<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: September 2, 1999
AT&T CORP.
A New York Commission File I.R.S. Employer
Corporation No. 1-1105 No.13-4924710
32 Avenue of the Americas, New York, New York 10013-3412
Telephone Number (212) 387-5400
<PAGE>
2
Form 8-K AT&T Corp.
September 2, 1999
ITEM 5 OTHER EVENTS.
a) Pro forma financial information
AT&T is filing pro forma financial information included in Exhibit 99.1 as
follows:
1. Unaudited pro forma condensed financial introductory paragraph(s).
2. Unaudited pro forma condensed Balance Sheet at June 30, 1999.
3. Unaudited pro forma condensed Income Statement for the period ended
June 30, 1999.
4. Unaudited pro forma condensed Income Statement for the year December
31, 1998.
5. Notes to unaudited pro forma condensed financial information.
b) In support of the pro forma financial information included in Exhibit 99.1,
AT&T is filing the audited financial statements as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998
of MediaOne Group, Inc., including the report of independent accountants.
Filed as Exhibit 99.2 to this 8-K is the following information:
1. Report of Independent Accountants.
2. Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.
3. Consolidated Balance Sheets at December 31, 1998 and 1997.
4. Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
5. Consolidated Statement of Shareowners' Equity for the years ended
December 31, 1998, 1997 and 1996.
6. Notes to consolidated financial statements.
Also in support of the above pro forma financial information, AT&T is
filing the MediaOne Group, Inc. unaudited consolidated financial results
for the period ended June 30, 1999. Filed as Exhibit 99.3 to this 8-K is
the following information:
1. Unaudited Consolidated Statements of Income for the Six Months Ended
June 30, 1999 and 1998.
2. Unaudited Consolidated Balance Sheets at June 30, 1999 and December
31, 1998.
3. Unaudited Consolidated Statements of Changes in Shareowners' Equity
for the Six Months Ended June 30, 1999 and June 30, 1998.
4. Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and June 30, 1998.
5. Notes to Consolidated Financial Statements.
c) On August 30, 1999, AT&T issued a press release concerning full year
financial guidance. The press release is attached as Exhibit 99.4 hereto.
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS
Exhibit 23 Consent of Arthur Andersen LLP
Exhibit 99.1 AT&T Corp. unaudited pro forma condensed financial results
at June 30, 1999, for the period ended June 30, 1999, and
for the year ended December 31, 1998.
Exhibit 99.2 MediaOne Group, Inc. financial results and other
information for the year ended December 31, 1998.
Exhibit 99.3 MediaOne Group, Inc. financial results for the period
ended June 30, 1999.
Exhibit 99.4 AT&T Corp. Press Release issued August 30, 1999.
<PAGE>
3
Form 8-K AT&T Corp.
September 2, 1999
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
September 2, 1999
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
report dated February 18, 1999 (except with respect to the matters discussed
in Note 22, as to which the date is March 22, 1999) included in MediaOne
Group, Inc.'s consolidated financial statements for the year ended December
31, 1998, filed in AT&T Corp.'s Form 8-K dated September 2, 1999.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
September 2, 1999.
<PAGE>
Exhibit 99
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma information set forth below for AT&T gives effect to
the merger as if it had been completed on January 1, 1998 for income statement
purposes, and as if it had been completed on June 30, 1999 for balance sheet
purposes, subject to the assumptions and adjustments in the accompanying notes
to the pro forma information. The unaudited pro forma condensed income
statements for the year ended December 31, 1998 and the six months ended June
30, 1999 give effect to the TCI merger as if the TCI merger had been completed
on January 1, 1998. As a result of the TCI merger, AT&T is accounting for the
Liberty Media Group under the equity method of accounting because AT&T does not
have a controlling financial interest in the Liberty Media Group.
The pro forma adjustments do not reflect any operating efficiencies and cost
savings that may be achieved with respect to the combined company. The pro forma
adjustments do not include any adjustments to historical sales for any future
price changes nor any adjustments to selling, marketing or any other expenses
for any future operating changes. Upon the closing of the merger, AT&T may incur
certain integration related expenses not reflected in the pro forma financial
statements as a result of the elimination of duplicate facilities, operational
realignment and related workforce reductions. Such costs would generally be
recognized by AT&T as a liability assumed as of the merger date resulting in
additional goodwill in accordance with Emerging Issues Task Force No. 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination
("EITF 95-3"). The assessment of integration related expenses is ongoing. The
following pro forma information is not necessarily indicative of the financial
position or operating results that would have occurred had the merger, and the
TCI merger, been consummated on the dates, or at the beginning of the periods,
for which such transactions are being given effect. The pro forma adjustments
reflecting the consummation of the merger are based upon the assumptions set
forth in the notes hereto, including the exchange of all of the outstanding
shares of MediaOne Group for an aggregate of approximately 613 million shares of
AT&T common stock not including AT&T stock options.
AT&T will account for the merger under the purchase method of accounting.
Accordingly, AT&T will establish a new basis for MediaOne Group's assets and
liabilities based upon the fair values thereof and the AT&T purchase price
including the costs of the merger. The purchase accounting adjustments made in
connection with the development of the pro forma combined financial statements
are preliminary and have been made solely for purposes of developing such pro
forma combined financial information. Such preliminary adjustments include the
allocation of consideration to certain investments of MediaOne Group identified
as "assets held for sale" by the AT&T Board based upon fair value as determined
by AT&T in conjunction with its financial advisors.
AT&T currently knows of no events other than those disclosed in these pro
forma notes that would require a material change to the preliminary purchase
price allocation. However, a final determination of required purchase accounting
adjustments will be made upon the completion of a study to be undertaken by AT&T
in conjunction with independent appraisers to determine the fair value of
certain of MediaOne Group's assets and liabilities, including intangible assets
and in-process research and development. Refer to note 3 for a discussion of the
sensitivity to earnings that may occur as a result of the final determination of
fair value. Assuming completion of the merger, the actual financial position and
results of operations will differ, perhaps significantly, from the pro forma
amounts reflected herein because of a variety of factors, including access to
additional information, changes in value not currently identified and changes in
operating results between the dates of the pro forma financial data and the date
on which the merger takes place.
