 1999
compared with the year-ago quarter. EBIT and EBITDA for business services
increased to $3,026 million, or 34.9%, and to $4,458 million, or 32.6%,
respectively, for the first six months of 1999 compared with the prior year. The
increases were due to revenue growth and associated margin improvement.
OTHER ITEMS
Capital additions for business services increased $387 million, or 31.7%, for
the second quarter of 1999 compared with the second quarter of 1998. Capital
additions increased $319 million, or 14.6%, for the first half of 1999 compared
with the first half of 1998. The increase for both periods was primarily driven
by the expansion of SONET, in support of data and IP, and business local,
partially offset by lower capital spending on circuit switched equipment.
Total assets increased $979 million, or 4.6%, to $22,394 million at June 30,
1999, compared with December 31, 1998, primarily due to an increase in property,
plant and equipment as a result of capital additions and increased accounts
receivable associated with higher revenues.
<TABLE>
CONSUMER SERVICES
<CAPTION>
Three months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................. $ 5,504 $ 5,695 $(191) (3.4)%
EBIT................................. 1,851 1,540 311 20.2%
EBITDA............................... 2,062 1,715 347 20.3%
OTHER ITEMS
Capital additions.................... $ 151 $ 81 $ 70 87.2%
<PAGE>
AT&T Form 10-Q - Part I
<CAPTION>
Six months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................. $10,990 $11,375 $(385) (3.4)%
EBIT................................. 3,717 2,845 872 30.7%
EBITDA............................... 4,142 3,196 946 29.6%
OTHER ITEMS
Capital additions.................... $ 258 $ 199 $ 59 30.0%
<CAPTION>
At June 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets......................... $ 6,687 $ 6,561 $ 126 1.9%
</TABLE>
REVENUES
Consumer services revenues decreased 3.4% for both the three and six-month
periods ended June 30, 1999, compared with the same periods last year. Excluding
AT&T WorldNet services, revenues were down 3.9% and 3.8% for the three and
six-month periods ended June 30, 1999, respectively, while long distance calling
volumes declined at a mid-single-digit rate for both periods. These results
reflect the competitive nature of the consumer long distance industry, and the
continued impact of AT&T's strategy to migrate higher-usage customers to
optional calling plans in order to optimize the customer base for future growth.
Two key elements of AT&T's strategy are to grow revenues through transaction
services and to bundle services to attract and retain high usage customers.
AT&T's transaction services continue to grow rapidly led by prepaid services,
whose growth in the second quarter was enhanced by the acquisition of certain
assets of SmarTalk TeleServices (SmartTalk). AT&T's bundled offer, AT&T Personal
Network Service, offers long distance, wireless, calling card, and personal 800
services at a single rate per minute, plus WorldNet Internet access, all on one
integrated bill. Personal Network has seen a positive response since
introduction in the first quarter of 1999 and now has nearly 250,000
subscribers.
Consumer WorldNet services revenues increased 55.0% in the second quarter of
1999 over the year-ago quarter to $76 million. Revenues increased 48.1% for the
first half of 1999 to $141 million compared with the first half of 1998. AT&T
WorldNet services now serves approximately 1.5 million residential subscribers,
an increase of 45% from a year ago.
EBIT/EBITDA
EBIT and EBITDA for consumer services increased 20.2% and 20.3%, respectively,
in the second quarter of 1999 compared with the second quarter of last year and
increased 30.7% and 29.6%, respectively, for the first half of 1999 compared
with the first half of last year. EBIT and EBITDA for consumer services
excluding the first quarter gain on the sale of Language Line increased 25.3%
and 24.8%, respectively, for the first half of 1999 over the same period last
year. The increases for both the quarter and year-to-date periods excluding the
gain on the sale of Language Line were driven primarily by lower negotiated
settlement rates and cost reduction efforts, primarily in marketing spending.
OTHER ITEMS
Capital additions for consumer services increased $70 million, or 87.2%, for the
second quarter of 1999 compared with the second quarter of 1998. The increase
was primarily due to greater capital expenditures to expand AT&T's network
infrastructure. Capital additions increased $59 million, or 30.0%, for the first
half of 1999 compared with the first half of 1998. The increase was primarily
due to increased capitalized software and greater capital expenditures to expand
AT&T's network infrastructure.
Total assets increased $126 million, or 1.9%, to $6,687 million primarily
associated with the purchase of SmartTalk in the first quarter.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
WIRELESS SERVICES
<CAPTION>
Three months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 1,878 $ 1,313 $ 565 43.1%
EBIT................................ 52 199 (147) (73.7)%
EBITDA excluding other income....... 329 278 51 18.3%
OTHER ITEMS
Capital additions................... $ 655 $ 247 $ 408 164.8%
<CAPTION>
Six months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 3,440 $ 2,477 $ 963 38.9%
EBIT................................ 24 214 (190) (88.7)%
EBITDA excluding other income....... 531 486 45 9.2%
OTHER ITEMS
Capital additions................... $ 817 $ 395 $ 422 106.6%
<CAPTION>
At June 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $21,388 $19,115 $2,273 11.9%
</TABLE>
REVENUES
Wireless services revenues increased $565 million, or 43.1%, in the second
quarter of 1999, and increased $963 million, or 38.9%, for the first half of
1999 compared with same periods last year. Wireless services 1999 results
include Vanguard Cellular Systems (Vanguard) since its acquisition on May 3,
1999, and 1998 results include our messaging business until the sale date of
October 2, 1998. Adjusted to exclude both Vanguard and our messaging business,
revenues grew 42.4% and 41.3% for the three and six-month periods ended June 30,
1999, respectively, compared with the prior year periods. The growth for both
periods was driven by the continued successful execution of AT&T's wireless
strategy of targeting and retaining high-value subscribers, expanding the
national wireless footprint, focusing on digital service, and offering simple
rate plans. AT&T's Digital One Rate service leverages all of the elements of the
wireless strategy and continues to generate significant revenue growth and
contribute positively to EBITDA. The number of AT&T Digital One Rate service
subscribers grew to nearly 1.5 million in the second quarter of 1999, with over
80% of the net additions representing new wireless customers for AT&T. In
addition, during the quarter, AT&T introduced Group Calling for business, which
offers simplicity and value with unlimited calling for a flat fee for "closed
user groups".
AT&T continues to experience strong growth in wireless subscribers and net
subscriber additions. Consolidated net additions increased 45.5% in the second
quarter of 1999 versus the second quarter of 1998 to over 473 thousand, bringing
consolidated subscribers, including approximately 700 thousand subscribers from
our acquisition of Vanguard, to a total of approximately 8.8 million at June 30,
1999, up 35.4% from a year ago and up 15.9% from one quarter ago. Total
subscribers, including partnership markets in which AT&T does not own a
controlling interest, exceeded 11 million in the second quarter.
<PAGE>
AT&T Form 10-Q - Part I
AT&T's focus on high-value subscribers has helped generate rising usage by
customers and increased quarterly average revenue per user (ARPU). ARPU across
all of AT&T's wireless markets was $66.2 in the second quarter, an increase of
15.3% from the second quarter of 1998 and a 9.2% increase from the first quarter
of 1999. This represents the third consecutive quarter ARPU has increased over
the prior year.
We continue to rapidly migrate customers to digital service, generating more
efficient use of the network while also reducing customer churn. At the end of
the second quarter, 69.0% of AT&T's 8.8 million consolidated subscribers were on
digital service, up from 45.2% one year ago and up from 67.3% one quarter ago.
EBIT/EBITDA EXCLUDING OTHER INCOME
EBIT was $52 million and $24 million for the three and six months ended June 30,
1999, respectively, representing decreases of 73.7% and 88.7% over the year ago
periods. The EBIT decline for both periods was primarily due to increased costs
from higher off-network roaming expenses, and increased customer acquisition
costs associated with the high growth of subscriber additions. In addition, EBIT
was also impacted by higher other income in 1998 due to the second quarter gain
on the sale of SmarTone. EBITDA excluding other income was $329 million and $531
million, for the three and six months ended June 30, 1999, respectively,
representing increases of 18.3% and 9.2% over the year ago periods. The
improvement for both periods was the result of revenue growth, partially offset
by increased costs from higher off-network roaming expenses and greater customer
acquisition costs associated with the high growth of subscriber additions.
Off-network roaming expenses continued to negatively impact results, but have
been favorably impacted as a result of aggressively capturing more minutes on
the AT&T network as well as reducing intercarrier roaming rates. AT&T continues
to address off-network usage through capital expansion, acquisitions and
affiliate launches. Capital expansion is underway within existing and new
markets, including Columbus, Ohio; Omaha, Nebraska; San Diego, California and
certain Connecticut cities. In May 1999, AT&T completed it merger with Vanguard,
adding more than 700 thousand subscribers and increasing AT&T's wireless
coverage in suburban and rural markets in the Ohio Valley and Northeastern U.S.
In addition, the announced acquisition of Honolulu Cellular closed on August 2,
1999. Partnership affiliations with Cincinnati Bell Wireless, Triton, Telecorp
and Tritel further expand AT&T's Time Division Multiple Access (TDMA) footprint.
Intercarrier roaming rates have also declined as a result of renegotiated
roaming agreements and the deployment of Intelligent Roaming Database (IRDB)
technology, which assists in identifying favorable roaming partners in areas not
included in our wireless network.
OTHER ITEMS
Capital additions increased $408 million, or 164.8%, in the second quarter of
1999, compared with the second quarter of 1998. Capital additions increased $422
million, or 106.6% in the first half of 1999, compared with the first half of
1998. These increases were the result of additional spending to upgrade and
increase capacity in existing markets.
Total assets increased $2,273 million, or 11.9%, to $21,388 million at June 30,
1999, from December 31, 1998. The increase was due primarily to increases in
goodwill, property, plant and equipment and licensing costs associated with our
acquisitions of Vanguard and Bakersfield Cellular. In addition, accounts
receivable were higher partially attributable to increased revenues.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
BROADBAND & INTERNET SERVICES
<CAPTION>
Date of
Three months acquisition
ended through
June 30, June 30,
Dollars in millions 1999 1999
<S> <C> <C>
Revenues............................ $1,419 $ 1,902
EBIT................................ (475) (1,121)
EBITDA excluding other income....... 266 (126)
OTHER ITEMS
Capital additions................... $ 838 $ 1,148
</TABLE>
At June 30,
1999
Total assets........................ $42,837
REVENUES
Revenues were $1,419 million for the second quarter of 1999 and were $1,902
million from the date of acquisition of TCI through June 30, 1999.
Broadband & Internet services ended the second quarter of 1999 with 11.3 million
basic cable customers and 1.4 million Digital Cable customers. The high-speed
cable Internet service, AT&T@Home, had approximately 83,000 customers at the end
of the second quarter, compared with 52,000 at the end of the first quarter.
Major markets served by AT&T's broadband network currently include Chicago, the
San Francisco Bay Area, Seattle/Tacoma, Denver, Portland and Dallas, among
others. AT&T continues to enhance and refine its broadband footprint through a
series of recently announced transactions, including MediaOne, Comcast
Corporation (Comcast), Lenfest Communications, Inc. (LCI), Cox Communications,
Inc. as well as other affiliates.
EBIT/EBITDA EXCLUDING OTHER INCOME
EBIT was a deficit of $475 million for the second quarter of 1999 and a deficit
of $1,121 million since acquisition in early March of 1999. EBITDA excluding
other income was $266 million for the second quarter of 1999 and a deficit of
$126 million since acquisition. Included in AB&IS results was a $594 million
first quarter 1999 charge for in-process research and development and a second
quarter 1999 charge of $50 million related to a contribution agreement entered
into by TCI to satisfy certain liabilities of Phoenixstar.
OTHER ITEMS
Total assets were $42,837 million at June 30, 1999.
Capital additions were $838 million for the second quarter of 1999 and $1,148
million since the date of acquisition through June 30, 1999, comprised primarily
of spending on cable distribution systems.
OTHER AND CORPORATE
<TABLE>
<CAPTION>
Three months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ 607 316 291 91.7%
EBIT................................ 37 (3,010) 3,047 101.2%
EBITDA.............................. 202 (2,903) 3,105 107.0%
OTHER ITEMS
Capital additions................... $ 181 $ 168 $ 13 8.1%
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
<CAPTION>
Six months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ 958 524 434 82.8%
EBIT................................ (430) (3,344) 2,914 87.1%
EBITDA.............................. (140) (3,108) 2,968 95.5%
OTHER ITEMS
Capital additions................... $ 545 $ 258 $ 287 109.9%
<CAPTION>
At June 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $16,646 $12,459 $ 4,187 33.6%
</TABLE>
REVENUES
Revenues for the second quarter of 1999 excluding the impacts of the AGNS
acquisition were $392 million, an increase of 23.8% from the same quarter a year
ago. Revenues for the first half of 1999 excluding the impacts of the AGNS
acquisition were $743 million, an increase of 41.7% compared with the first half
of last year. Revenue growth for both periods was primarily driven by AT&T
Solutions as a result of the continued strength of the outsourcing business.
International operations and ventures also contributed to the revenue growth
primarily due to an increase in reorigination and transit revenues. These
increases were partially offset by an increase in the elimination of
intercompany revenues. Additionally, revenue growth for the year-to-date period
was partially offset by the sale of ASCC in March 1998.
The elimination of revenues and profit generated by the sale of services between
business segments is primarily a result of the sale of business long distance
services to other AT&T units. Revenues eliminated in the second quarter were
$401 million, an increase of 85.2% from the second quarter of 1998 and were $697
million for the first six months of 1999, an increase of 40.6% over the same
period last year. The increases over 1998 were primarily due to business
services sales to AT&T Solutions and wireless services.
EBIT/EBITDA
EBIT and EBITDA were $37 million and $202 million for the second quarter of
1999, representing increases of 101.2% and 107.0%, respectively, over the second
quarter of 1998. EBIT and EBITDA were deficits of $430 million and $140 million,
respectively, for the first half of 1999 compared with deficits of $3,344
million and $3,108 million in the same period of 1998. Excluding restructuring
and other charges for both periods and the second quarter 1999 gain on the sale
of WOOD-TV and first quarter 1998 gains on the sales of ASCC and LIN-TV, EBIT
was a deficit of $130 million and EBITDA was $35 million for the second quarter
of 1999, an improvement of 51.6% and 122.6%, respectively, over the comparable
prior year period. EBIT was a deficit of $460 million and EBITDA was a deficit
of $170 million for the first half of 1999 on this same basis, an improvement of
31.2% and 60.8%, respectively, over the comparable prior year period. The
improvements for both periods were primarily due to lower corporate expenses
driven by cost cutting initiatives such as headcount reductions. Additionally,
the year-to-date improvement was impacted by lower equity losses for
international partnerships and ventures. The increases for both periods were
partially offset by higher interest income in 1998.
<PAGE>
AT&T Form 10-Q - Part I
OTHER ITEMS
Capital additions were essentially flat in the second quarter of 1999 compared
with the second quarter of last year. Capital additions increased $287 million,
or 109.9% for the first six months of 1999 compared with the first six months of
1998 primarily due to increased investments in nonconsolidated subsidiaries.
Total assets at June 30, 1999, were $16,646 million compared with $12,459
million at December 31, 1998, which represents a 33.6% increase. The increase
was primarily due to goodwill associated with the acquisition of the IBM Global
Network.
AT&T SOLUTIONS
AT&T Solutions is our outsourcing, network-management and professional-services
business. AT&T Solutions is comprised of the Solutions outsourcing unit, the
internal AT&T Information Technology Services unit, and the recently acquired
portions of the IBM Global Network. During the second quarter, AT&T completed
the US, Japan, Ireland, and UK portions of the IBM acquisition and renamed the
unit AT&T Global Network Services (AGNS). The results of AT&T Solutions are
included in the other and corporate group.
<TABLE>
<CAPTION>
Three months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 663 $ 254 $ 409 161.3%
EBIT................................ (18) 5 (23) (475.1)%
EBITDA.............................. 95 73 22 29.4%
OTHER ITEMS
Capital additions................... $ 65 $ 34 $ 31 94.1%
<CAPTION>
Six months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $1,006 $ 480 $ 526 109.4%
EBIT................................ (7) (4) (3) (66.4)%
EBITDA.............................. 179 131 48 37.0%
OTHER ITEMS
Capital additions................... $ 76 $ 57 $ 19 34.3%
<CAPTION>
At June 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $5,395 $1,023 $4,372 427.3%
</TABLE>
REVENUES
AT&T Solutions grew revenues 161.3% for the second quarter of 1999 and 109.4%
for the first six months of 1999 compared with the corresponding prior year
periods. Excluding the impact of AGNS, revenues grew 49.8% for the quarter and
50.5% for the first six months of 1999. The growth for both periods was the
result of continued strength in outsourcing services. In addition, AT&T
Solutions manages AT&T's internal network infrastructure and generated
approximately $423 million and $852 million in internal billings in the second
quarter and for the first six months of 1999, respectively, which were recorded
as a reduction to AT&T Solutions' expenses (cost recovery).
<PAGE>
AT&T Form 10-Q - Part I
AT&T Solutions, with more than 30,000 clients, including IBM, CitiGroup,
McGraw-Hill, Bank One, United Health Group, Textron, J.P. Morgan, Merrill Lynch,
and MasterCard International, has the potential for more than $11 billion in
outsourcing revenues over the life of the signed contracts. During the quarter,
AT&T Solutions also added Safeco, American Century and Teachers Insurance and
Annuity Association as clients.
EBIT/EBITDA
Excluding the impact of AGNS, EBIT and EBITDA were $10 million and $82 million
for the second quarter of 1999, respectively, an improvement over $5 million and
$73 million reported in the corresponding prior year quarter. EBIT and EBITDA
were $21 million and $166 million on this basis for the first half of 1999, an
improvement over a deficit of $4 million and a positive $131 million in the
first half of 1998. The improvement for both periods was primarily due to
revenue growth in the existing AT&T Solutions' outsourcing unit partially offset
by higher expenses driven by the higher revenues.
OTHER ITEMS
Capital additions for the second quarter of 1999 were $65 million, an increase
of 94.1% over the second quarter of 1998. Capital additions for the first six
months of 1999 were $76 million, an increase of 34.3% over the corresponding
prior year period. The increases were primarily due to the addition of client
support equipment.
Total assets increased $4,372 million, or 427.3%, from December 31, 1998, due
primarily to goodwill associated with the acquisition of the IBM Global Network.
INTERNATIONAL OPERATIONS AND VENTURES
International operations and ventures include consolidated foreign operations
such as AT&T Communications Services UK (Comms UK), ACC, transit and
reorigination businesses and international online services. The equity earnings
or losses of AT&T's nonconsolidated international joint ventures and alliances,
such as Alestra in Mexico and AT&T Canada Corp. are also included. As of June 1,
1999, AT&T Canada Corp. completed its merger with MetroNet Communication Corp.