<PAGE>
AT&T
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
MEDIAONE PRO FORMA
HISTORICAL GROUP AT&T WITH
HISTORICAL MEDIAONE PRO FORMA MEDIAONE
AT&T(1) GROUP(1) ADJUSTMENTS GROUP
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents..... $ 418 $ 1,032 $ (345) (3d) $ 1,105
20,429(7)
(20,429) (3a)
--
Receivables--net.............. 10,030 409 -- 10,439
Other current assets.......... 2,498 690 -- 3,188
---------- -------- ----------- ------------
Total current assets...... 12,946 2,131 (345) 14,732
Property, plant and
equipment--net.............. 34,994 4,501 -- 39,495
Licensing cost--net........... 8,315 -- -- 8,315
Franchise..................... -- -- 21,437(3n) 21,437
Goodwill...................... 28,402 11,371 24,344(3o) 52,746
(11,371) (3f)
Investment in Liberty Media
Group and related
receivables................. 35,389 -- -- 35,389
Other investments............. 16,268 9,789 (2,380) (6) 36,772
13,095(3h)
Other assets.................. 8,924 2,076 (582) (6) 8,868
(50) (5)
(1,500) (4)
Assets held for sale.......... -- 643 2,962(6) 16,127
12,522(3i)
---------- -------- ----------- ------------
Total non-current
assets.................. 132,292 28,380 58,477 219,149
Total assets.................. $145,238 $30,511 $ 58,132 $233,881
---------- -------- ----------- ------------
---------- -------- ----------- ------------
LIABILITIES:
Accounts payable.............. $ 5,738 $ 301 $ -- $ 6,039
Debt maturing within one
year........................ 7,085 1,718 20,429(7) 27,732
(1,500) (4)
Other current liabilities..... 8,754 884 -- 9,638
---------- -------- ----------- ------------
Total current
liabilities............. 21,577 2,903 18,929 43,409
Long-term debt................ 22,152 6,245 88(3j) 28,485
Deferred income taxes......... 11,039 6,954 15,007(3m) 33,000
Other long-term liabilities
and deferred credits........ 8,221 142 -- 8,363
---------- -------- ----------- ------------
Total long-term
liabilities............. 41,412 13,341 15,095 69,848
Total liabilities............. 62,989 16,244 34,024 113,257
Minority interest............. 2,407 1,107 110(3l) 3,624
Company-obligated convertible
quarterly income preferred
securities of a subsidiary
trust holding solely
subordinated debt securities
of AT&T..................... 4,695 -- -- 4,695
Subsidiary-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts holding
solely subordinated debt
securities of
subsidiaries................ 1,659 1,060 39(3k) 2,758
Preferred stock subject to
mandatory redemption........ -- 100 (50) (5) 50
(50) (3g)
50(3c)
Preferred stock............... -- 929 (929) (3e) --
Common stock.................. 3,196 10,409 (10,409) (3e) 3,809
613(3b)
Liberty Media Group Class A
tracking stock.............. 1,157 -- -- 1,157
Liberty Media Group Class B
tracking stock.............. 108 -- -- 108
Additional paid-in capital
AT&T common stock........... 27,446 -- 35,396(3b) 62,842
Liberty Media Group tracking
stock..................... 32,653 -- -- 32,653
Retained earnings
Common stock................ 7,594 371 (371) (3e) 7,594
Liberty Media Group tracking
stock..................... (601) -- (601)
Other......................... 1,935 291 (291) (3e) 1,935
---------- -------- ----------- ------------
Total shareowners'
equity.................. 73,488 12,000 24,009 109,497
--
Total liabilities and
shareowners' equity......... $145,238 $30,511 $ 58,132 $233,881
---------- -------- ----------- ------------
---------- -------- ----------- ------------
</TABLE>
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements
<PAGE>
AT&T
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
LIBERTY/ OTHER TCI PRO FORMA HISTORICAL
HISTORICAL HISTORICAL TCI VENTURES GROUP PRO FORMA AT&T WITH MEDIAONE
AT&T(1) (JAN-FEB '99)(1) ADJUSTMENT(2) ADJUSTMENTS(10) TCI GROUP(1)
----------- ----------------- --------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES....................... $ 29,787 $ 1,145 $ (204) $ -- $ 30,728 $ 1,327
OPERATING EXPENSES:
Access and other
interconnection.............. 7,400 -- -- -- 7,400 --
Network and other
communications services...... 6,646 543 (79) -- 7,110 534
Depreciation and amortization.. 3,280 277 (22) 77 3,612 578
Selling, general and
administrative............... 6,618 677 (260) -- 7,035 364
Restructuring and other
charges...................... 702 -- -- -- 702 --
----------- ------- ------ ------ ----------- -----------
Total operating expenses... 24,646 1,497 (361) 77 25,859 1,476
OPERATING INCOME (LOSS)........ 5,141 (352) 157 (77) 4,869 (149)
Equity losses from Liberty
Media Group.................. (601) -- (68) (144) (813) --
Other income (expense)--Net . 75 356 (321) (39) 71 867
Interest expense............... 649 161 (25) 82 867 199
Income (loss) from continuing
operations before income
taxes........................ 3,966 (157) (207) (342) 3,260 519
Provision (benefit) for income
taxes........................ 1,903 119 (207) (50) 1,765 806
----------- ------- ------ ------ ----------- -----------
Income (loss) from continuing
operations................... 2,063 (276) -- (292) 1,495 (287)
Dividend requirements on
preferred stocks............. -- (4) -- -- (4) (28)
----------- ------- ------ ------ ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ATTRIBUTABLE TO
COMMON SHAREOWNERS........... $ 2,063 $ (280) $ -- $ (292) $ 1,491 $ (315)
----------- ------- ------ ------ ----------- -----------
----------- ------- ------ ------ ----------- -----------
AT&T EPS CALCULATION:
Income from continuing
operations attributable to
AT&T common shareowners...... $ 2,664 $ 2,304
Weighted average shares
outstanding (basic).......... 2,970 3,153
Basic EPS...................... $ 0.90 $ 0.73
Income from continuing
operations attributable to
AT&T common shareowners...... $ 2,681 $ 2,321
Weighted average shares
outstanding (diluted)........ 3,043 3,258
Diluted EPS.................... $ 0.88 $ 0.71
Liberty Media Group EPS (14)
Basic.......................... $ (0.48) $ (0.65)
Diluted........................ $ (0.48) $ (0.65)
<CAPTION>
PRO FORMA
MEDIAONE AT&T WITH
GROUP PRO TCI AND
FORMA MEDIAONE
ADJUSTMENTS GROUP
----------- -----------
<S> <C> <C>
REVENUES....................... $ -- $ 32,055
OPERATING EXPENSES:
Access and other
interconnection.............. -- 7,400
Network and other
communications services...... -- 7,644
Depreciation and amortization.. 572 (8) 4,505
(257)(9)
Selling, general and
administrative............... -- 7,399
Restructuring and other
charges...................... -- 702
----------- -----------
Total operating expenses... 315 27,650
OPERATING INCOME (LOSS)........ (315) 4,405
Equity losses from Liberty
Media Group.................. -- (813)
Other income (expense)--Net . (303)(8) 2,360
225 (6)
1,500 (4)
Interest expense............... 526 (11) 1,436
(7)(8)
(149)(11a)
Income (loss) from continuing
operations before income
taxes........................ 737 4,516
Provision (benefit) for income
taxes........................ (203)(12) 2,368
----------- -----------
Income (loss) from continuing
operations................... 940 2,148
Dividend requirements on
preferred stocks............. 27 (13) (5)
----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ATTRIBUTABLE TO
COMMON SHAREOWNERS........... $ 967 $ 2,143
----------- -----------
----------- -----------
AT&T EPS CALCULATION:
Income from continuing
operations attributable to
AT&T common shareowners...... $ 2,956
Weighted average shares
outstanding (basic).......... 3,766
Basic EPS...................... $ 0.78
Income from continuing
operations attributable to
AT&T common shareowners...... $ 2,973
Weighted average shares
outstanding (diluted)........ 3,881
Diluted EPS.................... $ 0.77
Liberty Media Group EPS (14)
Basic.......................... $ (0.65)
Diluted........................ $ (0.65)
</TABLE>
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements
<PAGE>
AT&T
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
LIBERTY/
VENTURES OTHER TCI PRO FORMA HISTORICAL