(MetroNet), Canada's largest facilities-based competitive local exchange carrier
(CLEC). AT&T now owns 31% of the combined company, AT&T Canada, and continues to
account for its ownership as an equity investment. These results do not include
bilateral international long distance traffic, which is reflected in business
services and consumer services, as appropriate. The results of international
operations and ventures are included in the other and corporate group.
<TABLE>
<CAPTION>
Three months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 333 $ 272 $ 61 22.2%
EBIT................................ 60 (63) 123 195.7%
EBITDA.............................. 79 (42) 121 287.1%
OTHER ITEMS
Capital additions................... $ 42 $ 34 $ 8 21.8%
<PAGE>
AT&T Form 10-Q - Part I
<CAPTION>
Six months
ended
June 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 625 $ 451 $174 38.7%
EBIT................................ (189) (126) (63) (49.8)%
EBITDA.............................. (151) (88) (63) (71.8)%
OTHER ITEMS
Capital additions................... $ 357 $ 65 $292 454.4%
<CAPTION>
At June 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $2,599 $1,915 $684 35.8%
</TABLE>
REVENUES
Revenues grew 22.2% in the second quarter of 1999 to $333 million and grew 38.7%
to $625 million in the first six months of 1999 compared with the respective
prior year periods. Revenue growth for both periods was led by reorigination and
transit/interconnection due to increased demand and the addition of new traffic
routes. The growth for the year-to-date period was also impacted by improvements
in frame relay and wholesale growth, and the purchase of ACC in April 1998.
EBIT/EBITDA
EBIT and EBITDA improved in the second quarter of 1999 by $123 million and $121
million, respectively, compared with the corresponding prior year periods due
primarily to a net gain related to the exit of certain joint ventures that would
have competed directly with the global venture AT&T is forming with BT.
Excluding the net gain, EBIT and EBITDA improved in the second quarter of 1999
by $55 million and $53 million, respectively, due primarily to improving
financial performance in our nonconsolidated ventures and alliances, strong
revenues and volume growth in reorigination and transit/interconnect services
and cost reduction efforts.
EBIT and EBITDA each declined in the first half of 1999 by $63 million to
deficits of $189 million and $151 million, respectively. The declines were due
primarily to the 1999 net charge related to the exit of joint ventures that
would have competed directly with the global venture AT&T is forming with BT.
Excluding the charges, EBIT and EBITDA improved during the period by $65 million
each, due primarily to improving financial performance in ventures and
alliances, strong revenues and volume growth in reorigination and
transit/interconnect services, improved performance in the frame relay and
wholesale arenas and cost reduction efforts.
OTHER ITEMS
Capital additions were essentially flat for the second quarter of 1999 and
increased $292 million for the first six months of 1999, compared with the same
periods last year. The increases were primarily due to increased investments in
nonconsolidated subsidiaries.
Total assets were $2,599 million at June 30, 1999, compared with $1,915 million
at December 31, 1998. The increase was primarily driven by an increase in
goodwill due to our investment in AT&T Canada, additional investments in
consolidated subsidiaries and a higher cash balance associated with the gain on
sale of non-strategic investments in the second quarter.
<PAGE>
AT&T Form 10-Q - Part I
LIBERTY MEDIA GROUP RESULTS
Liberty Media Group produces, acquires and distributes entertainment,
educational and informational programming services through all available formats
and media. Liberty Media Group is also engaged in electronic retailing services,
direct marketing services, advertising sales relating to programming services,
infomercials and transaction processing. Although Liberty Media Group is wholly
owned by AT&T, it is accounted for as an equity investment in the accompanying
consolidated financial statements since AT&T does not have a controlling
financial interest in Liberty Media Group. Equity losses from Liberty Media
Group were $543 million for the second quarter of 1999 and $601 million for the
period from the date of acquisition through June 30, 1999.
<TABLE>
LIQUIDITY
<CAPTION>
Six months
ended
June 30,
Dollars in Millions 1999 1998
<S> <C> <C>
CASH FLOW OF CONTINUING OPERATIONS:
Provided by operating activities.............. $ 3,401 $ 4,032
(Used in) provided by investing activities.... (16,390) 8,428
Provided by (used in) financing activities.... 10,247 (5,025)
EBITDA* ........................................ $ 8,688 $ 4,187
<FN>
* Earnings before interest, taxes, depreciation and amortization
(EBITDA) for the first six months of 1999 includes restructuring and
other charges, net of $702 million, a $153 million pretax gain on the
sale of Language Line and an $88 million pretax gain on the sale of
WOOD-TV. EBITDA for the first six months of 1998 includes restructuring
and other charges, net of $3,344 million, pretax gains from the sales
of ASCC of $350 million, LIN-TV of $317 million and SmarTone of $103
million. EBITDA excludes the results of Liberty Media Group.
</FN>
</TABLE>
Net cash provided by operating activities of continuing operations for the six
months ended June 30, 1999, was $3,401 million. This represents a decrease of
$631 million compared with the first six months of 1998. The decrease was driven
primarily by an increase in the 1999 tax payments of approximately $1.4 billion
primarily related to the gain on the sale of UCS and an increase in accounts
receivable, partially offset by an increase in operating net income excluding
depreciation and amortization.
AT&T's investing activities resulted in a net use of cash of $16,390 million in
the first half of 1999 compared with a net source of cash of $8,428 million in
the first half of 1998. During the first six months of 1999, AT&T transferred
$5.5 billion of cash to Liberty Media Group, used $5.1 billion for capital
expenditures, purchased portions of the IBM Global Network for $4.2 billion and
loaned $1.5 billion to MediaOne to pay termination fees to Comcast. During the
first half of 1998, we received $5.7 billion as a settlement of a receivable in
conjunction with the sale of UCS as well as $3.5 billion in proceeds from the
sale. We also received a total of $1.6 billion in proceeds from the sales of
LIN-TV, ASCC and SmarTone in the first half of 1998. Our capital spending of
$3.4 billion was the primary use of cash in the first six months of 1998.
<PAGE>
AT&T Form 10-Q - Part I
During the first half of 1999, the net cash provided by financing activities was
$10,247 million compared with cash used in financing activities of $5,025
million in the first half of 1998. During the first half of 1999, AT&T received
$7.9 billion of cash from a March 1999 bond issuance, $5.0 billion from the
issuance of convertible securities and warrants to Microsoft Corporation
(Microsoft) and $3.3 billion from the issuance of commercial paper. From this,
$3.9 billion was used to fund the share repurchase program, $2.0 billion was
used to retire commercial paper and other short-term debt and $1.3 billion was
used to pay dividends on common stock. In the first half of 1998, cash used in
financing activities was largely attributable to the pay down of commercial
paper.
EBITDA is a measure of our ability to generate cash flow and should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with generally accepted accounting
principles. EBITDA increased $4,501 million, or 107.5%, for the six months ended
June 30, 1999, compared with the same period in 1998. Excluding AB&IS, AGNS, the
restructuring and other charges, and gains on sales of businesses in 1999 and
1998, EBITDA increased 31.3% to $8,875 million in the first six months of 1999
from $6,761 million for the first six months of 1998. The increase was primarily
due to increased revenues in business services and cost reductions in consumer
services and corporate overhead.
EURO CONVERSION
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
currency (Euro). The transition period is anticipated to extend between January
1, 1999, and July 1, 2002. We have assessed the impact of the conversion on
information-technology systems, currency exchange rate risk, derivatives and
other financial instruments, continuity of material contracts as well as income
tax and accounting issues. We do not expect the conversion during the transition
period to have a material effect on our consolidated financial statements.
FINANCIAL CONDITION
Total assets increased $85,688 million, or 143.9%, to $145,238 million at June
30, 1999, compared with December 31, 1998. The increase in total assets was due
primarily to our acquisition of TCI, which resulted in an investment in Liberty
Media Group of $35 billion, increased goodwill, and an increase in other
investments including Cablevision, Excite@Home and Lenfest Communications, Inc.
The acquisition of TCI also resulted in the addition of over $6 billion to
property, plant and equipment. Other assets also increased by $1.5 million
representing the Comcast break-up fee loaned to MediaOne by AT&T. In addition,
we recognized goodwill related to our acquisition of the IBM Global Network.
These increases were partially offset by a net decrease in cash, which was used
to partially fund the first quarter share repurchase, capital expenditures
during the period and the acquisition of the IBM Global Network.
Total liabilities increased $29,070 million, or 85.7%, to $62,989 million at
June 30, 1999, compared with December 31, 1998. The increase was due primarily
to the acquisition of TCI, particularly debt and deferred income taxes, an $8.0
billion bond offering and the issuance of commercial paper.
In addition, AT&T issued $5.0 billion of quarterly convertible income preferred
securities (recorded net of a $0.3 million discount) to Microsoft.
<PAGE>
AT&T Form 10-Q - Part I
Total shareowners' equity increased $47,966 million, or 187.9%, to $73,488
million at June 30, 1999, compared with December 31, 1998. The increase was due
primarily to the issuance of shares related to the TCI acquisition, partially
offset by shares repurchased.
AT&T Group's ratio of total debt to total capital at June 30, 1999, was 41.9%
compared with 20.9% at December 31, 1998. Equity includes the $5 billion
convertible securities issued to Microsoft and debt includes $1.7 billion of
non-convertible securities issued by TCI's subsidiary trusts. The increase was
primarily driven by an increase in debt associated with the TCI merger and an $8
billion bond issuance in March 1999, partially offset by a higher equity base.
AT&T Group's net debt-to-operational EBITDA was 1.65X at June 30, 1999, compared
with 0.24X at December 31, 1998.
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign exchange
rates. On a limited basis we use certain derivative financial instruments,
including interest rate swaps, options, forwards and other derivative contracts
to manage these risks. We do not use financial instruments for trading or
speculative purposes. All financial instruments are used in accordance with
board-approved policies.
Assuming a 10% downward shift in interest rates at June 30, 1999, the potential
loss for changes in fair value of unhedged debt would have been $1.0 billion.
AT&T has a $20 billion commitment from multiple lenders with credit agreements
to be finalized upon consummation of the proposed merger with the MediaOne
Group.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities. " Among other
provisions, it requires that entities recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. This effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T this means that the standard must be adopted no later than January 1, 2001.
Management does not expect the adoption of this standard to have a material
impact on AT&T's results of operations, financial position or cash flows.
YEAR 2000
AT&T is preparing its systems and applications for the year 2000 (Y2K). The
issue our Y2K program addresses is the use of a two-digit year field instead of
a four-digit year field in computer systems. If computer systems cannot
distinguish between the year 1900 and the year 2000, system failures or other
computer errors could result. The potential for failures and errors spans all
aspects of our business, including computer systems, voice and data networks,
and building infrastructures. We are also faced with addressing our
interdependencies with our suppliers, connecting carriers and major customers,
all of whom face the same issue.
<PAGE>
AT&T Form 10-Q - Part I
AT&T's company-wide Y2K program is focused on four interrelated categories which
are critical to maintaining uninterrupted service to our customers:
AT&T-developed applications and their external interfaces, AT&T networks,
information-technology (IT) platforms that support the applications, and non-IT
infrastructure.
AT&T's progress in our Y2K program is measured by certain key milestones or
phases common to each category of systems. These milestones are: assessment,
repair/remediation, testing and certification. AT&T monitors and tracks the
progress of our Y2K program through a series of scorecards that capture the
activities related to the Y2K process phases.
As of June 30, 1999, AT&T's network services (excluding recently completed
acquisitions) are year 2000 compliant. This means they have been assessed for
year 2000 impacts, repaired if necessary, tested and fully deployed. For all
other systems encompassed in our Y2K program, AT&T anticipates completion of all
phases by the third quarter of 1999, which is an extension of our previous time
frame due primarily due to the impact of acquisitions and vendor delays in
delivering Y2K-compliant software/hardware. The status of TCI's Y2K program is
discussed separately from the existing AT&T program. All targets cited herein
also exclude information regarding pending acquisitions, whose programs are
still being evaluated and planned for integration into the overall AT&T Y2K
program.
Program Status
AT&T now has over 3,500 applications that (1) directly support AT&T's voice and
data telecommunications services (including wired and wireless); (2) are
critical to the provisioning, administration, maintenance and customer
service/support related to our telecommunications services; and (3) support our
sales and marketing organizations, other AT&T services and internal
administrative functions. These applications represent over 380 million lines of
code. As of June 30, 1999, AT&T has completed 100% of the assessment and repair
and about 98% of the application testing. The certification and deployment of
these applications is targeted for completion in the third quarter of 1999.
With respect to external (third-party) interface assessment, formal letters were
sent to about 2,000 domestic telecommunications companies and international
telecommunications authorities to request information on their Y2K plans and
targets for compliance. We have identified over 1,000 different types of
third-party interfaces and about 10,000 total instances of those types. As of
June 30, 1999, AT&T has assessed approximately 99% of third-party interface
types, and approximately 98% are Y2K compliant. We expect to be 100% complete
with Y2K certification of external interfaces in the third quarter of 1999.
The AT&T network is critical to providing top-quality, reliable service to AT&T
customers. At June 30, 1999, the assessment, repair and certification phases of
the operation-support systems (OS) were 100% complete and these systems are now
fully deployed. In addition to the AT&T-developed applications supporting the
network, AT&T has inventoried about 2,000 unique types (manufactured/model
combinations) externally purchased network elements (NE) including switches,
routers, network-control points and signal-transfer points. Additional Y2K
testing is conducted to independently verify supplier claims of compliance. All
of the NEs are now certified. After OS/NE certification is complete, AT&T
performs integration testing to verify Y2K certification of NEs in conjunction
with the associated OS applications. Such integration testing is 100% completed
as of June 30, 1999, and all of the NEs are fully deployed.
<PAGE>
AT&T Form 10-Q - Part I
The IT infrastructure category addresses not only the computing platforms that
are critical to the AT&T-developed applications, but also the common modules,
communications protocols, the internal AT&T wide-area and local-area networks,
desktop hardware/software and the internal voice network. As of June 30, 1999,
AT&T was approximately 96% compliant in computing platforms, about 94% compliant
in desktops, approximately 98% compliant in voice systems and adjuncts, and
about 99% compliant in data networks. AT&T anticipates completion of IT
infrastructure certification by the third quarter of 1999.
The non-IT infrastructure focuses on the energy- and environment-management
systems that are critical to various computer systems, as well as safety,
security and operations. This aspect of the Y2K program encompasses more than
9,000 sites, as well as about 7,000 wireless cell sites. As of June 30, 1999,
approximately 98% of all sites completed inventory and about 94% are assessed
and compliant (or not impacted). AT&T has targeted 100% site compliance by the
third quarter of 1999.
In addition, AT&T is continuing network interoperability tests with a variety of
domestic and international testing partners. These tests are designed to
exercise the network across a range of our vendors, and across a range of AT&T
voice, private line, and data services. We are also testing with key customer
and industry segments, including the financial community, insurance,
transportation, manufacturing and others. All test results to date have been
positive.
Similar to AT&T's Y2K program, the TCI program has a four-phased approach to
determining the readiness of systems for Y2K, namely; assessment, remediation,
testing and implementation. We anticipate substantial completion of all phases
of TCI's program by the third quarter of 1999. TCI is also continuing 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.
CostsWe have expended approximately $600 million since inception in 1997 on all
phases of the Y2K project. This figure includes approximately $98 million of
costs incurred during the second quarter of 1999, of which approximately $14
million represented capital spending for upgrading and replacing non-compliant
computer systems and network components. Less than half of the 1999 costs
represent internal IT resources that have been redeployed from other projects
and are expected to return to these projects upon completion of the Y2K project.
We anticipate remaining Y2K costs for 1999, inclusive of approximately $69
million projected expenditures associated with completing the TCI program, will
be approximately $156 million. This projection includes approximately $50
million of capitalized costs.
Risk Assessment
We have assessed our business exposure that would result from a failure of our
Y2K program, as well as those of our suppliers, connecting carriers and major
customers. Such failures would result in business consequences that could
include failure to be able to serve customers, loss of network functionality,
inability to render accurate bills, lost revenues, harm to the AT&T brand, legal
and regulatory exposure, and failure of management controls. Although we believe
that internal Y2K compliance will be achieved no later than December 31, 1999,
there can be no assurance that the Y2K problem will not have a material adverse
effect on our business, financial condition or results of operations.
<PAGE>
AT&T Form 10-Q - Part I
Contingency Plans
AT&T's contingency planning program focuses on 38 critical business processes
and many more that are designated as "important" or "support". The plans address
all facets of business continuity, including key suppliers,
systems/applications, IT infrastructure and work centers. Specific examples of
AT&T's contingency plan initiatives include the following:
Plans are under way to engineer additional network capacity and to position AT&T
personnel on site at critical locations to monitor operations and manage
increases in work and call volumes.
Agreements are being negotiated with contractors and vendors to ensure the
availability of on-site technical support. This coverage includes, but is not
limited to, network centers and sites, customer-care centers and data centers.
We are planning to proactively stage power, fuel, water, heating,
air-conditioning and ventilation sources to support critical business operations
and personnel requirements.
Alternate procedures and processes are being developed to support critical
customer functions, including alternative procedures for rapid repair, recovery
and restoration of critical technology components by business resumption teams.
Procedures to perform database backups, hardcopy printouts, data retention and
recovery are being established for business critical data.
Risk Management
In addition to the contingency planning program, AT&T has implemented an
Independent Verification and Validation program for applications to validate the
quality of application remediation and testing, as well as the continuing
compliance of systems put back into production. We also continue to conduct
independent audits across critical areas of the Y2K program.
OTHER MATTERS
On April 30, 1999, AT&T completed its acquisition of the IBM Global Network
(IGN) business and its assets in the United States. The acquisition is occurring
in phases throughout 1999 as legal and regulatory requirements are met in each
of the 59 countries in which the business operates. In June of 1999, the
acquisitions of the IGN business in Japan, the United Kingdom and Ireland were
completed. The acquisition has been accounted for as a purchase. Accordingly,
the operating results of the IGN business have been included in the accompanying
consolidated financial statements since the date of acquisition. Intangible
assets of approximately $3.9 billion including customer lists and the excess of
the purchase price over the fair value of net assets acquired are being
amortized on a straight-line basis over periods ranging from five-30 years. The
pro forma impact of the IGN business results on historical AT&T results are not
material.