HISTORICAL HISTORICAL GROUP PRO FORMA AT&T WITH MEDIAONE
AT&T(1) TCI(1) ADJUSTMENT(2) ADJUSTMENTS(10) TCI GROUP(1)
----------- ----------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................ $ 53,223 $ 7,351 $ (1,148) $ -- $ 59,426 $ 2,882
OPERATING EXPENSES:
Access and other interconnection.... 15,328 -- -- -- 15,328 --
Network and other communications
services........................... 10,250 3,087 (495) -- 12,842 1,013
Depreciation and amortization....... 4,629 1,735 (135) 454 6,683 1,182
Selling, general and
administrative..................... 13,015 2,583 (943) -- 14,655 926
Restructuring and other charges..... 2,514 5 (5) -- 2,514 --
----------- ----------- ------------- ------- ----------- -----------
Total operating expenses........ 45,736 7,410 (1,578) 454 52,022 3,121
OPERATING INCOME (LOSS)............. 7,487 (59) 430 (454) 7,404 (239)
Equity earnings (losses) from
Liberty Media Group................ -- -- 626 (741) (115) --
Other income (expense)--Net......... 1,247 4,658 (1,631) (234) 1,500 3,368
(2,540)
Interest expense.................... 427 1,061 (103) 489 1,874 491
Income (loss) from continuing
operations before income taxes..... 8,307 3,538 (472) (4,458) 6,915 2,638
Provision (benefit) for income
taxes.............................. 3,072 1,595 (472) (948) 2,949 1,208
(298)
----------- ----------- ------------- ------- ----------- -----------
Income (loss) from continuing
operations......................... 5,235 1,943 -- (3,212) 3,966 1,430
Dividend requirements on preferred
stocks............................. -- (24) -- 14 (10) (108)
----------- ----------- ------------- ------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ATTRIBUTABLE TO COMMON
SHAREOWNERS........................ $ 5,235 $ 1,919 $ -- $ (3,198) $ 3,956 $ 1,322
----------- ----------- ------------- ------- ----------- -----------
----------- ----------- ------------- ------- ----------- -----------
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 Media Group EPS (14)
Basic............................... $ (0.10)
Diluted............................. $ (0.10)
<CAPTION>
PRO FORMA
MEDIAONE AT&T WITH
GROUP PRO TCI AND
FORMA MEDIAONE
ADJUSTMENTS GROUP
----------- -----------
<S> <C> <C>
REVENUES............................ $ -- $ 62,308
OPERATING EXPENSES:
Access and other interconnection.... -- 15,328
Network and other communications
services........................... 13,855
Depreciation and amortization....... 1,145 (8) 8,485
(525)(9)
Selling, general and
administrative..................... 15,581
Restructuring and other charges..... -- 2,514
----------- -----------
Total operating expenses........ 620 55,763
OPERATING INCOME (LOSS)............. (620) 6,545
Equity earnings (losses) from
Liberty Media Group................ -- (115)
Other income (expense)--Net......... (606)(8) 4,603
341 (6)
Interest expense.................... 1,052 (11) 3,103
(15)(8)
(299)(11a)
Income (loss) from continuing
operations before income taxes..... (1,623) 7,930
Provision (benefit) for income
taxes.............................. (445)(12) 3,712
----------- -----------
Income (loss) from continuing
operations......................... (1,178) 4,218
Dividend requirements on preferred
stocks............................. 52 (13) (66)
----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ATTRIBUTABLE TO COMMON
SHAREOWNERS........................ $ (1,126) $ 4,152
----------- -----------
----------- -----------
AT&T EPS CALCULATION:
Income from continuing operations
attributable to AT&T common
shareowners........................ $ 4,267
Weighted average shares outstanding
(basic)............................ 3,759
Basic EPS........................... $ 1.14
Income from continuing operations
attributable to AT&T common
shareowners........................ $ 4,267
Weighted average shares outstanding
(diluted).......................... 3,874
Diluted EPS......................... $ 1.10
Liberty Media Group EPS (14)
Basic............................... $ (0.10)
Diluted............................. $ (0.10)
</TABLE>
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements
<PAGE>
NOTES TO UNAUDITED AT&T CONDENSED PRO FORMA FINANCIAL STATEMENTS
1. These columns reflect the historical results of operations and financial
position of the respective companies. AT&T's historical balance sheet as of June
30, 1999 gives effect to the TCI merger.
2. These columns reflect the deconsolidation to the equity method of
accounting of the historical results of operations for the interests represented
by the shares of Liberty Media Group tracking stock. AT&T accounts for the
Liberty Media Group under the equity method because it does not possess a
"controlling financial interest" in the Liberty Media Group.
3. This adjustment reflects the acquisition of MediaOne Group and the
excess consideration over net assets acquired (goodwill). Accordingly, the
historical shareowners' equity accounts of MediaOne Group have been eliminated
(entry 3e). For the purpose of these pro forma financial statements,
consideration has been calculated assuming a mixed cash and stock election
pursuant to the terms of the merger agreement of $30.85 in cash and 0.95 of a
share of AT&T common stock for each share of MediaOne Group common stock
outstanding at the pro forma balance sheet date. The merger agreement specifies
the aggregate number of shares of AT&T common stock to be issued in exchange for
shares of MediaOne Group common stock and equivalents. The different election
provisions are intended to satisfy individual MediaOne Group shareholder and
optionholder preferences to the extent possible. Each election may be subject to
proration depending upon the consideration other shareholders and optionholders
elect to receive in the merger. Accordingly, under the terms of the merger, the
impact of such election provisions on the total consideration exchanged will not
materially differ from the mixed cash and stock election assumed in the pro
forma financial information. If the price of AT&T common stock is less than
$57.00 per share during a prescribed measurement period shortly prior to the
closing of the merger, an additional cash payment of up to $5.42 per share of
MediaOne Group common stock will be paid by AT&T for shares of MediaOne Group
common stock subject to the mixed cash and stock election. In that event, a new
measurement date for the purpose of valuing AT&T common stock for accounting
purposes would be established. The aggregate purchase price consideration would
change $613 million (not including the additional cash payment) for each $1 per
share change in the value of the AT&T common stock based on the average price a
few days before and after the merger is consummated affecting net income by $15
million annually based on a 40-year franchise/goodwill amortization period.
For the purpose of these pro forma financial statements, the MediaOne Group
Series D preferred stock is assumed to have been converted into MediaOne Group
common stock as of the pro forma balance sheet date and exchanged pursuant to
the mixed cash and stock election. Under the terms of the merger agreement,
MediaOne Group is required to call for the conversion of the MediaOne Group
Series D preferred stock as promptly as it is permitted to do so. The AT&T
Series E preferred stock to be issued as consideration in exchange for the
MediaOne Group Series E preferred stock has been valued based on the security's
liquidation value which approximates fair value. All outstanding and unvested
options to purchase shares of MediaOne Group common stock will vest upon
completion of the merger and have been included as consideration assuming a
"standard option election" pursuant to the terms of the merger agreement. Under
the standard option election, each MediaOne Group
<PAGE>
optionholder will receive cash and a converted option to purchase AT&T common
stock, the fair value of which was determined by using the Black-Scholes
option-pricing model.
<TABLE>
<CAPTION>
<C> <S> <C>
This adjustment reflects the acquisition of MediaOne Group and the excess consideration over net assets acquired
(goodwill) (in millions, except per share amounts).
Shares of MediaOne Group common stock outstanding at 6/30/99................................ 606.2
Shares of MediaOne Group common stock to be issued upon conversion of MediaOne Group Series
D preferred stock........................................................................... 39.6
Shares of MediaOne Group common stock to be exchanged for cash and AT&T common stock........ 645.8
Cash per share.............................................................................. $ 30.85
Cash consideration for outstanding shares................................................... $ 19,923
Cash consideration for 30 million outstanding options (average cash payment per option of
$16.87)..................................................................................... 506
a. Total cash consideration.................................................................... $ 20,429
AT&T common stock exchange ratio per share.................................................. 0.95
Equivalent AT&T shares (par value $1)....................................................... 613.5
AT&T common stock share price based on the average closing price a few days before and after
the merger was agreed to and announced...................................................... $ 57.05
SUB-TOTAL................................................................................... $ 35,000
AT&T stock options resulting from the conversion of MediaOne Group stock options in the
merger...................................................................................... 28.9
Average fair value per option............................................................... $ 34.91
SUB-TOTAL................................................................................... $ 1,009
b. AT&T common stock equity consideration...................................................... $ 36,009
c. Value of AT&T Series E preferred stock to be issued in exchange for MediaOne Group Series E
preferred stock at liquidation value (994 thousand outstanding shares at $50 per share)..... 50
d. Merger costs (estimate)..................................................................... 345
TOTAL CONSIDERATION......................................................................... $ 56,833
e. Historical net book value of MediaOne Group................................................. (12,000)
Pro Forma Adjustments relating to:
f. Existing MediaOne Group intangible assets................................................... 11,371
g. Exchange of MediaOne Group Series E preferred stock......................................... (50)
h. Investments................................................................................. (13,095)
i. Assets held for sale (see note 6)........................................................... (12,522)
j. Debt........................................................................................ 88
k. Subsidiary-Obligated Mandatorily redeemable preferred securities............................ 39
l. Minority interest in Centaur Funding Corporation............................................ 110
m. Deferred tax impacts........................................................................ 15,007
n. Franchise intangible........................................................................ (21,437)
o. Preliminary goodwill........................................................................ $ 24,344
</TABLE>
Upon the closing of the merger, the total consideration will be allocated to
the specific identifiable tangible and intangible assets and liabilities of
MediaOne Group after the completion of third-party appraisals during the
allocation period specified by Statement of Financial Accounting Standards No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises. A
preliminary allocation of the purchase price has been allocated to certain
identifiable tangible assets, the franchise intangible, and liabilities of
MediaOne Group, including deferred income tax impacts, based upon information
<PAGE>
available to the management of AT&T at the date of the preparation of the
accompanying pro forma condensed financial statements. Such information includes
quoted market prices where available and estimates of fair values provided in
conjunction with AT&T's financial advisors. See note 6 for a discussion on
"asset held for sale" accounting. The final purchase accounting allocation may
also include certain in-process research and development projects and intangible
assets such as customer relationships.
Consideration allocated to in-process research and development projects
would be recorded as a charge against net income in the period the merger
occurs. Each $1 billion allocated to in-process research and development would
have the effect of increasing net income in subsequent periods by $25 million
annually by reducing franchise/goodwill amortization expense. A preliminary
estimate of in-process research and development will not be available until the
completion of an independent evaluation of each project, if any, in process as
of the merger date.
Assuming an estimated useful life of 10 years, each $1 billion of
consideration allocated to intangible assets other than franchise/goodwill would
have the effect of decreasing net income by $46 million annually ($0.01 per
share). Certain restructuring related costs may be recorded by AT&T as a
liability upon the closing of the merger in accordance with EITF 95-3 that would
result in additional goodwill to be amortized over 40 years.
4. As a result of the termination of the merger agreement between MediaOne
Group and Comcast, MediaOne Group paid Comcast a termination fee of $1.5
billion. The termination fee was loaned to MediaOne Group by AT&T and was
recorded on MediaOne Group's balance sheet as a note payable to AT&T. The note
bears interest at LIBOR plus 0.15% and matures on December 31, 2000. The note is
due on demand at any time following consummation of the merger. For the purpose
of the pro forma financial statements, the note payable to AT&T has been
eliminated in consolidation and the non-recurring charge has been eliminated
from the condensed statement of income for the six months ended June 30, 1999.
5. Gives effect to the redemption of the MediaOne Group Series C preferred
stock. The MediaOne Group Series C preferred stock is redeemable, at the option
of the holder, into common shares of Financial Security Assurance Ltd. ("FSA")
or cash. MediaOne Group holds an investment in FSA common shares and anticipates
that the MediaOne Group Series C preferred stockholders will elect FSA common
shares upon redemption. The pro forma balance sheet reflects the FSA common
shares election. Under the terms of the merger agreement, MediaOne Group is
required to call for the redemption of the MediaOne Group Series C preferred
stock as promptly as it is permitted to do so.
6. MediaOne Group and AT&T intend to divest over a period of time not
expected to exceed one year from the date of the closing of the merger (the
"HOLDING PERIOD") certain non-strategic MediaOne Group assets preliminarily
valued at $16,127 million. MediaOne Group currently accounts for the majority of
these assets as equity method investments. The carrying value of assets intended
to be sold have been reclassified to the balance sheet caption "assets held for
sale" ($2,380 million from "Other investments" and $582 million from "Other
assets"). Such assets have been valued at their expected disposition value using
valuation methodologies prevalent in the industry ($12,522 million represents
the excess of fair value over carrying value). For pro forma income statement
purposes, interest expense incurred on incremental borrowings during the holding
period has been eliminated from all periods presented. The amount of interest
eliminated is based on the ratio of the preliminary value allocated to the
assets held for sale over the total consideration to acquire MediaOne Group
multiplied by total incremental interest expense. See Note 11. In addition, the
equity earnings (losses) reported on assets held for sale have been reflected in
the value assigned to assets held for sale and eliminated, net of tax, in all
periods reported.
<PAGE>
7. Reflects additional borrowings equal to the cash consideration to be
exchanged in the merger. The incremental borrowings are assumed to be short-term
indebtedness as AT&T intends to repay the debt with the proceeds from the sale
of certain non-strategic MediaOne Group assets (see Note 6).