On May 3, 1999, AT&T closed the previously announced merger with Vanguard
Cellular Systems, Inc. (Vanguard). Consummation of the merger resulted in the
issuance of approximately 12.6 million AT&T shares and payment of $485 million
in cash. In addition, Vanguard had approximately $550 million in debt, which was
subsequently repaid by AT&T. The merger with Vanguard was recorded as a
purchase. Accordingly the operating results of Vanguard have been included in
the accompanying consolidated financial statements since the date of
acquisition. The pro forma impact of Vanguard results on historical AT&T results
are not material.
<PAGE>
AT&T Form 10-Q - Part I
On June 1, 1999, AT&T Canada completed the announced merger with MetroNet
Communications Corp. (MetroNet), Canada's largest facilities-based competitive
local exchange carrier (CLEC). The combined companies were renamed AT&T Canada.
AT&T owns a 31% stake in the merged entity, which maintains a national network
to provide Canadian business customers with local and long distance voice, data,
Internet and electronic commerce services as well as wireless services through
Rogers Cantel AT&T.
On June 7, 1999, AT&T signed a definitive agreement with Cox Communications,
Inc. (Cox) whereby Cox will exchange its AT&T stock for cable television systems
that serve approximately 495,000 customers as well as certain other
consideration, including cash. Based on the closing price of AT&T stock when the
agreement was announced, the transaction is valued at approximately $2.8
billion. The agreement has been approved by the boards of both companies and
will be subject to necessary government and regulatory approvals.
On June 29, 1999, the previously announced global venture between AT&T and
British Telecommunications plc (BT) received approval from the U.S. Justice
Department. The venture has already received approval from the European
Commission. The global venture will combine the transborder assets and
operations of each company. The venture will be equally owned by both companies
when it begins operations. The receipt of certain additional regulatory
approvals is required and the venture is expected to be completed in the second
half of 1999.
On May 28, 1999, At Home Corporation 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, At Home
Corporation issued approximately 116 million shares of its common stock (as
adjusted for a June 1999 stock split) for all of the outstanding common stock of
Excite based on an exchange ratio of 2.083804 shares of At Home Corporation's
common stock (as adjusted for a June 1999 stock split) for each share of
Excite's common stock. As a result of the merger, AT&T's economic interest in At
Home Corporation (Excite@Home) decreased from 38.8% to 26.5%. Due to the
resulting increase in Excite@Home's equity, net of the dilution of AT&T's
ownership interest in Exite@Home, AT&T recorded a $466 million increase to
additional paid in capital. At June 30, 1999, AT&T owned 63,720,000 shares of
Excite@Home Class A common stock (as adjusted for a June 1999 stock split) and
has an approximate 58% voting interest on certain matters. During the second
quarter of 1999, the stockholders of Excite@Home approved certain changes in the
corporate governance of Excite@Home. As a result of these changes, management
has concluded that AT&T no longer holds a controlling financial interest in
Excite@Home and, accordingly, during the second quarter of 1999, AT&T ceased to
consolidate Excite@Home and began to account for Excite@Home using the equity
method of accounting. The effect of this deconsolidation was immaterial to the
consolidated financial statements of AT&T.
SUBSEQUENT EVENTS
On August 2, 1999, AT&T completed its acquisition of Honolulu Cellular Telephone
Company from BellSouth.
On August 5, 1999, AT&T and BT announced that they will jointly acquire a 33%
stake in Rogers Cantel Mobile Communications Inc. (Rogers Cantel) for
approximately $934 million in cash. The investment will be owned equally by AT&T
and BT. AT&T and BT also announced that BT will acquired 30% of AT&T's 31%
ownership interest in AT&T Canada for approximately $402 million. In addition,
Rogers Cantel and AT&T Canada will accelerate the bundling and joint marketing
of wired and wireless services for Canadian business customers. The closing of
these transactions is expected to take place in late August 1999.
<PAGE>
AT&T Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 2(c). Changes in Securities and Use of Proceeds.
On June 16, 1999, in a private placement transaction exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving a public offering, the company sold to Microsoft
Corporation for an aggregate price of $5 billion newly issued AT&T convertible
trust preferred securities with an aggregate face amount of $5 billion and
warrants to purchase 40 million shares of AT&T common stock.
The convertible trust preferred securities bear interest at a rate of 5% per
annum, payable quarterly, are convertible into 66.7 million shares of AT&T
common stock, which is equivalent to a conversion price of $75 per share, have a
maturity of 30 years, and the conversion feature can be terminated, under
certain conditions, after three years. The warrants will be exercisable in three
years to purchase 40 million AT&T common shares at $75 per share. Alternatively,
the warrants are exercisable on a cashless basis.
There were no underwriting discounts or commissions. The company intends to use
the proceeds to fund working capital and capital expenditures.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the shareholders of the registrant was held on May 19,
1999.
(b) Election of Directors*
Votes
(Millions)
Nominee For Withheld
C. Michael Armstrong 1,855 18
Kenneth T. Derr 1,855 18
M. Kathryn Eickhoff 1,855 19
Walter Y. Elisha 1,854 19
George M. C. Fisher 1,855 18
Donald V. Fites 1,855 19
Ralph S. Larsen 1,855 18
John C. Malone 1,855 19
Donald F. McHenry 1,854 19
Michael I. Sovern 1,854 19
Sanford I. Weill 1,855 18
Thomas H. Wyman 1,854 19
John D. Zeglis 1,855 18
*In July 1999, Amos B. Hostetter, Jr. was elected as a member of the board of
directors.
(c) Holders of common shares voted at this meeting on the following matters,
which were set forth in the registrant's proxy statement dated March 25, 1999.
(i) Ratification of Auditors
For Against Abstain
Ratification of the firm 1,861 4 8
of PricewaterhouseCoopers LLP (99.75%) (.25%)
as the independent auditors
to audit the registrant's
financial statements for
the year 1999.(*)
<PAGE>
AT&T Form 10-Q - Part II
(ii) Directors Proposals
Broker
For Against Abstain Non-Votes
That the Shareholders 1,322 240 18 292
approve the amendment to (56.23%) (10.28%) (.80%)
the 1997 Long-Term
Incentive Plan.(**)
*Percentages are based on the total common shares voted. Approval of this
proposal required a majority of the common shares voted.
**Percentages are based on total number of outstanding common shares. Approval
of this proposal required a majority of the outstanding common shares.
(iii) Shareholder Proposals**
Broker
For Against Abstain Non-Votes
That the company 114 1,427 40 292
establish a cap on (7.50%) (92.50%)
CEO compensation.(*)
*Percentages are based on the total common shares voted. Approval of this
proposal required a majority of the common shares voted.
**A second shareholder proposal requiring the board to take necessary steps to
change the Annual Meeting date to the third Wednesday of April was included in
the company's proxy statement but was not submitted at the meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99.1 Liberty Media Group Financial Results for the
Quarter and Year-to-Date Periods Ended
June 30, 1999
99.2 Tele-Communications, Inc. Financial Results for
the Quarter and Year-to-Date Periods Ended
June 30, 1999
99.3 AT&T Unaudited Pro-Forma Condensed Financial
Information for the Year Ended December 31, 1998
(b) Reports on Form 8-K
Form 8-K dated May 3, 1999, was filed pursuant to Item 5
(Other Events) and Item 7 (Financial Statements and
Exhibits). Form 8-K dated May 7, 1999, was filed pursuant
to Item 5 and Item 7.
<PAGE>
AT&T Form 10-Q - Part II
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T Corp.
/s/ N. S. Cyprus
------------------------------
By: N. S. Cyprus
Vice President and Controller
(Principal Accounting Officer)
Date: August 12, 1999
<PAGE>
AT&T Form 10-Q - Part II
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99.1 Liberty Media Group Financial Results for the
Quarter and Year-to-Date Periods Ended
June 30, 1999
99.2 Tele-Communications, Inc. Financial Results for
the Quarter and Year-to-Date Periods Ended
June 30, 1999
99.3 AT&T Unaudited Pro-Forma Condensed Financial
Information for the Year Ended December 31, 1998
Form 10-Q
For the Six
Months Ended
June 30, 1999
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
Income from Continuing Operations
Before Income Taxes ................................. $3,966
Less Interest Capitalized during
the Period........................................... 58
Add Equity Investment Losses, net of distributions
of Less than 50% Owned Affiliates.................... 273
Add Fixed Charges...................................... 905
Total Earnings from Continuing
Operations Before Income Taxes
and Fixed Charges.................................... $5,086
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 707
Interest Portion of Rental Expense..................... 116
Dividend Requirements on Subsidiary Preferred Stock and
Interest on Trust Preferred Securities................ 82
Total Fixed Charges.................................. $ 905
Ratio of Earnings to Fixed Charges..................... 5.6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet of AT&T Corp. at June 30, 1999, and the
unaudited consolidated statement of income for the six-month period ended June
30, 1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 418
<SECURITIES> 0
<RECEIVABLES> 11,257
<ALLOWANCES> 1,227
<INVENTORY> 0
<CURRENT-ASSETS> 12,946
<PP&E> 62,574
<DEPRECIATION> 27,580
<TOTAL-ASSETS> 145,238
<CURRENT-LIABILITIES> 21,577
<BONDS> 22,152
6,354
0
<COMMON> 4,461
<OTHER-SE> 69,027
<TOTAL-LIABILITY-AND-EQUITY> 145,238
<SALES> 0
<TOTAL-REVENUES> 29,787
<CGS> 0
<TOTAL-COSTS> 24,646
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 733
<INTEREST-EXPENSE> 649
<INCOME-PRETAX> 3,966
<INCOME-TAX> 1,903
<INCOME-CONTINUING> 2,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,063
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.88
</TABLE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
<TABLE>
Combined Balance Sheets
(unaudited)
<CAPTION>
New Liberty Old Liberty
(note 1)
June 30, December 31,
1999 1998
----------- -----------
amounts in millions
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,504 $ 407
Marketable securities 3,393 124
Trade and other receivables, net 149 185
Prepaid expenses and committed program rights 295 263
Other current assets 22 21
---------- -----------
Total current assets $ 5,363 $ 1,000
---------- -----------
Investments in affiliates, accounted for under the equity method, and
related receivables (note 5) 16,775 3,079
Investment in Time Warner, Inc. ("Time Warner") (note 6)
8,212 7,083
Investment in AT&T Corp. ("AT&T") -- 3,556
Investment in Sprint Corporation ("Sprint") (notes 2 and 5)
5,989 2,446
Other investments and related receivables 2,577 1,298
Property and equipment, at cost 138 935
Less accumulated depreciation 5 350
---------- -----------
$ 133 $ 585
---------- -----------
Intangible assets 10,316 1,139
Less accumulated amortization 178 164
---------- -----------
$ 10,138 $ 975
---------- -----------
Other assets, at cost, net of accumulated amortization
894 326
---------- -----------
Total assets $ 50,081 $ 20,348
========== ===========
</TABLE>
(continued)
<PAGE>
<TABLE>
Combined Balance Sheets, continued
(unaudited)
<CAPTION>
New Liberty Old Liberty
(note 1)
June 30, December 31,
1999 1998
----------- -----------
amounts in millions
<S> <C> <C>
Liabilities and Combined Equity
Current liabilities:
Accounts payable and accrued liabilities $ 239 $ 416
Accrued stock compensation 1,156 126
Program rights payable 177 156
Current portion of debt 683 578
----------- ----------
Total current liabilities 2,255 1,276
----------- ----------
Long-term debt (note 8) 1,493 2,318
Deferred income taxes (note 9) 10,918 4,458
Other liabilities 26 423
----------- ----------
Total liabilities $ 14,692 $ 8,475
----------- ----------
Minority interests in equity of attributed subsidiaries
-- 545
Obligation to redeem common stock -- 17
Combined equity (note 10):
Combined equity 33,317 6,896
Accumulated other comprehensive earnings, net of taxes
1,969 3,718
----------- ----------
35,286 10,614
Due to related parties 103 697
----------- ----------
Total combined equity $ 35,389 $ 11,311
----------- ----------
Commitments and contingencies (note 11)
Total liabilities and combined equity $ 50,081 $ 20,348
=========== ==========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Combined Statements of Operations and Comprehensive Earnings
(unaudited)
<CAPTION>
New Liberty Old Liberty
(note 1)
Three months ended
June 30,
1999 1998
amounts in millions,
except per share amounts
<S> <C> <C>
Revenue $ 221 $ 374
Operating costs and expenses:
Operating, selling, general and administrative 184 334
Stock compensation 496 107
Depreciation and amortization 177 57
---------- ----------
$ 857 $ 498
---------- ----------
Operating loss (636) (124)
Other income (expense):
Interest expense (33) (26)
Dividend and interest income 82 17
Share of losses of affiliates, net (note 5) (279) (297)
Minority interests in losses of attributed subsidiaries
12 9
Gain (loss) on disposition of assets (2) 5
Gain on issuance of equity by affiliate (note 7)
-- 201
Other, net (4) (2)
---------- ----------
$ (224) $ (93)
---------- ----------
Loss before income taxes (860) (217)
Income tax benefit 317 62
---------- ----------
Net loss $ (543) $ (155)
========== ==========
Other comprehensive earnings, net of taxes:
Foreign currency translation adjustments (55) (5)
Unrealized holding gains arising during the period, net of
reclassification adjustments 1,118 507
---------- ----------
Other comprehensive earnings 1,063 502
---------- ----------
Comprehensive earnings $ 520 $ 347
========== ==========
</TABLE>
<PAGE>
<TABLE>
Combined Statements of Operations and Comprehensive Earnings
(unaudited)
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 292 $ 282 $ 725
Operating costs and expenses:
Operating, selling, general and administrative
240 227 636
Stock compensation 455 183 265
Depreciation and amortization 230 47 111
---------- -------------- ------------
$ 925 $ 457 $ 1,012
---------- -------------- ------------
Operating loss (633) (175) (287)
Other income (expense):
Interest expense (46) (28) (44)
Dividend and interest income 106 12 34
Share of losses of affiliates, net (note 5) (359) (66) (554)
Minority interests in losses of attributed subsidiaries
12 4 22
Gain (loss) on dispositions, net (note 6) (2) 14 557
Gains on issuance of equity by affiliates and
subsidiaries (note 7) -- 389 239
Other, net (4) -- --
---------- -------------- ------------
$ (293) $ 325 254
---------- -------------- ------------
Earnings (loss) before income taxes (926) 150 (33)
Income tax benefit (expense) 325 (209) (14)
---------- -------------- ------------
Net loss $ (601) $ (59) $ (47)
========== ============== ============
Other comprehensive earnings, net of taxes:
Foreign currency translation adjustments
(43) (15) (4)
Unrealized holding gains arising during the period, net
of reclassification adjustments
2,012 971 855
---------- -------------- ------------
Other comprehensive earnings 1,969 956 851
---------- -------------- ------------
Comprehensive earnings $ 1,368 $ 897 $ 804
========== ============== ============
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
<TABLE>
Combined Statement of Equity
Six months ended June 30, 1999
(unaudited)
<CAPTION>
Accumulated
other Due to
comprehensive (from) Total
Combined earnings, related combined
equity net of taxes parties equity
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $ 6,896 $ 3,718 $ 697 $11,311
Net loss (59) -- -- (59)
Foreign currency translation adjustments -- (15) -- (15)
Unrealized gains on available-for-sale securities
-- 971 -- 971
Reversal of reclassification of redemption amount of
common stock subject to put obligation
8 -- -- 8
Transfer of net liabilities to related party, net of taxes
99 -- -- 99
Excess paid on settlement of preferred stock conversion
(18) -- -- (18)
Other transfers to related parties, net -- -- (24) (24)
------- ------- ------- -------
Balance at February 28, 1999 $ 6,926 $ 4,674 $ 673 $12,273
======= ======= ======= =======
Balance at March 1, 1999 33,515 -- 213 33,728
Net loss (601) -- -- (601)
Foreign currency translation adjustments -- (43) -- (43)
Unrealized gains on available-for-sale securities
-- 2,012 -- 2,012
AT&T Liberty Media Group Tracking Stock issued for
conversion of debentures 354 -- -- 354
Reversal of reclassification of redemption amount of
common stock subject to put obligation
9 -- -- 9
Gain in connection with the issuance of common stock of
attributed subsidiary 40 -- -- 40
Other transfers to related parties, net -- -- (110) (110)
------- ------- ------- -------
Balance at June 30, 1999 $33,317 $ 1,969 $ 103 $35,389
======= ======= ======= =======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
<TABLE>
Combined Statements of Cash Flows
(unaudited)
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (601) $ (59) $ (47)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 230 47 111
Stock compensation 455 183 265
Payments of stock compensation (27) (126) (71)
Share of losses of affiliates, net 359 66 554
Deferred income tax (benefit) expense
(314) 205 --
Intergroup tax allocation (14) -- --
Cash payment from AT&T pursuant to tax sharing
agreement 45 -- --
Minority interests in losses of attributed
subsidiaries (12) (4) (22)
Gain on issuance of equity by affiliates and
subsidiaries -- (389) (239)
Loss (gain) on disposition of assets, net
2 (14) (557)
Other noncash charges -- 9 2
Changes in current assets and liabilities, net of
the effect of acquisitions and dispositions:
Change in receivables (12) (19) (13)
Change in prepaid expenses and committed
program rights (7) (10) (35)
Change in payables and accruals 67 4 23
----------- ----------- ----------
Net cash provided (used) by operating
activities $ 171 $ (107) $ (29)
----------- ----------- ----------
Cash flows from investing activities:
Capital expended for property and equipment
(16) (21) (67)
Investments in and loans to affiliates and others
(434) (45) (692)
Return of capital from affiliates 6 -- 38
Purchases of marketable securities (6,172) (132) --
Sales and maturities of marketable securities
2,759 34 33
Cash paid for acquisitions (1) -- (10)
Cash proceeds from dispositions 2 43 298
Cash balances of deconsolidated subsidiaries
-- (53) --
Other, net (18) (9) 3
----------- ----------- ----------
Net cash used in investing activities
$ (3,874) $ (183) $ (397)
----------- ----------- ----------
</TABLE>
(continued)
<PAGE>
<TABLE>
Combined Statements of Cash Flows, continued
(unaudited)
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings of debt $ 495 $ 156 $ 1,083
Repayments of debt (463) (148) (270)
Cash transfers (to) from related parties (160) 132 (195)
Repurchase of stock of subsidiary -- (45) (7)
Repurchase of common stock -- -- (12)
Payments for call agreements -- -- (140)
Other, net 16 (1) (8)
------------- ----------------- -------------
Net cash (used) provided by financing
activities $ (112) $ 94 451
------------- ----------------- -------------
Net (decrease) increase in cash and
cash equivalents
(3,815) (196) 25
Cash and cash equivalents at beginning
of period 5,319 407 224
------------- ----------------- -------------
Cash and cash equivalents at end of
period $ 1,504 $ 211 $ 249
============= ================= =============
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Notes to Combined Financial Statements
June 30, 1999
(unaudited)
(1) Basis of Presentation
The accompanying combined financial statements include the accounts of
the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that
are attributed to Liberty Media Group, as defined below. On March 9,
1999, AT&T acquired TCI in a merger transaction (the "AT&T Merger").
See note 2. The AT&T Merger has been accounted for using the purchase
method. 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. Accordingly, for periods prior to March 1,
1999 the assets and liabilities attributed to Liberty Media Group and
the related combined financial statements are sometimes referred to
herein as "Old Liberty", and for periods subsequent to February 28,
1999 the assets and liabilities attributed to Liberty Media Group and
the related combined financial statements are sometimes referred to
herein as "New Liberty". The "Company" and "Liberty Media Group" refer
to both New Liberty and Old Liberty.
The following table represents the summary balance sheet of Old Liberty
at February 28, 1999 prior to the restructuring transactions and the
consummation of the AT&T Merger and the opening summary balance sheet
of New Liberty subsequent to the restructuring transactions and the
consummation of the AT&T Merger. Certain pre-merger transactions
occurring between March 1, 1999 and March 9, 1999 that affected Old
Liberty's equity, gains on issuance of equity by subsidiaries and stock
compensation have been reflected in the two-month period ended February
28, 1999.
<TABLE>
<CAPTION>
Old Liberty New Liberty
(amounts in millions)
<S> <C> <C>
Assets
Cash and cash equivalents $ 211 5,319
Other current assets 648 423
Investments in affiliates 3,971 17,073
Investment in Time Warner 7,361 7,832
Investment in Sprint 3,381 3,681
Investment in AT&T 3,856 --
Other investments 1,257 1,586
Property and equipment, net 532 125
Intangibles and other assets 817 11,273
----------- -----------
$ 22,034 $ 47,312
=========== ===========
Liabilities and Equity
Current liabilities $ 1,446 1,741
Debt 2,319 1,845
Deferred income taxes 5,369 9,931
Other liabilities 168 19
----------- -----------
Total liabilities $ 9,302 $ 13,536
----------- -----------
Minority interests in equity of
attributed subsidiaries 450 39
Obligation to redeem common stock 9 9
Equity 12,273 33,728
----------- -----------
$ 22,034 $ 47,312
=========== ===========
</TABLE>
(continued)
<PAGE>
The following table reflects the recapitalization resulting from the
AT&T Merger
(amounts in millions):
Total combined equity of Old Liberty $ 12,273
Net contribution resulting from the
restructuring transactions 2,334
Purchase accounting adjustments 19,121
Initial total combined equity of New Liberty
subsequent to the AT&T Merger $ 33,728
===============
At June 30, 1999, Liberty Media Group consisted principally of the
following: (i) AT&T's assets and businesses which provide programming
services including production, acquisition and distribution through all
available formats and media of branded entertainment, educational and
informational programming and software, including multimedia products,
(ii) AT&T's assets and businesses engaged in electronic retailing,
direct marketing, advertising sales relating to programming services,
infomercials and transaction processing, (iii) certain of AT&T's assets
and businesses engaged in international cable, telephony and
programming businesses and (iv) AT&T's holdings in a new class of
tracking stock of Sprint (the "Sprint PCS Group Stock").
All significant intercompany accounts and transactions have been
eliminated. The combined financial statements of Liberty Media Group
are presented for purposes of additional analysis of the consolidated
financial statements of AT&T and should be read in conjunction with
such consolidated financial statements.
The accompanying interim combined 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 combined financial statements should be read in conjunction with
the combined financial statements and notes thereto contained in AT&T's
Current Report on Form 8-K filed on March 22, 1999.
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.
Effective June 11, 1999, AT&T issued stock dividends to holders of AT&T
Liberty Media Group Tracking Stock (the "1999 Liberty Stock Dividend").
The 1999 Liberty Stock Dividend consisted of one share of AT&T Liberty
Media Group Tracking Stock for every one share of AT&T Liberty Media
Group Tracking Stock owned. The 1999 Liberty Stock Dividend has been
treated as a stock split, and accordingly, all share and per share
amounts have been restated to reflect the 1999 Liberty Stock Dividend.
Certain prior period amounts have been reclassified for comparability
with the 1999 presentation.
(continued)
<PAGE>
(2) Merger with AT&T
As a result of the AT&T Merger, holders of shares of TCI's then
outstanding Liberty Media Group Tracking Stock and TCI Ventures Group
Tracking Stock were issued separate shares of new targeted stock of
AT&T. Each share of TCI's then outstanding Liberty Media Group Series A
Tracking Stock was converted into 2 shares of a newly created class of
AT&T common stock, the AT&T Liberty Media Group Class A Tracking Stock,
each share of TCI's then outstanding Liberty Media Group Series B
Tracking Stock was converted into 2 shares of a newly created class of
AT&T common stock, the AT&T Liberty Media Group Class B Tracking Stock,
each share of TCI's then outstanding TCI Ventures Group Series A
Tracking Stock was converted into 1.04 shares of AT&T Liberty Media
Group Class A Tracking Stock and each share of TCI's then outstanding
TCI Ventures Group Series B Tracking Stock was converted into 1.04
shares of AT&T Liberty Media Group Class B Tracking Stock.
Effective with the AT&T Merger, each share of TCI's Convertible
Preferred Stock Series C-Liberty Media Group was converted into 112.5
shares of AT&T Liberty Media Group Class A Tracking Stock and each
share of TCI's Redeemable Convertible Liberty Media Group Preferred
Stock, Series H was converted into 1.18125 shares of AT&T Liberty Media
Group Class A Tracking Stock. In general, the holders of shares of AT&T
Liberty Media Group Class A Tracking Stock and the holders of shares of
AT&T Liberty Media Group Class B Tracking Stock will vote together as a
single class with the holders of shares of AT&T Common Stock on all
matters presented to such stockholders, with the holders being entitled
to three-fortieths (3/40th) of a vote for each share of AT&T Liberty
Media Group Class A Tracking Stock held, three-fourths (3/4th) vote per
share of AT&T Liberty Media Group Class B Tracking Stock held and 1
vote per share of AT&T Common Stock held.
(continued)
<PAGE>
The shares of AT&T Liberty Media Group Tracking Stock issued in the
AT&T Merger are intended to reflect the separate performance of the
businesses and assets attributed to Liberty Media Group. Immediately
prior to the AT&T Merger, certain assets previously attributed to Old
Liberty (including, among others, the shares of AT&T Common Stock
received in the merger of AT&T and Teleport Communications Group, Inc.
("Teleport") (see note 7), Old Liberty's interests in At Home
Corporation ("@Home"), the National Digital Television Center, Inc.
("NDTC") and Western Tele-Communications, Inc.) were attributed to "TCI
Group" (a group of TCI's assets, which, prior to the AT&T Merger, was
comprised primarily of TCI's domestic cable and communications
business) in exchange for approximately $5.5 billion in cash (the
"Asset Transfers"). Also, upon consummation of the AT&T Merger, through
a new tax sharing agreement between the Company and AT&T, the Company
is entitled to the benefit of approximately $2 billion in net operating
loss carryforwards available to the entities included in TCI's
consolidated income tax return as of the date of the AT&T Merger. Such
net operating loss carryforwards are subject to adjustment by the
Internal Revenue Service ("IRS") 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 Warrants") previously attributed to TCI Group were attributed to
the Company in exchange for approximately $176 million in cash. Certain
agreements entered into at the time of the AT&T Merger provide, among
other things, for preferred vendor status to the Company for digital
basic distribution on AT&T's systems of new programming services
created by the Company and for a renewal of existing affiliation
agreements. 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.
Pursuant to a proposed final judgment (the "Final Judgment") agreed to
by TCI, AT&T and the United States Department of Justice (the "DOJ") on
December 31, 1998, Liberty Media Group transferred all of its
beneficially owned securities (the "Sprint Securities") of Sprint to a
trustee (the "Trustee") prior to the AT&T Merger. The Final Judgment,
if entered by the United States District Court for the District of
Columbia, would require the Trustee, on or before May 23, 2002, to
dispose of a portion of the Sprint Securities sufficient to cause
Liberty Media Group to beneficially own no more than 10% of the
outstanding Series 1 PCS Stock of Sprint on a fully diluted basis on
such date. On or before May 23, 2004, the Trustee must divest the
remainder of the Sprint Securities beneficially owned by Liberty Media
Group.
The Final Judgment would provide that the Trustee vote the Sprint
Securities beneficially owned by Liberty Media Group in the same
proportion as other holders of Sprint's PCS Stock so long as such
securities are held by the trust. The Final Judgment would also
prohibit the acquisition by Liberty Media Group of additional Sprint
Securities, with certain exceptions, without the prior written consent
of the DOJ.
(continued)
<PAGE>
(3) Loss Per Common Share
Basic earnings or loss 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.
The basic and diluted loss attributable to Liberty Media Group common
stockholders per common share for the three and four months ended June
30, 1999 was computed by dividing the net loss attributable to Liberty
Media Group common stockholders by the weighted average number of
common shares outstanding of AT&T Liberty Media Group Tracking Stock
during each period. Potential common shares were not included in the
computations of weighted average shares outstanding because their
inclusion would be anti-dilutive.
At June 30, 1999, there were 54 million potential common shares
consisting of fixed and nonvested performance awards, stock options and
convertible securities that could potentially dilute future EPS
calculations in periods of net earnings. No material changes in the
weighted average outstanding shares or potential common shares occurred
after June 30, 1999.
<TABLE>
<CAPTION>
Three months Four months
ended ended
June 30, 1999 June 30, 1999
amounts in millions,
except per share amounts
<S> <C> <C>
Basic and diluted EPS:
Loss attributable to
common stockholders $ 543 601
============= =============
Weighted average common
shares 1,264 1,250
============= =============
Basic and diluted loss per
share attributable to
common stockholders $ 0.43 $ 0.48
============= =============
</TABLE>
(continued)
<PAGE>
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $58 million for the four month period ended
June 30, 1999, $32 million for the two month period ended February 28,
1999 and $41 million for the six months ended June 30, 1998. Cash paid
for income taxes for the four month period ended June 30, 1999, the two
month period ended February 28, 1999 and the six months ended June 30,
1998 was not material.
<TABLE>
<CAPTION>
New Liberty Old Liberty
Four months Two months Six months
ended ended ended
June 30, February 28, June 30,
1999 1999 1998
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 3 $ -- $ 15
Net liabilities assumed (2) -- (2)
Gain in connection with the issuance of shares
by attributed subsidiary -- -- (3)
------------- --------------- ---------------
Cash paid for acquisitions $ 1 $ -- $ 10
============= =============== ===============
</TABLE>
Liberty ceased to include TV Guide, Inc. ("TV Guide") in its combined
financial results and began to account for TV Guide using the equity
method of accounting, effective March 1, 1999 (see note 7). The effects
of changing the method of accounting for Liberty Media Group's
ownership interests in TV Guide from the consolidation method to the
equity method are summarized below (amounts in millions):
Assets (other than cash and cash equivalents)
reclassified to investments in affiliates $ (572)
Liabilities reclassified to investments in
affiliates 190
Minority interests in equity of subsidiaries
reclassified to investments in affiliates 63
Gain on issuance of equity by subsidiary 372
Decrease in cash and cash equivalents $ 53
===========
The following table reflects the change in cash and cash equivalents
resulting from the AT&T Merger and related restructuring transactions
(amounts in millions):
Cash and cash equivalents prior to the AT&T Merger $ 211
Cash received in the Asset Transfers, net of
cash balances transferred 5,284
Cash paid to TCI Group for GI Warrants (176)
Cash and cash equivalents subsequent to the
AT&T Merger $ 5,319
(continued)
<PAGE>
(5) Investments in Affiliates Accounted for Under the Equity Method
Liberty Media Group has various investments accounted for under the
equity method. The following table includes Liberty Media Group's
carrying amount of the more significant investments at June 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
New Liberty Old Liberty
June 30, December 31,
1999 1998
amounts in millions
<S> <C> <C>
USA Networks, Inc. ("USAI") and related investments
$ 2,594 $ 1,042
Telewest Communications plc ("Telewest")
1,933 515
Discovery Communications, Inc. ("Discovery")
3,620 49
Fox/Liberty Networks LLC ("Fox Sports") 1,393 (1)
TV Guide 1,769 --
QVC, Inc. ("QVC") 2,513 197
Flextech plc ("Flextech") 736 320
Other foreign investments (other than Telewest and
Flextech) 1,462 346
Other 755 611
----------- ----------
$ 16,775 $ 3,079
=========== ==========
</TABLE>
The following table reflects Liberty Media Group's share of earnings
(losses) of affiliates:
<TABLE>
<CAPTION>
New Liberty Old Liberty
Four months Two months Six months
ended ended ended
June 30, February 28, June 30,
1999 1999 1998
amounts in millions
<S> <C> <C> <C>
USAI and related investments $ (9) $ 10 $ 9
Telewest (97) (38) (64)
Discovery (76) (8) (18)
Fox Sports (48) (1) (77)
TV Guide (11) -- --
QVC (9) 13 21
Flextech (13) (5) (9)
Other foreign investments (56) (22) (49)
PCS Ventures -- -- (324)
Other (40) (15) (43)
---------- ---------- ----------
$ (359) (66) (554)
========== ========== ==========
</TABLE>
(continued)
<PAGE>
Summarized unaudited combined financial information for affiliates is
as follows:
<TABLE>
<CAPTION>
New Liberty Old Liberty
Four months Two months Six months
ended ended ended
June 30, February 28, June 30,
1999 1999 1998
amounts in millions
<S> <C> <C> <C>
Combined Operations
Revenue $ 4,060 $ 2,341 $ 6,383
Operating expenses (3,451) (1,894) (5,944)
Depreciation and amortization
(520) (353) (1,160)
--------- --------- ---------
Operating income (loss) 89 94 (721)
Interest expense (323) (281) (810)
Other, net (244) (127) (145)
--------- --------- ---------
Net loss $ (478) $ (314) $ (1,676)
========= ========= =========
</TABLE>
USAI owns and operates businesses in network and television production,
television broadcasting, electronic retailing, ticketing operations,
and internet services. At June 30, 1999, Liberty Media Group directly
and indirectly held 29.6 million shares of USAI's common stock. Liberty
Media Group also held shares directly in certain subsidiaries of USAI
which are exchangeable into 39.5 million shares of USAI common stock.
Liberty Media Group's direct ownership of USAI is currently restricted
by FCC regulations. The exchange of these shares can be accomplished
only if there is a change to existing regulations or if Liberty Media
Group obtains permission from the FCC. If the exchange of Liberty Media
Group's shares of such subsidiary stock, as well as certain securities
owned by Universal Studios, Inc. and certain of its affiliates, into
USAI common stock were completed at June 30, 1999, Liberty Media Group
would own 69.1 million shares or approximately 21% (on a fully-diluted
basis) of USAI common stock. USAI's common stock had a closing market
price of $40-1/8 per share on June 30, 1999. Liberty Media Group
accounts for its investments in USAI and related subsidiaries on a
combined basis under the equity method.
In February 1998, USAI paid cash and issued shares and one of it
subsidiaries issued shares in connection with the acquisition of
certain assets from Universal Studios, Inc. (the "Universal
Transaction"). Liberty Media Group recorded an increase to its
investment in USAI of $54 million and an increase to combined equity of
$33 million (after deducting a deferred income taxes of $21 million) as
a result of this share issuance. No gain was recognized in the combined
statement of operations and comprehensive earnings for the Universal
Transaction due primarily to Liberty Media Group's intention at such
time to purchase additional equity interests in USAI. In connection
with the Universal Transaction, Liberty Media Group was granted an
antidilutive right with respect to any future issuance of USAI common
stock, subject to certain limitations, that enables it to maintain its
percentage ownership interests in USAI.
(continued)
<PAGE>
Telewest currently operates and constructs cable television and
telephone systems in the UK. At June 30, 1999 Liberty Media Group
indirectly owned 463 million of the issued and outstanding Telewest
ordinary shares. The reported closing price on the London Stock
Exchange of Telewest ordinary shares was (pound)2.85 ($4.49) per share
at June 30, 1999.
Liberty Media Group and The News Corporation Limited ("News Corp.")
each held 50% of Fox Sports which operates national and regional sports
networks. Prior to the first quarter of 1998, Liberty Media Group had
no obligation, nor intention, to fund Fox Sports. During 1998, Liberty
Media Group made the determination to provide funding to Fox Sports
based on specific transactions consummated by Fox Sports. Consequently,
Liberty Media Group's share of losses of Fox Sports for the six months
ended June 30, 1998 included previously unrecognized losses of Fox
Sports of approximately $64 million. Losses for Fox Sports were not
recognized in prior periods due to the fact that Liberty Media Group's
investment in Fox Sports was less than zero.
On July 15, 1999 News Corp. acquired Liberty Media Group's 50% interest
in Fox Sports in exchange for 51.8 million News Corp. American
Depository Receipts ("ADRs") representing preferred limited voting
ordinary shares of News Corp. In a related transaction, Liberty Media
Group acquired from News Corp. 28.1 million additional ADRs
representing preferred limited voting ordinary shares of News Corp. for
approximately $695 million.
The class A common stock of TV Guide is publicly traded. At June 30,
1999, Liberty Media Group held 29 million shares of TV Guide Class A
common stock and 37 million shares of TV Guide Class B common stock.
See note 7. The TV Guide Class B common stock is convertible,
one-for-one, into TV Guide Class A common stock. The closing price for
TV Guide Class A common stock was $36-5/8 per share on June 30, 1999.
Flextech develops and sells a variety of television programming in the
UK. At June 30, 1999, Liberty Media Group indirectly owned 58 million
Flextech ordinary shares. The reported closing price on the London
Stock Exchange of the Flextech ordinary shares was (pound)10.22
($16.11) per share at June 30, 1999.
The PCS Ventures included Sprint Spectrum Holding Company, L. P. and
MinorCo, L.P. (collectively, "Sprint PCS") and PhillieCo Partnership I,
L.P. ("PhillieCo"). The partners of each of the Sprint PCS partnerships
were subsidiaries of Sprint, Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and Liberty Media Group. The partners of
PhillieCo were subsidiaries of Sprint, Cox and Liberty Media Group.
Liberty Media Group had a 30% partnership interest in each of the
Sprint PCS partnerships and a 35% partnership interest in PhillieCo.