8. Represents the amortization of franchise and goodwill resulting from the
preliminary allocation of the excess of consideration over the net assets of
MediaOne Group. AT&T expects the amount of excess consideration allocated to
goodwill and franchise agreements upon completion of third-party appraisals to
be amortized over 40 years. The Chief Accountant's office of the SEC has
notified AT&T that as a result of competitive, technological and regulatory
forces, the SEC believes the expiration of the intangible assets associated with
the merger could occur sooner than 40 years. The SEC believes a more reasonable
amortization period to be in the range of 20 to 25 years. AT&T has considered
the views of the SEC but continues to believe that consideration allocated to
franchise agreements and goodwill has an indeterminate life that is to be
amortized over the maximum period of 40 years under current generally accepted
accounting principles. The amortization period for goodwill and franchise
intangibles of 40 years is based by AT&T upon the expected useful life of the
franchise agreements and value related to the access to homes passed that is
integral to AT&T's strategy of providing fully-integrated facilities-based
residential communications services on a national basis. The factors considered
in determining the appropriate amortization period included the expected life of
the associated technology including hybrid fiber optic cable, legal and
regulatory considerations, experience with renewing franchises and territories,
future changes in technology, anticipated market demand and competition. If the
franchise intangible and goodwill (including cable investments) were amortized
over a period of 25 years, AT&T's net income would be reduced by $635 million
annually or $0.16 per share. If the amortization period were 20 years, AT&T's
net income would be reduced by $1,040 million annually or $0.27 per share. An
allocation to customer relationships and other intangible assets with shorter
amortization periods will be made, although the amounts allocated are not
expected to be material. AT&T will evaluate the periods of amortization
continually to determine whether later events and circumstances warrant revised
estimates of useful lives. As discussed in Note 3, amounts allocated to other
assets such as intangible assets may be amortized over shorter periods resulting
in a lower net income. Any amount allocated to goodwill will also be impacted by
any in-process research and development charge that may be recorded. An
assessment of the useful lives attributable to other assets is not complete.
Consideration allocated to MediaOne Group investments other than assets held for
sale has been amortized over the estimated period of benefit preliminarily
estimated to range from seven to 30 years. Interest expense accretion on
MediaOne Group debt and other mezzanine obligations has been recognized over the
remaining life of the debt. No amortization has been recorded on the
consideration allocated to the assets held for sale.
9. Gives effect to the elimination of MediaOne Group historical
amortization expense.
10. Represents TCI merger purchase accounting adjustments. These adjustments
include the amortization of the excess of the purchase price over the net assets
acquired, incremental interest expense on additional borrowings, and the
elimination of certain non-recurring gains with respect to TCI's investment in
Teleport Communications Group Inc. ("TCG"). The TCI merger closed on March 9,
1999.
11. Represent the recognition of incremental interest expense on the
additional borrowings incurred to fund the cash consideration to be exchanged in
the merger. See note 7. Interest expense was calculated using an interest rate
of 5.15% for the year ended December 31, 1998 and for the six months ended June
30, 1999. The interest rate reflects the 90-day commercial paper rate in effect
as of July 30, 1999. An increase of 25 basis points in the assumed interest
rates would result in additional pre-tax interest expense of $51 million
annually ($37 million excluding interest attributable to debt incurred to fund
the assets held for sale). As discussed in note 6, interest expense of $299
million for 1998 and $149 million for 1999 has not been recognized as it is
attributable to the incremental
<PAGE>
borrowings incurred to fund the acquisition of the non-strategic assets that are
held for sale during the holding period (adjustment 11a).
12. Reflects the statutory tax effect of the pro forma adjustments.
13. Gives effect to the elimination of dividend requirements on MediaOne
Group Series C preferred stock and MediaOne Group Series D preferred stock
assumed to be redeemed or converted into MediaOne Group common stock at or
before the time of the merger.
14. Liberty Media Group tracking stock was split on a two-for-one basis,
payable on June 11, 1999. The Liberty Media Group earnings per share amounts in
these pro forma income statements are on a post-split basis.
<PAGE>
Exhibit 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF MEDIAONE GROUP, INC.:
We have audited the accompanying Consolidated Balance Sheets of MediaOne
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related Consolidated Statements of Operations, Shareowners'
Equity and Cash Flows for each of the three years in the period ended December
31, 1998. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and this
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MediaOne Group,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 18, 1999 (except with
respect to the matters discussed
in Note 22, as to which the date
is March 22, 1999).
<PAGE>
REPORT OF MANAGEMENT
The Consolidated Financial Statements of MediaOne Group have been prepared
in conformity with generally accepted accounting principles applied on a
consistent basis. The integrity and objectivity of information in these
financial statements, including estimates and judgments, are the responsibility
of management, as is all other financial information included in this report.
MediaOne Group maintains a system of internal accounting controls designed
to provide reasonable assurance as to the integrity and reliability of financial
statements, the safeguarding of assets and the prevention and detection of
material errors or fraudulent financial reporting. Monitoring of such systems
includes an internal audit program designed to objectively assess the
effectiveness of internal controls and recommend improvements therein.
Limitations exist in any system of internal accounting controls based upon
the recognition that the cost of the system should not exceed the benefits
derived. MediaOne Group believes that the Company's system does provide
reasonable assurance that transactions are executed in accordance with
management's general or specific authorizations and is adequate to accomplish
the stated objectives.
The independent certified public accountants, whose report is included
herein, were engaged to express an opinion on our Consolidated Financial
Statements. Their opinion is based on procedures performed in accordance with
generally accepted auditing standards, including examining, on a test basis,
evidence supporting the amounts and disclosures in the Consolidated Financial
Statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
In an attempt to assure objectivity, the financial information contained in
this report is subject to review by the Audit Committee of the Board of
Directors. The Audit Committee is composed of outside directors who meet
regularly with management, internal auditors and independent auditors to review
financial reporting matters, the scope of audit activities and the resolution of
audit findings.
Charles M. Lillis
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Richard A. Post
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
February 18, 1999
<PAGE>
MEDIAONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Sales and other revenues........................................................... $ 2,882 $ 3,847 $ 1,837
Operating expenses:
Cost of sales and other revenues................................................. 1,013 1,255 563
Selling, general and administrative.............................................. 926 1,305 844
Depreciation and amortization.................................................... 1,182 1,257 386
--------- --------- ---------
Total operating expenses....................................................... 3,121 3,817 1,793
--------- --------- ---------
Operating income (loss)............................................................ (239) 30 44
Interest expense................................................................... (491) (678) (164)
Equity losses in unconsolidated ventures........................................... (417) (909) (346)
Gain on sale of domestic wireless investment....................................... 3,869 -- --
Gains on sales of investments...................................................... 70 421 --
Loss on PrimeStar investment....................................................... (163) -- --
Guaranteed minority interest expense............................................... (74) (87) (55)
Other income (expense)--net........................................................ 83 16 (16)
--------- --------- ---------
Income (loss) from continuing operations before income taxes....................... 2,638 (1,207) (537)
(Provision) benefit for income taxes............................................... (1,208) 380 180
--------- --------- ---------
Income (loss) from continuing operations........................................... 1,430 (827) (357)
Income from discontinued operations--net of tax: (See Note 24)
Results of operations............................................................ 747 1,524 1,535
Gain on Separation............................................................... 24,461 -- --
--------- --------- ---------
Income before extraordinary item................................................... 26,638 697 1,178
Extraordinary item--early extinguishment of debt--net of tax....................... (333) -- --
--------- --------- ---------
NET INCOME......................................................................... $ 26,305 $ 697 $ 1,178
--------- --------- ---------
--------- --------- ---------
Preferred stock dividends and accretion............................................ (55) (52) (9)
Loss on redemption of Preferred Securities......................................... (53) -- --
--------- --------- ---------
EARNINGS AVAILABLE FOR COMMON STOCK(1)............................................. $ 26,197 $ 645 $ 1,169
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) The Company distributed $25,345 as a dividend to New U S WEST stockholders
upon the Separation representing the fair value of the businesses comprising
New U S WEST.