(continued)
<PAGE>
On November 23, 1998, Liberty Media Group, Comcast, and Cox exchanged
their respective interests in Sprint PCS and PhillieCo (the "PCS
Exchange") for shares of Sprint PCS Group Stock which tracks the
performance of Sprint's newly created PCS Group (consisting initially
of the PCS Ventures and certain PCS licenses which were separately
owned by Sprint). The Sprint PCS Group Stock collectively represents an
approximate 17% voting interest in Sprint. As a result of the PCS
Exchange, Liberty Media Group holds the Sprint Securities which
consists of shares of Sprint PCS Group Stock, as well as certain
additional securities of Sprint exercisable for or convertible into
such securities, representing approximately 24% of the equity value of
Sprint attributable to its PCS Group and less than 1% of the voting
interest in Sprint. Through November 23, 1998, Liberty Media Group
accounted for its interest in the PCS Ventures using the equity method
of accounting, however, as a result of the PCS Exchange and Liberty
Media Group's less than 1% voting interest in Sprint, Liberty Media
Group no longer exercises significant influence with respect to its
investment in the PCS Ventures. Accordingly, Liberty Media Group
accounts for its investment in the Sprint PCS Group Stock as an
available-for-sale security.
The $14 billion aggregate excess of Liberty Media Group's aggregate
carrying amount in its affiliates over Liberty Media Group's
proportionate share of its affiliates' net assets is being amortized
over an estimated useful life of 20 years.
Certain of Liberty Media Group's affiliates are general partnerships
and subsidiaries of Liberty Media Group that are general partners in
such partnerships, are liable as a matter of partnership law for all
debts (other than non-recourse debts) of that partnership in the event
liabilities of that partnership were to exceed its assets.
(6) Investment in Time Warner
Liberty Media Group holds shares of a series of Time Warner's series
common stock with limited voting rights (the "TW Exchange Stock") that
are convertible into an aggregate of 114 million shares of Time Warner
common stock.
As security for borrowings under one of its credit facilities, Liberty
Media Group has pledged a portion of its TW Exchange Stock. At June 30,
1999 such pledged portion had an aggregate fair value of approximately
$3.2 billion.
On June 24, 1997 Liberty Media Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern
Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
(together with Southern, the "Southern Business") through a purchase of
assets (the "Southern Option"). Liberty Media Group received shares of
TW Exchange Stock which are convertible into 12.8 million shares of
Time Warner common stock valued at $306 million in consideration for
the grant. In September 1997, Time Warner exercised the Southern
Option. Pursuant to the Southern Option, Time Warner acquired the
Southern Business, effective January 1, 1998, for $213 million in cash.
Liberty Media Group recognized a $515 million pre-tax gain in
connection with such transactions in the first quarter of 1998.
(continued)
<PAGE>
(7) Acquisitions and Dispositions
On January 12, 1998, Liberty Media Group acquired from a minority
shareholder of TV Guide (formerly known as United Video Satellite
Group, Inc. ("UVSG")) 24.8 million shares of UVSG Class A common stock
in exchange for 12.7 million shares of TCI's then outstanding TCI
Ventures Group Series A Tracking Stock and 7.3 million shares of TCI's
then outstanding Liberty Media Group Series A Tracking Stock. The
aggregate value assigned to such shares issued was based upon the
market value of such shares at the time the transaction was announced.
As a result of such transaction Liberty Media Group increased its
ownership in the equity of UVSG to approximately 73% and the voting
power increased to 93%. In connection with the issuance of common stock
in such transaction, Liberty Media Group recorded a $346 million
increase to combined equity.
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("SNG") in exchange
for an approximate 20% interest in SNG. As a result of such
transaction, Liberty Media Group's direct and indirect (through UVSG)
ownership interest in SNG, decreased to approximately 80%. In
connection with the increase in SNG's equity, net of the dilution of
Liberty Media Group's ownership interest in SNG, that resulted from
such transaction, Liberty Media Group recognized a gain of $38 million
(before deducting deferred income tax expense of $15 million). Turner
Vision's contribution to SNG was accounted for as a purchase and the
$61 million excess of the purchase price over the fair value of the net
assets acquired was recorded as excess cost and is being amortized over
five years.
On April 22, 1998, Teleport completed a merger transaction with ACC
Corp. As a result, Liberty Media Group's interest in Teleport was
reduced to approximately 26%. In connection with the increase in
Teleport's equity, net of the dilution of Liberty Media Group's
interest in Teleport, that resulted from the merger, Liberty Media
Group recorded a non-cash gain of $201 million (before deducting
deferred income tax expense of $71 million).
On July 24, 1998, Teleport was acquired by AT&T and Liberty Media Group
received in exchange for all of its interest in Teleport, approximately
70.4 million shares of AT&T common stock (as adjusted for a 3-for-2
stock split).
(continued)
<PAGE>
On March 1, 1999, UVSG and News Corp. completed a transaction whereby
UVSG acquired News Corp.'s TV Guide properties creating a broader
platform for offering television guide services to consumers and
advertisers and UVSG was renamed TV Guide. A unit of News Corp.
received $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.
purchased 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 Media Group. As a result of these transactions, and
another transaction completed on the same date, News Corp., Liberty
Media Group and TV Guide's public stockholders own on an economic basis
approximately 44%, 44% and 12%, respectively, of TV Guide. Following
such transactions, News Corp. and Liberty Media Group each have
approximately 49% of the voting power of TV Guide's outstanding stock.
In connection with the increase in TV Guide's equity, net of the
dilution of Liberty Media Group's ownership interest in TV Guide,
Liberty Media Group recognized a gain of $372 million (before deducting
deferred income tax expense of $147 million). Upon consummation,
Liberty Media Group began accounting for its interest in TV Guide under
the equity method of accounting.
(8) Long-Term Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
New Liberty Old Liberty
June 30, December 31,
1999 1998
amounts in millions
<S> <C> <C>
Bank credit facilities $ 2,094 $ 2,029
Convertible Subordinated Debentures
-- 229
4-1/2% Convertible Subordinated Debentures
-- 345
Other 82 293
----------- -----------
$ 2,176 $ 2,896
Less current maturities 683 578
----------- -----------
Total $ 1,493 $ 2,318
=========== ===========
</TABLE>
On April 8, 1999, Liberty Media Group redeemed all of its outstanding
4-1/2% Convertible Subordinated Debentures due February 15, 2005. See
note 10.
At June 30, 1999, Liberty Media Group had approximately $876 million in
unused lines of credit under its bank credit facilities.
The bank credit facilities of Liberty Media Group generally contain
restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and include limitations on
indebtedness, liens and encumbrances, acquisitions, dispositions,
guarantees and dividends. Additionally, Liberty Media Group pays fees
ranging from .15% to .375% per annum on the average unborrowed portions
of the total amounts available for borrowings under its bank credit
facilities.
(continued)
<PAGE>
As collateral for borrowings under one of Liberty Media Group's credit
facilities, the banks lend against certain assets designated by Liberty
Media Group (the "Designated Assets"). The carrying amount of the
Designated Assets as of June 30, 1999 was $6.5 billion. Recourse to the
banks for payment of Liberty Media Group's obligations under this
facility is limited solely to the Designated Assets. Also, as security
for borrowings under one of its credit facilities, Liberty Media Group
has pledged a portion of its TW Exchange Stock. See note 6.
Certain of Liberty Media Group's bank credit facilities have credit
agreements which provide for a three month interest reserve to be held
by an administrative agent. Such interest reserves amounted to $18
million and $17 million as of June 30, 1999 and December 31, 1998,
respectively, and are included in other current assets in the
accompanying combined balance sheets.
Liberty Media Group believes that the carrying value of Liberty Media
Group's debt approximated its fair value at June 30, 1999.
On July 7, 1999, Liberty Media Group received net cash proceeds of
approximately $741 million and $494 million from the issuance of 7-7/8%
Senior Notes due 2009 (the "Senior Notes") and 8-1/2% Senior Debentures
due 2029 (the "Senior Debentures"), respectively. The Senior Notes have
an aggregate principal amount of $750 million and the Senior Debentures
have an aggregate principal amount of $500 million. Interest on the
Senior Notes and the Senior Debentures is payable on January 15 and
July 15 of each year. The proceeds were used to repay outstanding
borrowings under certain of Liberty Media Group's credit facilities,
which were subsequently canceled.
(9) Income Taxes
Subsequent to the AT&T Merger, Liberty Media Group is included in the
consolidated federal income tax return of AT&T and party to a tax
sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). The
income tax provision for Liberty Media Group is calculated based on the
increase or decrease in the tax liability of the AT&T consolidated
group resulting from the inclusion of those items in the consolidated
tax return of AT&T which are attributable to Liberty Media Group.
Under the AT&T Tax Sharing Agreement, Liberty Media Group will receive
a cash payment from AT&T in periods when it generates taxable losses
and such taxable losses are utilized by AT&T to reduce the consolidated
income tax liability. This utilization of taxable losses will be
accounted for by Liberty Media Group as a current federal intercompany
income tax benefit. To the extent such losses are not utilized by AT&T,
such amounts will be available to reduce federal taxable income
generated by Liberty Media Group in future periods, similar to a net
operating loss carryforward and will be accounted for as a deferred
federal income tax benefit.
(continued)
<PAGE>
In periods when Liberty Media Group generates federal taxable income,
AT&T has agreed to satisfy such tax liability on Liberty Media Group's
behalf up to a certain amount. The reduction of such computed tax
liabilities will be accounted for by Liberty Media Group as a credit to
combined equity. The total amount of future federal tax liabilities of
Liberty Media Group which AT&T will satisfy under the AT&T Tax Sharing
Agreement is approximately $512 million, which represents the tax
effect of the net operating loss carryforward reflected in TCI's final
federal income tax return, subject to IRS adjustments. Thereafter,
Liberty Media Group is required to make cash payments to AT&T for
federal tax liabilities of Liberty Media Group.
To the extent AT&T utilizes existing net operating losses of entities
attributed to Liberty Media Group, such amounts will be accounted for
by Liberty Media Group as a reduction of combined equity.
Liberty Media Group will generally make cash payments to AT&T related
to states where it generates taxable income and receive cash payments
from AT&T in states where it generates taxable losses.
Liberty Media Group's obligation under the 1995 TCI Tax Sharing
Agreement of approximately $139 million (subject to adjustment), which
is included in "due to related parties," shall be paid at the time, if
ever, that Liberty Media Group deconsolidates from the AT&T income tax
return. Liberty Media Group's receivable under the 1997 TCI Tax Sharing
Agreement of approximately $220 million was forgiven in the AT&T Tax
Sharing Agreement and recorded as an adjustment to combined equity by
Liberty Media Group in connection with the AT&T Merger.
(10) Combined Equity
Stock Repurchase and Issuances
On April 8, 1999, Liberty Media Group redeemed all of its outstanding
4-1/2% Convertible Subordinated Debentures due February 15, 2005. The
debentures were convertible into shares of AT&T Liberty Media Group
Class A Tracking Stock at a conversion price of $23.54, or 42.48 shares
per $1,000 principal amount. Certain holders of the debentures had
exercised their rights to convert their debentures and 14.6 million
shares of AT&T Liberty Media Group Tracking Stock were issued to such
holders. In connection with such issuance of AT&T Liberty Media Group
Tracking Stock, Liberty Media Group recorded a $354 million increase to
combined equity.
During the six months ended June 30, 1998, pursuant to a stock
repurchase program, Liberty Media Group repurchased 239,450 shares of
TCI's then outstanding TCI Ventures Group Stock and 266,783 shares of
TCI's then outstanding Liberty Media Group Stock at an aggregate cost
of $12 million.
In conjunction with a stock repurchase program or similar transaction,
the issuer may elect to sell put options on its own common stock.
Proceeds from any sales of puts with respect to TCI's then outstanding
TCI Ventures Group Tracking Stock and TCI's then outstanding Liberty
Media Group Tracking Stock have been reflected as an increase to
combined equity, and an amount equal to the maximum redemption amount
under unexpired put options with respect to such tracking stocks was
reflected as an "obligation to redeem common stock" in the accompanying
combined balance sheets.
(continued)
<PAGE>
Stock Issuances by Subsidiary
During the second quarter of 1999, TCI Music issued approximately 4.8
million shares of common stock in connection with the conversion of its
preferred stock and approximately 0.4 million shares of common stock in
connection with the exercise of certain employee stock options. As a
result, Liberty Media Group's interest in TCI Music was reduced to 86%.
In connection with the increase in TCI Music's equity, net of the
dilution of Liberty Media Group's interest in TCI Music, that resulted
from such stock issuances, Liberty Media Group recorded a $40 million
increase to combined equity.
Transactions with AT&T (formerly TCI) and Other Related Parties
Certain AT&T corporate general and administrative costs are charged to
Liberty Media Group. Included in operating expenses in the accompanying
combined statements of operations and comprehensive earnings, during
the four month period ended June 30, 1999, the two month period ended
February 28, 1999 and the six months ended June 30, 1998, Liberty Media
Group was allocated less than $1 million, $2 million and $9 million,
respectively, in corporate general and administrative costs by TCI.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming and other services to cable
distribution operators (including AT&T) and others. Charges to AT&T are
based upon customary rates charged to others. Amounts included in
revenue for services provided to AT&T were $71 million, $43 million and
$130 million for the four month period ending June 30, 1999, the two
month period ending February 28, 1999 and the six months ended June 30,
1998, respectively.
Entities included in Liberty Media Group lease satellite transponder
facilities from NDTC. In connection with the AT&T Merger, NDTC is no
longer included in the combined financial results of Liberty Media
Group. Charges by NDTC for such arrangements and other related
operating expenses for the four months ended June 30, 1999 aggregated
$10 million and are included in operating expenses in the accompanying
combined statements of operations and comprehensive earnings.
A subsidiary of Liberty Media Group issued preferred stock in
connection with a previous acquisition which was convertible at the
option of the holders into 1,084,056 of TCI's then outstanding TCI
Group Series A Common Stock. In July 1998, Liberty Media Group entered
into an equity swap transaction with a commercial bank, which provided
Liberty Media Group with the right but not the obligation to acquire
1,084,056 shares of TCI's then outstanding TCI Group Series A Stock for
approximately $45 million on or before April 19, 1999. Liberty Media
Group exercised its right under this equity swap transaction and used
the TCI Group Series A Stock to satisfy the exchange requirements of
the aforementioned preferred stock during the two months ended February
28, 1999. In connection with such transaction, Liberty Media Group
recorded an $18 million decrease to combined equity for the difference
between the exercise price of the right and the carrying amount of the
preferred stock.
(continued)
<PAGE>
Prior to the AT&T Merger, a limited liability company owned by Dr. John
C. Malone (Liberty Media Group's Chairman) acquired, from certain
subsidiaries of Liberty Media Group, for $17 million, working cattle
ranches located in Wyoming. No gain or loss was recognized on such
acquisition. The purchase price was paid by such limited liability
company in the form of a 12-month note in the amount of $17 million
having an interest rate of 7%. Such note is payable at any time without
penalty and is personally guaranteed by Dr. Malone.
In connection with the AT&T Merger, Liberty Media Group paid two
directors of Liberty Media Corporation and one other individual, all
three of whom are directors of TCI, an aggregate of $12 million for
services rendered in connection with the AT&T Merger. Such amount is
included in operating, selling, general and administrative expenses for
the two months ended February 28, 1999 in the accompanying combined
statements of operations and comprehensive earnings.
On February 9, 1998, in connection with the settlement of certain legal
proceedings relative to the Estate of Bob Magness (the "Magness
Estate"), the late founder and former Chairman of the Board of TCI, TCI
entered into a call agreement with Dr. Malone and Dr. Malone's wife
(together with Dr. Malone, the "Malones"), and a call agreement with
the Estate of Bob Magness, the Estate of Betsy Magness, Gary Magness
(individually and in certain representative capacities) and Kim Magness
(individually and in certain representative capacities) (collectively,
the "Magness Group"). Under these call agreements, each of the Magness
Group and the Malones granted to TCI the right to acquire all of the
shares of TCI's common stock owned by them ("High Voting Shares") that
entitle the holder to cast more than one vote per share (the
"High-Voting Stock") upon Dr. Malone's death or upon a contemplated
sale of the High-Voting Shares (other than a minimal amount) to third
parties. In either such event, TCI had the right to acquire such shares
at a price equal to the then market price of shares of TCI's common
stock of the corresponding series that entitled the holder to cast no
more than one vote per share (the "Low-Voting Stock"), plus a 10%
premium, or in the case of a sale, the lesser of such price and the
price offered by the third party. In addition, each call agreement
provides that if TCI were ever to be sold to a third party, then the
maximum premium that the Magness Group or the Malones would receive for
their High-Voting Shares would be the price paid for shares of the
relevant series of Low-Voting Stock by the third party, plus a 10%
premium. Each call agreement also prohibits any member of the Magness
Group or the Malones from disposing of their High-Voting Shares, except
for certain exempt transfers (such as transfers to related parties or
to the other group or public sales of up to an aggregate of 5% of their
High-Voting Shares after conversion to the respective series of
Low-Voting Stock) and except for a transfer made in compliance with
TCI's purchase right described above. TCI paid $150 million to the
Malones and $124 million to the Magness Group in consideration of their
entering into the call agreements, of which an aggregate of $140
million was allocated to and paid by Liberty Media Group.
(continued)
<PAGE>
Also in February 1998, TCI, the Magness Group and the Malones entered
into a shareholders' agreement which provides for, among other things,
certain participation rights by the Magness Group with respect to
transactions by Dr. Malone, and certain "tag-along" rights in favor of
the Magness Group and certain "drag-along" rights in favor of the
Malones, with respect to transactions in the High-Voting Stock. Such
agreement also provides that a representative of Dr. Malone and a
representative of the Magness Group will consult with each other on all
matters to be brought to a vote of TCI's shareholders, but if a mutual
agreement on how to vote cannot be reached, Dr. Malone will vote the
High-Voting Stock owned by the Magness Group pursuant to an irrevocable
proxy granted by the Magness Group.
In connection with the AT&T merger, Liberty Media Group became entitled
to exercise TCI's rights and became subject to its obligations under
the call agreement and the shareholders' agreement with respect to the
Liberty Media Group Class B tracking stock acquired by the Malones and
the Magness Group as a result of the AT&T merger. If Liberty Media
Group were to exercise its call right under the call agreement with the
Malones or the Magness Group, it may also be required to purchase
High-Voting Shares of the other group if such group exercises its
"tag-along" rights under the shareholders' agreement.
Due to Related Parties
The components of "Due to related parties" are as follows:
<TABLE>
<CAPTION>
New Liberty Old Liberty
June 30, December 31,
1999 1998
amounts in millions
<S> <C> <C>
Note payable to TCI, including
accrued interest $ -- $ 141
Intercompany account 103 556
----------- -----------
$ 103 $ 697
=========== ===========
</TABLE>
The non-interest bearing intercompany account includes certain stock
compensation allocations (in Old Liberty) and income tax allocations
that are to be settled at some future date. Stock compensation
liabilities of New Liberty are classified as a separate component in
current liabilities. All other amounts included in the intercompany
account are to be settled within thirty days following notification.
(11) Commitments and Contingencies
Encore Media Group, a wholly owned subsidiary of Liberty Media Group,
is obligated to pay fees for the rights to exhibit certain films that
are released by various producers through 2017 (the "Film Licensing
Obligations"). Based on customer levels at June 30, 1999, these
agreements require minimum payments aggregating approximately $775
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.
(continued)
<PAGE>
Flextech has undertaken to finance the working capital requirements of
a joint venture, (the "Principal Joint Venture") formed with BBC
Worldwide and is obligated to provide the Principal Joint Venture with
a primary credit facility of (pound)88 million ($139 million) and
subject to certain restrictions, a standby credit facility of (pound)30
million ($49 million). As of June 30, 1999, the Principal Joint Venture
had borrowed (pound)40 million ($63 million) under the primary credit
facility. If Flextech defaults on its funding obligation to the
Principal Joint Venture and fails to cure within 42 days after receipt
of notice from BBC Worldwide, BBC Worldwide is entitled, within the
following 90 days, to require that Liberty Media Group assume all of
Flextech's funding obligations to the Principal Joint Venture.
Liberty Media Group has guaranteed various loans, notes payable,
letters of credit and other obligations (the "Guaranteed Obligations")
of certain affiliates. At June 30, 1999, the Guaranteed Obligations
aggregated approximately $377 million. Currently, Liberty Media Group
is not certain of the likelihood of being required to perform under
such guarantees.
Liberty Media Group leases business offices, has entered into pole
rental and transponder lease agreements and uses certain equipment
under lease arrangements.
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including Liberty
Media Group's Puerto Rico subsidiary's cable television systems (the
"Puerto Rico Subsidiary"). The Puerto Rico Subsidiary's cable
television systems represent $19 million of Liberty Media Group's
revenue for the six months ended June 30, 1999.
As of June 30, 1999, approximately 93% of the Puerto Rico Subsidiary's
pre-hurricane basic customers were receiving cable television services.
Although there can be no assurance, the Puerto Rico Subsidiary
estimates that it will regain substantially all of its pre-hurricane
customer base by August 31, 1999. The loss of revenue from September
21, 1998 through June 30, 1999 was $12 million. The Puerto Rico
Subsidiary's business interruption insurance covered the first $3
million in lost revenue.
The Puerto Rico Subsidiary has also claimed coverage for business
interruption under a secondary insurance carrier. Such policy, which
covers the Puerto Rico Subsidiary's parent company's subsidiaries,
carries a deductible of $2.5 million. This insurance claim is subject
to approval by such insurance carrier and accordingly, no assurance can
be given that amounts claimed will be paid in their entirety. However,
in the event such claims are collected the overall impact in lost
revenues for the Puerto Rico Subsidiary as a result of Hurricane
Georges will not exceed $2.5 million.
Liberty Media Group has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. Although it is reasonably possible Liberty Media Group may
incur losses upon conclusion of such matters, an estimate of any loss
or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the accompanying
combined financial statements.
(continued)
<PAGE>
During the six months ended June 30, 1999, Liberty Media Group, in
conjunction with AT&T, continued its enterprise-wide, comprehensive
efforts to assess and remediate its computer systems and related
software and equipment to ensure such systems, software and equipment
recognize, process and store information in the year 2000 and
thereafter. AT&T's year 2000 remediation efforts include an assessment
of Liberty Media Group's most critical systems, equipment, and
facilities. AT&T also continued its efforts to verify the year 2000
readiness of Liberty Media Group's significant suppliers and vendors
and continued to communicate with significant business partners and
affiliates to assess such partners and affiliates' year 2000 status.
Failure to achieve year 2000 compliance by Liberty Media Group, its
significant business partners and affiliates with which it has a
relationship could negatively affect Liberty Media Group's ability to
conduct business for an extended period. There can be no assurance that
all of Liberty Media Group's computer systems and related software will
be fully year 2000 compliant; in addition, other companies on which
Liberty Media Group's computer systems and related software and
operations rely may or may not be fully compliant on a timely basis,
and any such failure could have a material adverse effect on Liberty
Media Group's financial position, results of operation or liquidity.
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
-------- ------------
June 30, December 31,
1999 1998
-------- ------------
amounts in millions
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ -- | $ 419
|
Restricted cash (note 4) 40 | 185
|
Trade and other receivables, net 490 | 653
|
Prepaid and committed program rights -- | 263
|
Investment in Liberty Media Group and related receivables (note 5) 35,349 | --
|
Investments in affiliates other than Liberty Media Group (the "Other |
Affiliates"), accounted for under the equity method (notes 6 |
and 12) 11,082 | 4,709
|
Investment in Time Warner, Inc. ("Time Warner") (note 2) 41 | 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 129 | 63
Distribution systems 5,894 | 10,107
Support equipment and buildings 1,081 | 1,769
------- | -------
7,104 | 11,939
Less accumulated depreciation 270 | 4,786
------- | -------
6,834 | 7,153
------- | -------
|
Intangible assets 22,752 | 15,782
Less accumulated amortization 186 | 2,723
------- | -------
22,566 | 13,059
------- | -------
|
Other assets, net of accumulated amortization 1,547 | 2,290
------- | -------
|
$77,949 | $41,851
======= | =======
</TABLE>
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
-------- ------------
June 30, December 31,
1999 1998
-------- ------------
amounts in millions
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Accounts payable $ 307 | $ 229
Accrued interest 231 | 253
|
Accrued programming expense 301 | 471
|
Other accrued expenses 702 | 1,128
|
Debt (notes 2 and 8): |
|
Due to unaffiliated parties 9,915 | 14,052
Notes payable to AT&T 7,286 | --
|
Deferred income taxes 4,778 | 9,749
|
Other liabilities 1,329 | 1,819
-------- | --------
|
Total liabilities 24,849 | 27,701
-------- | --------
|
Minority interests in equity of consolidated subsidiaries 2,175 | 1,460
|
Redeemable securities (note 2): |
|
Preferred stock -- | 300
Common stock -- | 22
|
Company-obligated mandatorily redeemable preferred securities of |
subsidiary trusts ("Trust Preferred Securities") holding solely |
subordinated debt securities (note 9) 1,659 | 1,500
|
Stockholders' equity (notes 2 and 10): |
|
Class A Series Preferred Stock, $.01 par value -- | --
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred |
Stock, $.01 par value -- | --
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 53,045 | 5,987
Accumulated other comprehensive earnings, net of taxes 2,011 | 3,749
Retained earnings (accumulated deficit) (1,770) | 1,124
-------- | --------
53,299 | 12,371
|
Investment in AT&T (notes 2 and 11) (4,033) | --
Treasury stock and common stock held by subsidiaries, at cost -- | (1,503)
-------- | --------
|
Total stockholders' equity 49,266 | 10,868
-------- | --------
Commitments and contingencies (notes 13 and 14) |
$ 77,949 | $ 41,851
======== | ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- -------------
Three months Three months
ended ended
June 30, 1999 June 30, 1998
------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C>
Revenue $ 1,419 | $ 1,830
|
Operating costs and expenses: |
|
Operating (note 11) 558 | 700
Selling, general and administrative 360 | 467
Year 2000 costs 25 | 1
AT&T merger and integration costs 27 | 10
Stock compensation 119 | 183
Reserve for loss arising from contingent obligation (note 13) 50 | --
Depreciation and amortization 402 | 434
------- | -------
1,541 | 1,795
------- | -------
|
Operating income (loss) (122) | 35
|
Other income (expense): |
Interest expense: |
Unaffiliated parties (154) | (251)
AT&T (notes 2 and 8) (87) | --
Interest and dividend income 3 | 18
Share of losses of Liberty Media Group (note 5) (543) | --
Share of losses of the Other Affiliates, net (note 6) (300) | (351)
Minority interests in earnings of consolidated subsidiaries, net |
(note 9) (43) | (35)
Gain on issuance of stock by equity investee -- | 201
Gains on disposition of assets, net (note 7) -- | 36
Other, net (6) | (8)
------- | -------
(1,130) | (390)
------- | -------
|
Loss before income taxes and extraordinary loss (1,252) | (355)
|
Income tax benefit 222 | 69
------- | -------
|
Loss before extraordinary loss (1,030) | (286)
|
Extraordinary loss (net of income tax benefit of |
$9 million) (note 8) -- | (13)
------- | -------
|
Net loss (1,030) | (299)
|
Dividend requirements on preferred stocks (3) | (2)
------- | -------
|
Net loss attributable to common stockholders $(1,033) | $ (301)
======= | =======
</TABLE>
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- -------------
Three months Three months
ended ended
June 30, 1999 June 30, 1998
------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C>
Net loss attributable to common stockholders:
TCI Group Series A and Series B common stock $ -- | $ (144)
Liberty Media Group Series A and Series B common stock -- | (65)
TCI Ventures Group Series A and Series B common stock -- | (92)
------- | -------
$ -- | $ (301)
======= | =======
Basic loss attributable to common stockholders per common share |
(note 3): |
|
TCI Group Series A and Series B common stock $ -- | $ (.28)
======= | =======
Liberty Media Group Series A and Series B common stock |
$ -- | $ (.18)
======= | =======
TCI Ventures Group Series A and Series B common stock $ -- | $ (.22)
======= | =======
|
Diluted loss attributable to common stockholders per common and |
potential common share (note 3): |
|
TCI Group Series A and Series B common stock $ -- | $ (.28)
======= | =======
Liberty Media Group Series A and Series B common stock $ -- | $ (.18)
======= | =======
TCI Ventures Group Series A and Series B common stock $ -- | $ (.22)
======= | =======
|
Comprehensive earnings $ 57 | $ 209
======= | =======
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- --------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue $ 1,902 | $ 1,145 $ 3,720
|
Operating costs and expenses: |
|
Operating (note 11) 746 | 467 1,448
Selling, general and administrative 483 | 322 904
Year 2000 costs 31 | 11 1
AT&T merger and integration costs 27 | 65 10
Stock compensation 74 | 366 412
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 569 | 277 868
------- | ------- -------
2,574 | 1,508 3,643
------- | ------- -------
|
Operating income (loss) (672) | (363) 77
|
Other income (expense): |
Interest expense: |
Unaffiliated parties (204) | (161) (535)
AT&T (notes 2 and 8) (106) | -- --
Interest and dividend income 6 | 13 39
Share of losses of Liberty Media Group (note 5) (601) | -- --
Share of losses of the Other Affiliates, net (note 6) (377) | (161) (589)
Minority interests in earnings of consolidated |
subsidiaries, net (note 9) (58) | (26) (65)
Gains on issuance of equity interests by subsidiaries |
(note 7) -- | 389 38
Gain on issuance of stock by equity investee -- | -- 201
Gains on disposition of assets, net (notes 6 and 7) -- | 144 1,099
Other, net 5 | 8 (18)
------- | ------- -------
(1,335) | 206 170
------- | ------- -------
|
Earnings (loss) before income taxes and |
extraordinary loss (2,007) | (157) 247
|
Income tax benefit (expense) 237 | (119) (177)
------- | ------- -------
|
Earnings (loss) before extraordinary loss (1,770) | (276) 70
|
Extraordinary loss (net of income tax benefit of $3 million |
in 1999 and $15 million in 1998, respectively) (note 8) -- | (5) (23)
------- | ------- -------
|
Net earnings (loss) (1,770) | (281) 47
|
Dividend requirements on preferred stocks (3) | (4) (13)
------- | ------- -------
|
Net earnings (loss) attributable to common |
stockholders $(1,773) | $ (285) $ 34
======= | ======= =======
</TABLE>
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- --------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Net earnings (loss) attributable to common stockholders: |
TCI Group Series A and Series B common stock $ -- | $ (226) $ 83
Liberty Media Group Series A and Series B common stock -- | (49) 238
TCI Ventures Group Series A and Series B common stock -- | (10) (287)
------- | ------- -------
$ -- | $ (285) $ 34
======= | ======= =======
Basic earnings (loss) attributable to common stockholders |
per common share (note 3): |
TCI Group Series A and Series B common stock $ -- | $ (.42) $ .16
======= | ======= =======
Liberty Media Group Series A and Series B common stock $ -- | $ (.13) $ .67
======= | ======= =======
TCI Ventures Group Series A and Series B common stock $ -- | $ (.02) $ (.68)
======= | ======= =======
|
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) $ .15
======= | ======= =======
Liberty Media Group Series A and Series B common stock $ -- | $ (.13) $ .61
======= | ======= =======
TCI Ventures Group Series A and Series B common stock $ -- | $ (.09) $ (.68)
======= | ======= =======
Comprehensive earnings $ 241 | $ 691 $ 905
======= | ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statement of Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
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
ventures, 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
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statement of Stockholders' Equity, continued
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Class B Additional comprehensive
Preferred Common paid-in earnings,
Stock Stock capital net of taxes
--------- ------- ---------- -------------
amounts in millions
<S> <C> <C> <C> <C>
New TCI
- -------
Balance at March 1, 1999 (note 2) $ -- $ 13 $ 52,142 $ --
Net loss -- -- -- --
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 (note 6) -- -- 470 --
Gain from issuance of common stock by attributed
subsidiary of Liberty Media Group -- -- 40 --
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) -- -- -- 2,054
Foreign currency translation adjustments,
net of taxes (note 5) -- -- -- (43)
-------- -------- -------- --------
Balance at June 30, 1999 $ -- $ 13 $ 53,045 $ 2,011
======== ======== ======== ========
<CAPTION>
Total
Accumulated Investment in stockholders'
deficit in AT&T equity
----------- ------------- -------------
amounts in millions
<S> <C> <C> <C>
New TCI
- -------
Balance at March 1, 1999 (note 2) $ -- $ (4,018) $ 48,137
Net loss (1,770) -- (1,770)
Payment of preferred stock dividends -- -- (10)
Issuance of AT&T Common Stock upon
conversion of notes held by the Company
(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 affiliates
(note 6) -- -- 470
Gain from issuance of common stock by attributed
subsidiary of Liberty Media Group -- -- 40
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 -- (15) (15)
Change in unrealized holding gains for
available-for-sale securities, net of
taxes (note 5) -- -- 2,054
Foreign currency translation adjustments,
net of taxes (note 5) -- -- (43)
-------- -------- --------
Balance at June 30, 1999 $ (1,770) $ (4,033) $ 49,266
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- ---------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(1,770) | $ (281) $ 47
Adjustments to reconcile net earnings (loss) to net cash |
provided by (used in) operating activities: |
Depreciation and amortization 569 | 277 868
Stock compensation 74 | 366 412
Payments of obligation relating to stock compensation -- | (294) (136)
Reserve for loss arising from contingent obligation 50 | -- --
Payment of amounts relating to contingent obligation (114) | -- --
Share of losses of Liberty Media Group 601 | -- --
Share of losses of the Other Affiliates, net 377 | 161 589
Extraordinary loss (17) | 8 38
Minority interests in earnings of consolidated |
subsidiaries, net 58 | 26 65
Gains on issuance of equity interests by subsidiaries -- | (389) (38)
Gain on issuance of stock by equity investee -- | -- (201)
Gains on disposition of assets, net -- | (144) (1,099)
Deferred income tax expense (benefit) (210) | 113 122
Write-off of in-process research and development costs 594 | -- --
Other noncash charges (credits) (29) | 1 (6)
Changes in operating assets and liabilities, net of the |
effect of acquisitions and dispositions: |
Change in receivables (38) | (66) (30)
Change in prepaids 7 | (18) (33)
Change in non-interest bearing intercompany account |
with AT&T (15) | -- --
Change in other accruals and payables (14) | 44 (46)
------- | ------- -------
|
Net cash provided by (used in) operating activities 123 | (196) 552
------- | ------- -------
Cash flows from investing activities: |
Cash paid for acquisitions (29) | (353) (72)
Capital expended for property and equipment (1,013) | (297) (560)
Effect on cash and cash equivalents of deconsolidation |
of subsidiaries (401) | (53) --
Investments in and loans to affiliates (4) | (52) (770)
Collections of loans to affiliates 161 | 709 928
Proceeds from disposition of assets 28 | 344 643
Change in restricted cash 15 | 112 (274)
Other investing activities (2) | 65 (14)
------- | ------- -------
Net cash provided by (used in) investing activities (1,245) | 475 (119)
------- | ------- -------
Cash flows from financing activities: |
Borrowings of debt 2,127 | 583 2,966
Repayments of debt (1,490) | (1,468) (2,895)
Proceeds received upon termination of equity swap facilities -- | 677 --
Prepayment penalties -- | (4) (34)
Repurchase of common stock -- | -- (13)
Repurchase of subsidiary common and preferred stock -- | (45) (7)
Payment of preferred stock dividends (10) | (4) (23)
Payment of dividends on subsidiary preferred stock and Trust |
Preferred Securities (79) | (12) (95)
Payments for call agreements -- | -- (274)
Other financing activities (1) | 8 (7)
------- | ------- -------
|
Net cash provided by (used in) financing activities 547 | (265) (382)
------- | ------- -------
|
Net change in cash and cash equivalents (575) | 14 51
Cash and cash equivalents at beginning of period 575 | 419 244
------- | ------- -------
|
Cash and cash equivalents at end of period $ -- | $ 433 $ 295
======= | ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(unaudited)
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts
of Tele-Communications, Inc. and those of all majority-owned
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.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain prior period amounts have been reclassified for comparability
with the 1999 presentation.
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)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following the AT&T Merger, the authorized capital of TCI consists of
3,552,375,096 shares, consisting of 3,550,000,000 shares of common
stock, par value $.01 per share, and 2,375,096 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). The Preferred
Stock is divided into two classes: 700,000 shares of Class A Preferred
Stock, par value $.01 per share, and 1,675,096 shares of Class B 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock, par value
$.01 per share ("Class B Preferred Stock").
(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 (as adjusted for a June 1999 two-for-one stock split) 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 (as adjusted for a June 1999 stock
split) 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 (as adjusted for a June
1999 stock split), (vi) each share of TCI Ventures Group Series B Stock
was converted into 1.04 shares of AT&T Liberty Class B Tracking Stock
(as adjusted for a June 1999 two-for-one stock split), (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 (as adjusted for a June 1999 two-for-one stock
split), (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 (as adjusted for a June 1999 two-for-one
stock split). Following the AT&T Merger, each share of 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)
<PAGE>
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 $2.0 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 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.
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.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Immediately prior to the AT&T Merger, TCI restructured its ownership of
certain of its subsidiaries (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)
<PAGE>
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):
<TABLE>
<S> <C>
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
</TABLE>
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.