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MEDIAONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS
<S> <C> <C> <C>
MEDIAONE GROUP STOCK(1)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations................................... $ 2.18 $ (1.45) $ (0.74)
Income from discontinued operations(2)..................................... 0.26 0.57 0.58
Gain on Separation......................................................... 40.25 -- --
Extraordinary item--early extinguishment of debt........................... (0.55) -- --
---------- ---------- ----------
Basic earnings (loss) per common share....................................... $ 42.14 $ (0.88) $ (0.16)
---------- ---------- ----------
---------- ---------- ----------
BASIC AVERAGE COMMON SHARES OUTSTANDING...................................... 607,648 606,749 491,924
---------- ---------- ----------
---------- ---------- ----------
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations................................... $ 2.10 $ (1.45) $ (0.74)
Income from discontinued operations(2)..................................... 0.24 0.57 0.58
Gain on Separation......................................................... 37.46 -- --
Extraordinary item--early extinguishment of debt........................... (0.51) -- --
---------- ---------- ----------
Diluted earnings (loss) per common share..................................... $ 39.29 $ (0.88) $ (0.16)
---------- ---------- ----------
---------- ---------- ----------
DILUTED AVERAGE COMMON SHARES OUTSTANDING.................................... 652,955 606,749 491,924
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) For additional earnings per share information of MediaOne Group Stock and
earnings per share information of Communications Stock, see Note
17--Earnings Per Share--to the Consolidated Financial Statements.
(2) Amounts represent the operations of U S WEST Dex, Inc., which were
discontinued as of June 12, 1998.
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MEDIAONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 415 $ 184
Accounts and notes receivable, less allowance for credit losses of $31 and $64,
respectively.............................................................................. 255 604
Income tax receivable....................................................................... 375 --
Current portion of deferred tax asset....................................................... 74 102
Prepaid and other........................................................................... 33 77
Marketable securities....................................................................... 48 --
Net investment in assets of discontinued operations......................................... -- 4,367
--------- ---------
Total current assets.......................................................................... 1,200 5,334
Property, plant and equipment-net............................................................. 4,069 4,272
Investment in AirTouch Communications......................................................... 5,919 --
Investment in Time Warner Entertainment....................................................... 2,442 2,486
Net investment in international ventures...................................................... 1,344 742
Net investment in assets held for sale........................................................ -- 419
Intangible assets-net......................................................................... 11,647 12,597
Other assets.................................................................................. 1,571 933
--------- ---------
Total assets.................................................................................. $ 28,192 $ 26,783
--------- ---------
--------- ---------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt............................................................................. $ 569 $ 735
Accounts payable............................................................................ 332 395
Employee compensation....................................................................... 80 109
Deferred revenue and customer deposits...................................................... 87 108
Other....................................................................................... 546 841
--------- ---------
Total current liabilities..................................................................... 1,614 2,188
Long-term debt................................................................................ 4,853 8,228
Deferred income taxes......................................................................... 6,035 3,276
Deferred credits and other.................................................................... 641 587
Commitments and contingencies.................................................................
Minority interest in Centaur Funding.......................................................... 1,099 --
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures........................................................ 1,061 1,080
Preferred stock subject to mandatory redemption............................................... 100 100
Shareowners' equity:
Series D Preferred Stock--$1.00 per share par value, 20,000,000 shares authorized,
19,999,478 shares issued and outstanding.................................................. 927 923
Common shares--............................................................................. 10,324 10,876
MediaOne Group Stock--$0.01 per share par value, 2,000,000,000 shares authorized,
630,915,792 and 626,565,410 issued, and 603,475,920 and 607,807,934 outstanding,
respectively.............................................................................
Communications Stock--$0.01 per share par value, 2,000,000,000 shares authorized,
484,522,015 issued and 484,515,415 outstanding in 1997...................................
Retained earnings (deficit)................................................................. 669 (359)
LESOP guarantee............................................................................. -- (46)
Accumulated other comprehensive income (loss)............................................... 869 (70)
--------- ---------
Total shareowners' equity..................................................................... 12,789 11,324
--------- ---------
Total liabilities and shareowners' equity..................................................... $ 28,192 $ 26,783
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MEDIAONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................... $ 26,305 $ 697 $ 1,178
Adjustments to net income:
Discontinued operations............................................................ (747) (1,524) (1,535)
Gain on Separation................................................................. (24,461) -- --
Extraordinary loss on debt extinguishment.......................................... 333 -- --
Depreciation and amortization...................................................... 1,182 1,257 386
Equity losses in unconsolidated ventures........................................... 417 909 346
Distribution from unconsolidated ventures.......................................... 51 9 14
Gain on sale of domestic wireless investment....................................... (3,869) -- --
Gains on sales of investments...................................................... (70) (421) --
Loss on PrimeStar investment....................................................... 163 -- --
Deferred income taxes and amortization of investment tax credits................... 1,579 (149) (68)
Provision for uncollectibles....................................................... 42 74 44
Separation costs paid................................................................ (140) -- --
Changes in operating assets and liabilities:
Accounts and notes receivable...................................................... 142 (163) (83)
Prepaid and other current assets................................................... (22) (44) 14
Accounts payable and accrued liabilities........................................... (304) 239 114
Other-net............................................................................ (37) 111 21
--------- --------- ---------
Cash provided by operating activities................................................ 564 995 431
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment....................................... (1,726) (1,522) (627)
Payment to Continental Cablevision shareowners....................................... -- (1,150) --
Investments in international ventures................................................ (583) (334) (257)
Investments in domestic ventures..................................................... (108) (249) (164)
Purchase of miscellaneous assets..................................................... (92) (25) --
Proceeds from sales of investments................................................... 241 1,827 28
Cash from net investment in assets held for sale..................................... 31 231 213
Other-net............................................................................ (164) -- --
--------- --------- ---------
Cash used for investing activities................................................... (2,401) (1,222) (807)
--------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt.................................... 728 (3,556) 3,829
Repayments of long-term debt......................................................... (5,447) (379) (4,217)
Repayments of Preferred Securities................................................... (582) -- --
Proceeds from issuance of long-term debt-net......................................... 1,642 4,123 360
Proceeds from issuance of Preferred Securities-net................................... 484 -- 465
Proceeds from issuance of common stock............................................... 144 106 136
Proceeds from issuance of Centaur Funding Preference Shares-net...................... 1,099 -- --
Purchases of treasury stock.......................................................... (383) (53) (297)
Dividends paid on common stock....................................................... (519) (992) (939)
Dividends paid on preferred stock.................................................... (51) (50) (9)
--------- --------- ---------
Cash used for financing activities................................................... (2,885) (801) (672)
--------- --------- ---------
Cash provided by discontinued operations............................................. 4,953 1,091 1,149
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase........................................................................... 231 63 101
Beginning balance.................................................................. 184 121 20
--------- --------- ---------
Ending balance..................................................................... $ 415 $ 184 $ 121
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MEDIAONE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME/(LOSS)
-------------
PREFERRED COMMON RETAINED FOREIGN
STOCK STOCK EARNINGS LESOP CURRENCY
AMOUNT AMOUNT (DEFICIT) GUARANTEE TRANSLATION
----------- ----------- --------- ----------- -------------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995......................... $ 8,228 $ (121) $ (127) $ (38)
Issuance of Communications Stock.................. 216
Issuance of MediaOne Group Stock for Continental
Acquisition..................................... 2,590
Other issuances of MediaOne Group Stock........... 38
Issuance of Series D Preferred Stock.............. $ 920
Purchase of treasury stock........................ (297)
Common dividends declared ($2.14 per
Communications share)........................... (1,024)
Preferred dividends............................... (9)
Other............................................. (34) (7) 36
Comprehensive Income:
Net income...................................... 1,178
Market value adjustments for debt and equity
securities, net...............................
Foreign currency translation.................... (1)
Other comprehensive income, net...............
Total comprehensive income........................
----- ----------- --------- ----- ---
BALANCE DECEMBER 31, 1996......................... 920 10,741 17 (91) (39)
Issuance of Communications Stock.................. 138
Issuance of MediaOne Group Stock.................. 40
Purchase of treasury stock........................ (53)
Common dividends declared ($2.14 per
Communications share)........................... (1,034)
Preferred dividends............................... 3 (52)
Other............................................. 10 13 45
Comprehensive Income:
Net income...................................... 697
Market value adjustments for debt and equity
securities, net...............................
Foreign currency translation.................... (56)
Other comprehensive income, net...............
Total comprehensive income........................
----- ----------- --------- ----- ---
BALANCE DECEMBER 31, 1997......................... 923 10,876 (359) (46) (95)
Issuance of Communications Stock.................. 24
Distribution of New U S WEST...................... (421) (24,924)
Issuance of MediaOne Group Stock.................. 81
Purchase of treasury stock........................ (383)
Common dividends declared ($0.535 per
Communications share)........................... (260)
Preferred dividends and accretion................. 4 (55)
Loss on redemption of Preferred Securities........ (53)
Other............................................. 147 15 46
Comprehensive Income:
Net income...................................... 26,305
Market value adjustments for debt and equity
securities and Exchangeable Notes, net........
Foreign currency translation.................... (4)
Other comprehensive income, net...............
Total comprehensive income........................
----- ----------- --------- ----- ---
BALANCE DECEMBER 31, 1998......................... $ 927 $ 10,324 $ 669 $ -- $ (99)
----- ----------- --------- ----- ---
----- ----------- --------- ----- ---
<CAPTION>
UNREALIZED
GAIN/(LOSS) ON
DEBT AND EQUITY COMPREHENSIVE
SECURITIES TOTAL INCOME
----------------- --------- --------------
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1995......................... $ 6 $ (32)
Issuance of Communications Stock..................
Issuance of MediaOne Group Stock for Continental
Acquisition.....................................
Other issuances of MediaOne Group Stock...........
Issuance of Series D Preferred Stock..............
Purchase of treasury stock........................
Common dividends declared ($2.14 per
Communications share)...........................
Preferred dividends...............................
Other.............................................
Comprehensive Income:
Net income...................................... $ 1,178
Market value adjustments for debt and equity
securities, net............................... (5) (5)
Foreign currency translation.................... (1)
---------
Other comprehensive income, net............... (6) (6)
-------
Total comprehensive income........................ $ 1,172
----- --------- -------
-------
BALANCE DECEMBER 31, 1996......................... 1 (38)
Issuance of Communications Stock..................
Issuance of MediaOne Group Stock..................
Purchase of treasury stock........................
Common dividends declared ($2.14 per
Communications share)...........................
Preferred dividends...............................
Other.............................................
Comprehensive Income:
Net income...................................... 697
Market value adjustments for debt and equity
securities, net............................... 24 24
Foreign currency translation.................... (56)
---------
Other comprehensive income, net............... (32) (32)
-------
Total comprehensive income........................ $ 665
----- --------- -------
-------
BALANCE DECEMBER 31, 1997......................... 25 (70)
Issuance of Communications Stock..................
Distribution of New U S WEST......................
Issuance of MediaOne Group Stock..................
Purchase of treasury stock........................
Common dividends declared ($0.535 per
Communications share)...........................
Preferred dividends and accretion.................
Loss on redemption of Preferred Securities........
Other.............................................
Comprehensive Income:
Net income...................................... 26,305
Market value adjustments for debt and equity
securities and Exchangeable Notes, net........ 943 943
Foreign currency translation.................... (4)
---------
Other comprehensive income, net............... 939 939
-------
Total comprehensive income........................ $ 27,244
----- --------- -------
-------
BALANCE DECEMBER 31, 1998......................... $ 968 $ 869
----- ---------
----- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: THE SEPARATION
Prior to June 12, 1998, MediaOne Group, Inc. ("MediaOne Group" or the
"Company") was known as "U S WEST, Inc." ("Old U S WEST"). On June 12, 1998, Old
U S WEST separated its businesses into two independent public companies (the
"Separation"). Until the Separation, Old U S WEST conducted its businesses
through two groups: U S WEST Media Group (the "Media Group") and U S WEST
Communications Group (the "Communications Group"). Upon Separation, Old U S WEST
was renamed "MediaOne Group, Inc." and retained the multimedia businesses of
Media Group, except for U S WEST Dex, Inc. ("Dex"), the domestic directory
business. The telecommunications businesses of the Communications Group became
an independent public company and retained the "U S WEST, Inc." name ("New U S
WEST"). In addition, Dex was aligned with New U S WEST (the "Dex Alignment").
The Separation was consummated pursuant to the terms of a separation
agreement between MediaOne Group and New U S WEST (the "Separation Agreement").
The Company accounted for the distribution of New U S WEST stock to the
Communications Group stockholders, and to the Media Group stockholders for the
Dex Alignment, as a discontinuance of the businesses comprising New U S WEST. As
a result, certain financial information of Old U S WEST has been restated to
give effect to the classification of New U S WEST as a discontinued operation.
See Note 24--Discontinued Operations--to the Consolidated Financial Statements.
Prior to the Separation, Old U S WEST had outstanding two separate classes
of common stock which reflected the performance of its two groups. The
performance of Media Group was reflected by the U S WEST Media Group common
stock (the "Media Stock") and the performance of the Communications Group was
reflected by the U S WEST Communications Group common stock (the "Communications
Stock"). Upon Separation, and in accordance with the Separation Agreement, each
outstanding share of Media Stock remains outstanding and represents one share of
MediaOne Group common stock ("MediaOne Group Stock"). Each issued and
outstanding share of Communications Stock was redeemed for one share of New U S
WEST common stock. See Note 16--Shareowners' Equity--to the Consolidated
Financial Statements.