The following table reflects the opening summarized balance sheet of
New TCI which includes the effects of the Restructuring, purchase
accounting adjustments resulting from the allocation of AT&T's purchase
price to acquire Old TCI and the deconsolidation of the entities
comprising Liberty Media Group following the AT&T Merger:
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
New TCI
March 1, 1999
---------------------
(amounts in millions)
<S> <C>
Assets
Cash and cash equivalents $ 575
Restricted cash 55
Receivables and prepaid assets 573
Investment in Liberty Media Group 33,728
Investment in the Other Affiliates 8,147
Property and equipment, net 6,072
Intangible assets, net 25,347
Other assets, net 2,395
---------
$ 76,892
=========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,728
Debt 16,850
Deferred income taxes 4,680
Other liabilities 1,271
---------
Total liabilities 24,529
---------
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
---------
$ 76,892
=========
</TABLE>
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):
<TABLE>
<S> <C>
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
========
</TABLE>
(continued)
<PAGE>
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. Certain of the more significant effects of purchase
accounting are described below.
The $25 billion assigned to New TCI's intangible assets, as of March 1,
1999, is primarily comprised of goodwill and is being amortized over
the estimated useful lives of such assets, primarily 40 years. 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 and 9.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following unaudited condensed results of operations for the six
months ended June 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.
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1999 1998
--------- ---------
(amounts in millions)
<S> <C> <C>
Revenue $ 2,843 $ 3,186
Net loss before extraordinary item $ (2,278) (652)
Net loss $ (2,283) (675)
</TABLE>
(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 six month periods ended
June 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)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted earnings attributable to TCI Group common
stockholders per common share for the six months ended June
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 six months ended June 30, 1998 to net earnings,
assuming conversion of TCI Group convertible securities as of
the beginning of the period, by the weighted average number of
common shares outstanding of TCI Group Stock during the
period. Shares issuable upon conversion of the Series C-TCI
Group Preferred Stock, the Series G Preferred Stock, preferred
stock of subsidiaries, convertible notes payable, and stock
options and other performance awards have been included in the
computation of weighted average shares, as illustrated below.
Shares of TCI Group Stock issuable upon exercise of certain
stock rights, and issuable upon conversion of Convertible
Preferred Stock, Series D ("Series D Preferred Stock") and
associated dividend payments for the six months ended June 30,
1998 have been excluded as adjustments in computing the
diluted earnings attributable to TCI Group common shareholders
per common share as Series D Preferred Stock is antidilutive
for the six months ended June 30, 1998. All of the outstanding
shares of Series D Preferred Stock were redeemed effective
April 1, 1998.
The diluted loss attributable to TCI Group common stockholders
per common share for the three months ended June 30, 1998 was
computed by dividing net loss attributable to TCI Group common
stockholders 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.
In connection with the March 9, 1999 AT&T Merger, TCI Group
Stock was converted into AT&T Common Stock. See note 2.
(continued)
<PAGE>
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:
<TABLE>
<CAPTION>
Old TCI
-------------------------------------------------
Two months Three months Six months
ended ended ended
February 28, 1999 June 30, 1998 June 30, 1998
----------------- ------------- -------------
amounts in millions, except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to common stockholders $(226) $(144) $ 83
===== ===== =====
Weighted average common shares 539 523 520
===== ===== =====
Basic earnings (loss) per share attributable to
common stockholders $(.42) $(.28) $ .16
===== ===== =====
Diluted EPS:
Earnings (loss) attributable to common stockholders $(226) $(144) $ 83
Add preferred dividend requirements -- -- 6
Add interest expense -- -- 1
Less fees paid on equity swap facilities (4) -- --
----- ----- -----
Adjusted earnings (loss) attributable to common
stockholders assuming conversion of preferred shares $(230) $(144) $ 90
===== ===== =====
Weighted average common shares 539 523 520
----- ----- -----
Add dilutive potential common shares:
Employee and director options and other
performance awards -- -- 9
Convertible notes payable -- -- 24
Series C-TCI Group Preferred Stock -- -- 7
Series G Preferred Stock -- -- 8
Preferred stock of subsidiaries -- -- 45
----- ----- -----
Dilutive potential common shares -- -- 93
----- ----- -----
Diluted weighted average common shares 539 523 613
===== ===== =====
Diluted earnings (loss) per share attributable to
common stockholders $(.43) $(.28) $ .15
===== ===== =====
</TABLE>
(continued)
<PAGE>
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 six month periods ended
June 30, 1998 and the diluted loss attributable to Old Liberty
Group common stockholders per common and potential common
share for the two months ended February 28, 1999, were
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. Potential common shares were not included
in the diluted computation of weighted average shares for the
two months ended February 28, 1999 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 six
months ended June 30, 1998 were computed by dividing earnings
attributable to Old Liberty Group common stockholders by the
weighted average number of common and 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, 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.
The diluted loss attributable to Old Liberty Group common
stockholders per common share for the three months ended June
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.
In connection with the AT&T Merger, Liberty Group Stock was
converted into AT&T Liberty Tracking Stock. See note 2.
(continued)
<PAGE>
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:
<TABLE>
<CAPTION>
Old TCI
-------------------------------------------------
Two months Three months Six months
ended ended ended
February 28, 1999 June 30, 1998 June 30, 1998
----------------- ------------- -------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to common stockholders $ (49) $ (65) $ 238
===== ===== =====
Weighted average common shares 367 358 356
===== ===== =====
Basic earnings (loss) per share attributable to common
stockholders $(.13) $(.18) $ .67
===== ===== =====
Diluted EPS:
Earnings (loss) attributable to common stockholders $ (49) $ (65) $ 238
===== ===== =====
Weighted average common shares 367 358 356
----- ----- -----
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 H Preferred Stock -- -- 4
----- ----- -----
Dilutive potential common shares -- -- 35
----- ----- -----
Diluted weighted average common shares 367 358 391
===== ===== =====
Diluted earnings (loss) per share attributable to common
stockholders $(.13) $(.18) $ .61
===== ===== =====
</TABLE>
(c) TCI Ventures Group Stock
------------------------
The basic loss attributable to TCI Ventures Group common
stockholders per common share for the two months ended
February 28, 1999 and the three and six month periods ended
June 30, 1998 was computed by dividing net 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 (423 million, 422 million and
421 million, respectively). Potential common shares were not
included in the diluted calculation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted loss attributable to TCI Ventures Group common
stockholders per common share for the two months ended
February 28, 1999 and the three and six month periods ended
June 30, 1998 was computed by dividing net 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. In 1999, the net loss
attributable to TCI Ventures Group common stock holders 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.
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.
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
Cash paid for interest was $105 million, $287 million and $538 million
for the four months ended June 30, 1999, the two months ended February
28, 1999 and the six months ended June 30, 1998, respectively.
Cash paid for income taxes was not material during such periods.
Significant non-cash investing and financing activities and certain
supplemental disclosures with respect to the statement of cash flows
are reflected below:
<TABLE>
<CAPTION>
New TCI Old TCI
------------- ---------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Recorded value of assets acquired $ (29) | $(353) $(729)
Net liabilities assumed -- | -- 3
Deferred tax liability recorded in acquisitions -- | -- 107
Change in minority interests in equity of |
consolidated subsidiaries -- | -- (179)
Elimination of notes receivable from affiliates -- | -- 350
Common stock issued in acquisitions -- | -- 376
----- | ----- -----
|
Cash paid for acquisitions $ (29) | $(353) $ (72)
===== | ===== =====
|
Capitalized costs of distribution agreements $ 79 | $ -- $ 83
===== | ===== =====
</TABLE>
(continued)
<PAGE>
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 (amounts in millions):
<TABLE>
<CAPTION>
Four months Two months
ended ended
June 30, 1999 February 28, 1999
------------- -----------------
<S> <C> <C>
Assets (other than cash and cash equivalents) |
reclassified to investments in affiliates $(896) | $(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 466 | 372
----- | -----
|
Decrease in cash and cash equivalents $ 401 | $ 53
===== | =====
</TABLE>
For a description of certain additional non-cash transactions, see
notes 2, 6 and 7.
The Company's restricted cash of $40 million and $185 million at June
30, 1999 and December 31, 1998, respectively, is primarily comprised of
proceeds received in connection with certain asset dispositions. Such
proceeds, which aggregated $32 million and $162 million at June 30,
1999 and December 31, 1998, respectively, are designated to be
reinvested in certain identified assets for income tax purposes. At
December 31, 1998, the Company's restricted cash also included $17
million held as collateral for interest payment obligations pursuant to
certain bank credit facilities.
(continued)
<PAGE>
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 (amounts in millions):
<TABLE>
<CAPTION>
Four months
ended
June 30, 1999
-------------
<S> <C>
Revenue $ 292
Operating costs and expenses (240)
Stock compensation (455)
Depreciation and amortization (230)
-------
Operating loss (633)
Interest expense (46)
Other, net 78
-------
Net loss $ (601)
=======
</TABLE>
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
four months ended June 30, 1999 includes changes in Liberty Media
Group's unrealized holding gains for available-for-sale securities
totaling $2,012 million, net of taxes, and Liberty Media Group's
foreign currency translation adjustments totaling $43 million, net of
taxes.
(continued)
<PAGE>
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:
<TABLE>
<CAPTION>
New TCI Old TCI
-------- ------------
June 30, December 31,
1999 1998
-------- ------------
amounts in millions
<S> <C> <C>
Cablevision Systems Corporation ("CSC") (a) $ 3,223 | $ 945
@Home (b) 3,193 | --
Lenfest Communications, Inc. ("Lenfest") 1,708 | (138)
Texas Cable Partners, L.P. 726 | 111
InterMedia Capital Partners IV, L.P.
("InterMedia IV") and InterMedia
Capital Management IV, L.P. ("ICM IV") 574 | 201
USA Networks, Inc. and related investments (c) -- | 1,042
Various foreign equity investments (c) -- | 1,492
Other 1,658 | 1,056
------- | -------
$11,082 | $ 4,709
======= | =======
</TABLE>
-----------------
(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 six months ended
June 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)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has also entered into letters of intent with CSC
which provide for the Company to acquire a cable system in
Michigan and an additional 4% of CSC's Class A common shares
and for CSC to (i) acquire cable systems serving approximately
250,000 customers in Connecticut and (ii) assume $110 million
of liabilities.
At June 30, 1999, the Company owned 48,942,172 shares of CSC
Class A common stock, which had a closing market price of
$70.00 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 has concluded that
TCI no longer holds 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
(as adjusted for a June 1999 two-for-one stock split) for all
of the outstanding common stock of Excite based on an exchange
ratio of 2.083804 shares of @Home's common stock (as adjusted
for a June 1999 two-for-one stock split) for each share of
Excite's common stock. @Home may issue up to approximately 46
million additional shares of common stock (as adjusted for a
June 1999 two-for-one stock split) 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 $466 million increase to
"Additional paid-in capital" and a $298 million increase to
"Deferred income tax liability." At June 30, 1999, the Company
owned 63,720,000 shares of @Home Class A common stock (as
adjusted for a June 1999 two-for-one stock split), which had a
closing market price of $53.94 per share on such date.
(continued)
<PAGE>
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 (as adjusted for a June 1999
two-for-one stock split). 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 June 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 $11.2
billion, of which $5.4 billion, $4.2 billion and $1.6 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:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
Combined Operations 1999 1998
------------------- ------- -------
amounts in millions
<S> <C> <C>
Revenue $ 5,443 $ 8,209
Operating expenses (4,333) (7,211)
Depreciation and amortization (1,324) (1,585)
------- -------
Operating loss (214) (587)
Interest expense (766) (1,110)
Other, net (124) (172)
------- -------
Net loss $(1,104) $(1,869)
======= =======
</TABLE>
(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
agreements are subject to completion of certain other transactions, and
regulatory and legal approvals.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On May 4, 1999, AT&T and Lenfest announced that they have signed an
agreement for AT&T to acquire the remaining 50% interest in Lenfest not
already owned by TCI. Lenfest has approximately 1.5 million customers
in the greater Philadelphia area. AT&T has agreed to a stock purchase
of the remaining ownership interest, and expects to issue shares of
AT&T Common Stock to Lenfest valued at approximately $2.2 billion,
subject to purchase price adjustments. The number of shares of AT&T
Common Stock issued to Lenfest will be based on the average price per
share of AT&T Common Stock during the sixty day period prior to the
closing date. The transaction is subject to receipt of necessary legal
and regulatory approvals. No assurance can be given that such
transaction will be consummated. See note 6.
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.
During the second quarter of 1999, the Company entered into an
agreement for the acquisition by Charter Communications, Inc.
("Charter") and TCI of certain cable television systems owned by
InterMedia IV and InterMedia Partners. Charter will pay consideration
consisting of cash and cable television systems for the systems it
acquires from InterMedia IV. TCI will acquire certain other cable
systems in a non-cash transaction. Upon the consummation of the
transactions, TCI will own all of the partnership interests in
InterMedia IV and InterMedia Partners. The transactions are subject to
various closing conditions. No assurance can be given that such
transactions will be consummated. 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 Communications
Group LLC (the "Bresnan Transaction") and its 46% interest in Falcon
Communications, L.P. (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
During the second quarter of 1999, the Company paid $40 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 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.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the two months ended February 28, 1999, the Company completed a
transaction whereby the Company contributed cable television systems to
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 the
entity, the Company's ownership interest in such majority-owned
subsidiary 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 such entity 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)
<PAGE>
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. As a result
of these transactions, and another transaction completed on the same
date, News Corp., Liberty/Ventures Group and TV Guide's public
stockholders own on an economic basis approximately 44%, 44% and 12%,
respectively, of TV Guide. Following such transactions, News Corp. and
Liberty/Ventures Group each have 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 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.
(8) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
New TCI Old TCI
-------- ------------
June 30, December 31,
1999 1998
-------- ------------
amounts in millions
<S> <C> <C>
AT&T Notes (a) $ 7,286 | $ --
Other notes payable (b) 9,602 | 9,412
Bank credit facilities (c) -- | 3,773
Commercial paper -- | 109
Convertible notes (d) -- | 40
Capital lease obligations and other debt 313 | 718
------- | -------
|
$17,201 | $14,052
======= | =======
</TABLE>
(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 (5.52% at June 30, 1999) and
are due and payable on or before March 9, 2004. Interest on
the AT&T Notes is compounded quarterly.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) 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 in 1999. Such loss
related to prepayment penalties and the retirement of deferred
loan costs.
During the six months ended June 30, 1998, the Company
redeemed certain notes payable which had an aggregate
principal balance of $299 million and fixed interest rates
ranging from 8.67% to 10.125%. In connection with such
redemptions, the Company recognized a pre-tax loss on early
extinguishment of debt of $38 million in 1998. Such loss
related to prepayment penalties amounting to $34 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.
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 (as adjusted for a June
1999 two-for-one stock split) and 3,451,897 shares of
Satellite Series A Common Stock.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $945 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 June 30, 1999, the fair value of the
Company's debt, exclusive of the AT&T Notes, was $9,584 million, as
compared to a carrying value of $9,915 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.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company may enter into Interest Rate Swaps pursuant
to which it (i) pays fixed interest rates (the "Fixed Rate Agreements")
and receives variable interest rates and (ii) pays variable interest
rates (the "Variable Rate Agreements") and receives fixed interest
rates. During the six months ended June 30, 1998, the Company's
payments pursuant to the Fixed Rate Agreements were $1 million. At
December 31, 1998, all of the Company's Fixed Rate Agreements had
expired, therefore, no such payments were made in 1999. During the four
months ended June 30, 1999, the two months ended February 28, 1999 and
the six months ended June 30, 1998, the Company's net receipts pursuant
to the Variable Rate Agreements were $9 million, $1 million and $4
million, respectively.
Information concerning the Company's Variable Rate Agreements at June
30, 1999 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to be
Expiration Interest rate Notional received (paid) upon
date to be received amount termination (a)
---------- -------------- -------- --------------------
<S> <C> <C> <C>
September 1999 6.4% $ 350 $ 2
February 2000 5.8%-6.6% 300 2
March 2000 5.8%-6.0% 675 3
September 2000 5.1% 75 (1)
March 2027 9.7% 300 9
December 2036 9.7% 200 --
------- -------
$ 1,900 $ 15
======= =======
</TABLE>
--------------------
(a) The estimated amount that the Company would receive to
terminate the agreements at June 30, 1999, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 (6.1% at June 30, 1999) and receives a variable rate
based on the Constant Maturity Treasury Index ("CMT") (5.9% at June 30,
1999) on a notional amount of $400 million through September 2000; and
pays a variable rate based on LIBOR (6.0% at June 30, 1999) and
receives a variable rate based on CMT (6.0% at June 30, 1999) on
notional amounts of $95 million through February 2000. During each of
the four months ended June 30, 1999, the two months ended February 28,
1999 and the six months ended June 30, 1998, the Company's net payments
pursuant to such agreements were $1 million. At June 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, the Company does not anticipate material
near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of June 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 $48
million, $23 million and $71 million during the four months ended June
30, 1999, the two months ended February 28, 1999 and the six months
ended June 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.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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 (before deducting deferred income
tax expense of $883 million) on such transaction during the third
quarter of 1998 based on the difference between the carrying amount of
TCI's interest in TCG and the fair value of the AT&T Common Stock
received. 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. The Company does not
anticipate that it will receive dividends on its investment in AT&T
Common Stock.
The Company's non-interest bearing intercompany account with AT&T ($15
million at June 30, 1999) is included in TCI's "Investment in AT&T" in
the accompanying consolidated balance sheet.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain entities attributed to Liberty Media Group produce and/or
distribute programming to the Company. Charges to the Company
aggregated $69 million for the four months ended June 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 four months ended June
30, 1999, such amounts aggregated $17 million and are included in
selling, general and administrative expenses in the accompanying
consolidated statements of operations.
NDTC leases transponder facilities to entities attributed to Liberty
Media Group. Charges by NDTC for such arrangements were $10 million for
the four months ended June 30, 1999 and are included in revenue in the
accompanying consolidated statements of operations.
(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, TCI's Chairman and Chief Executive Officer, acquired, from
certain subsidiaries of Old TCI, working cattle ranches located in
Wyoming in exchange for a $17 million promissory note from such limited
liability company. No gain or loss was recognized on such acquisition.