In connection with the Dex Alignment, (i) each holder of Media Stock
received as a dividend .02731 shares of New U S WEST common stock for each share
of Media Stock held (the "Dex Dividend"), and (ii) $3.9 billion of Old U S WEST
debt was refinanced by New U S WEST.
In connection with the Separation, MediaOne Group refinanced substantially
all of the indebtedness issued or guaranteed by Old U S WEST through a
combination of tender offers, prepayments and consent solicitations (the
"Refinancing"). See Note 10--Debt--to the Consolidated Financial Statements.
NOTE 2: BUSINESS OVERVIEW
MediaOne Group is a diversified global broadband communications company, and
the third largest cable television system operator in the United States with
large clusters in Atlanta, Massachusetts, California, Florida, Detroit, and
Minneapolis/St. Paul. The Company has operations and investments in two
principal areas: (1) domestic broadband communications, and (2) international
broadband and wireless communications. Among its investments, MediaOne Group
owns an investment in Time Warner
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: BUSINESS OVERVIEW (CONTINUED)
Entertainment Company, L.P. ("TWE" or "Time Warner Entertainment"), which
provides cable programming, filmed entertainment and broadband communications
services, and is the second largest cable television system operator in the
United States. The Company also owns an investment in Telewest Communications
plc ("Telewest"), the largest provider of residential cable, telephone and
Internet access services in the United Kingdom.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The Consolidated Financial Statements include the
accounts of the Company and its majority-owned subsidiaries. Effective on
December 31, 1998, the Consolidated Balance Sheet includes the accounts of the
capital assets segment. Prior to this time, the capital assets segment had been
reported as "net investment in assets held for sale." See Note 23--Net
Investment In Assets Held For Sale--to the Consolidated Financial Statements.
All significant intercompany amounts and transactions within continuing
operations have been eliminated. Investments in less than majority-owned
ventures are generally accounted for using the equity method.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles ("GAAP") requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment, including construction materials, is carried at cost less accumulated
depreciation. Additions, replacements and substantial betterments are
capitalized. Costs for normal repair and maintenance of property, plant and
equipment are expensed as incurred.
MediaOne of Delaware, Inc. ("MediaOne"), the domestic cable and broadband
subsidiary of the Company, provides for depreciation of certain property, plant
and equipment using various straight-line group methods and remaining economic
lives. When depreciable property, plant and equipment accounted for on the group
methods is retired or sold, the original cost less the net salvage value is
generally charged to accumulated depreciation. The Company's remaining assets
are depreciated using the straight-line method. Gains or losses on disposal are
included in income.
The Company depreciates buildings between 10 to 35 years, cable distribution
systems between 3 to 15 years, and general purpose computers and other between 3
to 20 years.
Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and reflected as a reduction
of interest expense. Amounts capitalized were $19, $36 and $38 for the years
ended 1998, 1997 and 1996, respectively.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTER SOFTWARE. MediaOne capitalizes computer software, whether
purchased or developed internally. Capitalized software costs are amortized over
periods ranging up to 5 years. MediaOne Group expenses all other computer
software costs.
Capitalized computer software of $89 and $24 at December 31, 1998 and 1997,
respectively, is recorded in property, plant and equipment. MediaOne amortized
capitalized computer software costs of $13, $10 and $1 in 1998, 1997 and 1996,
respectively.
INTANGIBLE ASSETS. Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their net tangible assets. The costs of
identified intangible assets and goodwill are amortized by the straight-line
method over periods ranging from 5 to 25 years. These assets are evaluated for
impairment with other related assets, using the methodology as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Debt and marketable equity
securities are classified as available for sale and are carried at fair market
value with unrealized gains and losses included in equity as a component of
other comprehensive income.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of international
subsidiaries and investments are translated at year-end exchange rates, and
income statement items are translated at average exchange rates for the year.
Resulting translation adjustments are included in equity as a component of other
comprehensive income. Gains and losses resulting from foreign currency
transactions are included in income.
FINANCIAL INSTRUMENTS. Synthetic instrument accounting is used for interest
rate swaps if the index, maturity, and amount of the instrument match the terms
of the underlying debt. Net interest accrued is recognized over the life of the
instruments as an adjustment to interest expense and is a component of cash
provided by operating activities. Any gain or loss on the termination of an
instrument that qualifies for synthetic instrument accounting would be deferred
and amortized over the remaining life of the original instrument.
Deferral accounting is used for foreign currency forward and purchased
option contracts which qualify for and are designated as hedges of firm equity
investment commitments and for forward and purchased option contracts which
qualify as hedges of future debt issues or investments in debt and equity
securities. To qualify for deferral accounting, the contracts must have a high
inverse correlation to the exposure being hedged, and reduce the risk or
volatility associated with changes in foreign exchange rates, interest rates, or
equity prices. Qualified foreign exchange contracts are carried at market value
with gains and losses recorded in equity until sale of the investment. Qualified
interest rate contracts are associated with the related debt and amortized as
yield adjustments. Qualified interest rate and equity contracts associated with
investments in debt or equity securities are carried at market value, with gains
and losses recorded to the associated investment account. Any gain or loss on
the termination of a contract that qualifies for deferral accounting would be
deferred and accounted for with the underlying transaction being hedged. If a
contract does not maintain the required correlation with the hedged item,
deferral accounting is terminated and a gain or loss is recognized in the
Consolidated Statement of Operations for the difference between the change in
the fair value of the contract and the change in the fair value of the hedged
item.
Market value accounting is used for derivative contracts which do not
qualify for synthetic instrument or hedge accounting. Market value accounting is
also used for foreign exchange contracts designated as
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
hedges of foreign denominated receivables and payables. These contracts are
carried at market value in other assets or liabilities with gains and losses
recorded as other income or expense. The Company does not enter into derivative
financial instruments for trading purposes.
STOCK OPTIONS. MediaOne Group accounts for its stock incentive plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company also follows the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." See Note
18--Stock Incentive Plans--to the Consolidated Financial Statements.
REVENUE RECOGNITION. Cable television, local telephone and high speed data
Internet access are generally billed monthly in advance, and revenues are
recognized the following month when services are provided. Revenues derived from
other cable television services, including pay-per-view and advertising, are
recognized as the service is provided.
ADVERTISING COSTS. Costs related to advertising are expensed as incurred.
Advertising expense was $114, $206 and $73 in 1998, 1997 and 1996, respectively.
INCOME TAXES. The provision for income taxes consists of an amount for
taxes currently payable or receivable and an amount for tax consequences
deferred to future periods.
EARNINGS PER COMMON SHARE. MediaOne Group computes basic and diluted
earnings per common share in accordance with SFAS No. 128, "Earnings Per Share."
See Note 17--Earnings Per Share--to the Consolidated Financial Statements.
Unless otherwise indicated, all per share amounts in the notes to the
Consolidated