Upon payment of such note, the excess of the proceeds received over the
carrying value of the cattle ranches will be reflected as an increase
to additional paid-in-capital. 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.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As described more fully in note 7, the Company has entered into an
agreement wherein TCI will acquire all of the partnership interests in
InterMedia IV and InterMedia Partners. An individual who is a director
and executive officer of TCI, currently has a .001% special limited
partnership interest in ICM IV, which in turn has a 1.19% limited
partnership interest in InterMedia IV. Such individual's special
limited partnership interest in ICM IV was created in August 1997 in
connection with TCI's acquisition of all of the partnership interests
(other than a .002% general partnership interest and a .001% special
limited partnership interest) in ICM IV. Such individual also
indirectly owns a minimal interest in InterMedia Partners. In
connection with the proposed transaction described in note 7, it is
anticipated that such individual, by virtue of his .001% special
limited partnership interest in ICM IV, will participate in a profit
sharing mechanism of InterMedia IV and receive cash consideration based
on the valuation of InterMedia IV in the transaction described in note
7. Although the amount of such consideration is uncertain at this time,
its is expected that such consideration will be approximately $10
million. In the transaction described above, it is expected that such
individual will receive less than $50,000 for his indirect interest in
InterMedia Partners.
For additional transactions involving the Company's officers and
directors, see notes 8 and 13.
(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.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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 June 30, 1999, these
agreements require minimum payments aggregating approximately $317
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 June 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 $77 million at June 30, 1999. The Company also has agreed
to take certain steps to support debt compliance with respect to
obligations aggregating $1,690 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.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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 the second quarter of
1999, the Company contributed approximately $114 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.
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 $392
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 (the "Digital
Terminal Purchase Agreement") with GI to purchase advanced digital
set-top devices. The hardware and software incorporated into these
devices are designed and manufactured to be compatible and
interoperable with the OpenCable(TM) architecture specifications
adopted by CableLabs, the cable television industry's research and
development consortium, in November 1997. NDTC has agreed that Approved
Purchasers will purchase, in the aggregate, a minimum of 6.5 million
set-top devices during calendar years 1998, 1999 and 2000 at an average
price of $318 per set-top device. The 1998 purchase commitment of 1.5
million set-top devices was met. During the six months ended June 30,
1999, approximately 930,000 set-top devices had been purchased related
to the 1999 commitment of 1,750,000 devices. GI agreed to provide NDTC
and its Approved Purchasers the most favorable prices, terms and
conditions made available by GI to any customer purchasing advanced
digital set-top devices. In connection with NDTC's purchase commitment,
GI agreed to grant warrants to purchase its common stock proportional
to the number of devices ordered by each organization. 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, TCI is required to repay a proportional
amount of such cash to Liberty Media Group. NDTC has the right to
terminate the Digital Terminal Purchase Agreement if, among other
reasons, GI fails to meet a material milestone designated in the
Digital Terminal Purchase Agreement with respect to the development,
testing and delivery of advanced digital set-top devices.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 17, 1998, the Company acquired 21.4 million shares of common
stock of GI in exchange for (i) certain of the assets of NDTC's set-top
authorization business, (ii) the license of certain related software to
GI, (iii) a $50 million promissory note from the Company to GI, and
(iv) a nine-year revenue guarantee from the Company in favor of GI. In
connection therewith, NDTC also entered into a services agreement
pursuant to which it will provide certain postcontract services to GI's
set-top authorization business. The 21.4 million shares of GI common
stock are, in addition to other transfer restrictions, restricted as to
their sale by NDTC for a three-year period. The Company recorded its
investment in such shares at fair value which included a discount
attributable to the above-described liquidity restriction. 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 $346 million 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 $42 million present value of the
promissory note due from the Company to GI, was deferred by the
Company. A portion of such excess equal to the $160 million present
value of the annual amounts specified by the revenue guarantee is being
amortized to revenue over nine years in proportion to such annual
guaranteed amounts. The remaining $186 million excess is being
amortized to revenue on a straight-line basis over the nine-year period
that NDTC is required to perform postcontract services.
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 six months ended June 30, 1999, the Company continued its
enterprise-wide, comprehensive efforts to assess and remediate its
computer systems and related software and equipment to ensure such
systems, software and equipment recognize, process and store
information in the year 2000 and thereafter. The Company's year 2000
remediation efforts include an assessment of its most critical systems,
such as customer service and billing systems, headends and other cable
plant systems that support the Company's programming services, business
support operations, and other equipment and facilities. The Company
also continued its efforts to verify the year 2000 readiness of its
significant suppliers and vendors and continued to communicate with
significant business partners and affiliates to assess such partners
and affiliates' year 2000 status.
The Company has a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 remediation efforts. The PMO is
responsible for overseeing, coordinating and reporting on the Company's
year 2000 remediation efforts. At June 30, 1999, it was comprised of a
340-member, full-time staff, accountable to executive management of the
Company.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the six months ended June 30, 1999, the Company continued its
survey of significant third-party vendors and suppliers whose systems,
services or products are important to the Company's operations. The
year 2000 readiness of such vendors and suppliers is critical to
continued provision of the Company's cable service. The Company has
examined the public disclosures regarding compliance 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 Company is in the process of examining the
public disclosures regarding compliance 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' test data
certifications, engaging in regular conferences with vendors' year 2000
teams, or re-examining public disclosures for changes in status. For
those vendors and suppliers who do not expect to be year 2000 ready by
December 31, 1999, or are deemed to be critical to the Company's
operations, contingency planning efforts are underway to make such
changes as are required to continue critical operations.
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 four
months ended June 30, 1999 were $31 million and $10 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 four months ended June 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 $69 million, bringing the total estimated cost
associated with the Company's year 2000 remediation efforts to be not
less than $136 million (including $32 million for replacement of
noncompliant information technology systems). Also included in this
estimate is $13 million in future payments to be made pursuant to
unfulfilled executory contracts or commitments with vendors for year
2000 remediation services.
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.
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance based on a measure of Operating Cash Flow.
Operating 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.
In addition, New TCI's performance is evaluated by AT&T based on
several factors, of which the primary financial measure is earnings,
including other income, before interest expense and taxes ("EBIT").
Segment EBIT data and segment depreciation and amortization are
provided supplementally herein along with the Company's standard
measure of Operating Cash Flow. The Company's calculation of EBIT may
or may not be consistent with the calculation of EBIT by other public
companies, and EBIT should not be viewed as an alternative to generally
accepted accounting principles measures of income, as a measure of
performance, or to cash flows from operating, investing and financing
activities as a measure of liquidity.
The Company generally accounts for intersegment sales and transfers as
if the sales or transfers were to third parties, that is, at current
market prices.
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)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company utilizes the following interim financial information for
purposes of making decisions about allocating resources to a segment
and assessing a segment's performance:
<TABLE>
<CAPTION>
Domestic cable
& communications All
services other Total
---------------- -------- ---------
amounts in millions
<S> <C> <C> <C>
New TCI
--------
Three months ended
June 30, 1999:
-------------
External and
intersegment revenue $ 1,358 $ 69 $ 1,427
Intersegment revenue $ 4 $ 4 $ 8
Segment Operating Cash Flow $ 492 $ 9 $ 501
Segment depreciation and
amortization $ 267 $ 135 $ 402
Segment EBIT $ (123) $ (888) $(1,011)
Four months ended
June 30, 1999:
-------------
External and
intersegment revenue $ 1,812 $ 100 $ 1,912
Intersegment revenue $ 5 $ 5 $ 10
Segment Operating Cash Flow $ 664 $ 9 $ 673
Segment depreciation and
amortization $ 378 $ 191 $ 569
Segment EBIT $ (617) $(1,080) $(1,697)
- ------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Domestic cable Domestic
& communications programming All
services services other Total
---------------- ----------- ------- -------
<S> <C> <C> <C> <C>
Old TCI
-------
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
June 30, 1998:
-------------
External and
intersegment revenue $ 1,521 $ 165 $ 225 $ 1,911
Intersegment revenue $ (4) $ 69 $ 16 $ 81
Segment Operating Cash Flow $ 624 $ 16 $ 23 $ 663
Six months ended
June 30, 1998:
-------------
External and
intersegment revenue $ 3,116 $ 322 $ 436 $ 3,874
Intersegment revenue $ (9) $ 141 $ 22 $ 154
Segment Operating Cash Flow $ 1,279 $ 44 $ 45 $ 1,368
</TABLE>
(continued)
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of reportable segment Operating Cash Flow to the
Company's consolidated EBIT and consolidated earnings (loss) before
income tax and extraordinary loss is as follows:
<TABLE>
<CAPTION>
New TCI Old TCI
------------- --------------------------------------
Four months Two months Six months
ended ended ended
June 30, 1999 February 28, 1999 June 30, 1998
------------- ----------------- -------------
amounts in millions
<S> <C> <C> <C>
Total Operating Cash Flow for reportable segments $ 664 | $ 331 $ 1,323
Other Operating Cash Flow 9 | 25 45
Other items excluded from Operating Cash Flow: |
Year 2000 costs (31) | (11) (1)
AT&T merger and integration costs (27) | (65) (10)
Stock compensation (74) | (366) (412)
Reserve for loss arising from contingent obligation (50) | -- --
Write-off of in-process research and development costs (594) | -- --
Depreciation and amortization (569) | (277) (868)
Interest and dividend income 6 | 13 39
Share of losses of Liberty Media Group (601) | -- --
Share of losses of the Other Affiliates, net (377) | (161) (589)
Minority interest in earnings of consolidated |
subsidiaries, net (58) | (26) (65)
Gains on issuance of equity interests by subsidiaries -- | 389 38
Gain on issuance of stock by equity investee -- | -- 201
Gains on disposition of assets, net -- | 144 1,099
Other, net 5 | 8 (18)
------- | ------- -------
EBIT (1,697) | 4 782
Interest expense (310) | (161) (535)
------- | ------- -------
Earnings (loss) before income taxes and |
extraordinary loss $(2,007) | $ (157) $ 247
======= | ======= =======
</TABLE>
AT&T UNAUDITED PRO FORMA CONDENSED FINANCIALS
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The unaudited pro forma information set forth below for AT&T Corp.
(AT&T) gives effect to the merger with Tele-Communications, Inc. (TCI) (the
Merger) and certain merger-related asset transfers from TCI Liberty Media Group
and TCI Ventures Group (Liberty/Ventures Group) as if they had been completed on
January 1, 1998, subject to the assumptions and adjustments in the accompanying
notes to the pro forma financial information.
Following the Merger, the new Liberty Media Group (Liberty) tracking
stock continues to represent an interest in the same assets and businesses as
Liberty/Ventures Group tracking stocks did prior to the Merger (after giving
effect to the asset transfers). Pursuant to certain agreements, Liberty is being
managed separately from the AT&T Common Stock Group. Under Delaware corporate
law, the Liberty Board has virtually all of Liberty's corporate governance
powers and the Class B and C directors on the Liberty Board (who were designees
of TCI prior to the merger) constitute a majority of the Liberty Board. AT&T
designated one third of the directors and its rights as the sole shareholder of
the common stock of Liberty following the Merger are limited to actions which
will require shareholder approval. Those actions are limited to (a) approval of
a merger or sale of all or substantially all of the assets of Liberty Media
Corporation (b) a liquidation of the Liberty Media Corporation (c) amendment of
Liberty Media Corporation's certificate of incorporation, and (d) election of
directors. Furthermore, AT&T does not have the ability to remove the Class B and
C directors (or their designees) or have an opportunity to elect a majority of
the Liberty Board until 2006, at which time election by AT&T to the Liberty
Board of persons other than those designated by the then Class B and C directors
will constitute a "Triggering Event" which will result in all of the assets and
businesses of Liberty being transferred into an entity controlled by persons
other than AT&T unless the "Triggering Event" is waived by Liberty Management
LLC. Therefore, management has concluded that AT&T does not have a controlling
financial interest (as that term is used in Statement of Financial Accounting
Standards No. 94) in Liberty, and therefore accounts for its investment in
Liberty under the equity method. In addition, as a tracking stock all of its
earnings or losses are excluded from the earnings available to the holders of
AT&T common stock. The AT&T common stock group represents historical AT&T
together with TCI's domestic cable and telecommunications operations, TCI's
interest in At Home Corporation (Excite @Home), as well as other assets
transferred in the merger.
This pro forma financial information should be read in conjunction
with the historical financial statements of AT&T and TCI. Historical AT&T
financial statements can be found in the Company's annual report on form 10-K/A
as amended March 23, 1999 and July 12, 1999. TCI historical financial statements
can be found in TCI's form 10-K filed on March 15, 1999.
The pro forma adjustments do not reflect any operating efficiencies and
cost savings that may be achievable with respect to the combined companies. The
pro forma adjustments do not include any adjustments to historical sales for any
future price changes nor any adjustments to selling and marketing expenses for
any future operating changes.
The following information is not necessarily indicative of the
financial position or operating results that would have occurred had the Merger
and the asset transfers been consummated on January 1, 1998. The pro forma
adjustments reflecting the consummation of the Merger are based upon the
purchase method of accounting and upon the assumptions set forth in the notes
hereto, including the exchange of all the outstanding shares of TCI Group
tracking stock for an aggregate of approximately 664 million shares of AT&T
Common Stock.
<PAGE>
AT&T undertook a study to determine the fair value of certain of TCI's
assets and liabilities (as so adjusted) and has made appropriate purchase
accounting adjustments. A final allocation will be made upon completion of the
appraisal process. We do not believe the final purchase price allocation will
differ materially from what has been reflected herein.
<TABLE>
AT&T
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
For the year ended December 31, 1998
(In millions, except per share amounts)
<CAPTION>
Pro Forma
Liberty/ Other Pro Forma
Historical Historical Ventures Pro Forma AT&T with
AT&T(1) TCI(1) Adjustment(2) Adjustments TCI
<S> <C> <C> <C> <C> <C>
Revenues $ 53,223 $ 7,351 $ (1,148) $ -- $ 59,426
Operating expenses:
Access and other
interconnection 15,328 -- -- -- 15,328
Network and other
communications services 10,250 3,087 (495) -- 12,842
Depreciation and
amortization 4,629 1,735 (135) 454 (3) 6,683
Selling, general and
administrative 13,015 2,583 (943) -- 14,655
Restructuring and
other charges 2,514 5 (5) -- 2,514
Total operating
expenses 45,736 7,410 (1,578) 454 52,022
Operating income (loss) 7,487 (59) 430 (454) 7,404
Equity earnings (losses)
from Liberty Media Group -- -- 626 (741)(4) (115)
Other income (expense) 1,247 4,658 (1,631) (234)(3) 1,500
(2,540)(6)
Interest expense 427 1,061 (103) 489 (5) 1,874
Income (loss) from
continuing operations
before income taxes 8,307 3,538 (472) (4,458) 6,915
Provision (benefit) for
income taxes 3,072 1,595 (472) (948)(6) 2,949
(298)(7)
Income (loss) from
continuing operations 5,235 1,943 -- (3,212) 3,966
Dividend requirements
on preferred stocks -- (24) -- 14 (8) (10)
Income (loss) from
continuing operations
attributable to common
shareowners $ 5,235 $ 1,919 $ -- $ (3,198) $ 3,956
<PAGE>
AT&T EPS Calculation:
Income from continuing
operations attributable
to AT&T common
shareowners $ 5,235 $ 4,071
Weighted average shares
outstanding (basic) 2,676 3,146
Basic EPS $ 1.96 $ 1.29
Income from continuing
operations attributable
to AT&T common
shareowners $ 5,235 $ 4,071
Weighted average shares
outstanding (diluted) 2,700 3,251
Diluted EPS $ 1.94 $ 1.25
Liberty (9)
Basic EPS $ (0.19)
Diluted EPS $ (0.19)
<FN>
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements.
Notes to Unaudited AT&T Pro Forma Financial Statements (in millions, except per
share amounts)
1. These columns represent historical results of operations.
2. This column represents deconsolidation to the equity method of
accounting of the historical results of operations and financial
position for the interests represented by the shares of Liberty Media
Group Tracking Stock that were issued in the Merger. AT&T accounts for
Liberty Media Group under the equity method because it does not possess
a "controlling financial interest" in Liberty Media Group. Such
deconsolidated interests exclude those interests included in the asset
transfers. These columns also reflect adjustments to intergroup
eliminations as a result of certain merger-related asset transfers. In
addition, the Liberty/Ventures Group and the TCI Group exchanged
certain other assets. These other asset exchanges are immaterial and
are not reflected in this unaudited pro forma condensed statement of
income. Liberty Media Group tracking stock reflects the separate
performance of the businesses and assets attributed to Liberty Media
Group subsequent to the Merger.
3. This entry represents the amortization of goodwill resulting from the
allocation of the excess of consideration over the net assets of the
TCI Group and the assets acquired by AT&T in the asset transfers, net
of TCI's historical franchise amortization. The excess of the aggregate
purchase price of $52.155 billion over the fair value of net assets
acquired, based on this allocation, was approximately $24 billion, and
is being amortized on a straight line basis over seven to 40 years. The
amortization period of intangible assets, including the goodwill
amortized over 40 years, is based upon the expected useful life of the
franchise agreements and value related to the access to homes passed.
In addition, approximately $11 billion of goodwill related to Liberty
was recorded as part of our investment and is being amortized on a
straight-line basis over 20 years as a component of equity earnings
(losses) from Liberty. The factors considered in determining the
appropriate amortization period included the expected life of the
associated technology, legal and regulatory considerations, experience
with renewing franchises and territories, future changes in technology,
anticipated market demand and competition. $9.0 billion has been
allocated to TCI's equity investments. Such consideration is being
amortized over lives ranging from 25 to 40 years. Amounts allocated to
other identifiable intangibles were not material. AT&T will evaluate
the periods of amortization continually to determine whether later
events and circumstances warrant revised estimates of useful lives.
4. Represents purchase accounting adjustments for Liberty.
5. These entries represent the recognition of incremental interest expense
on additional borrowing of $9.5 billion to fund TCI Group's payment to
<PAGE>
Liberty Media Group in connection with the asset transfers and $4
billion of AT&T Common Stock to be repurchased by AT&T under a Board
approved share repurchase program. (The share repurchase program was
completed in March 1999.) A borrowing mix of 20% short term and 80%
long term was assumed. Interest expense was calculated using an
interest rate of 5.96% based on AT&T's incremental borrowing rate.
6. Represents certain non-recurring gains with respect to the Liberty/
Ventures Group's investments in Excite@Home and Teleport Communications
Group Inc.
7. These adjustments represent the statutory tax effect of the pro forma
adjustments.
8. Gives effect to the elimination of dividend requirements on certain TCI
Group preferred stock that was converted at the time of the Merger.
9. Liberty tracking stock split on a two-for-one basis, payable on June
11, 1999. The outstanding common shares and earnings per share amounts
in this pro forma income statement are on a pre-split basis. Pro forma
basic and diluted earnings per Liberty common share, adjusted to
reflect the stock split would be $(0.10) for the year ended December
31, 1998.
</FN>
</TABLE>
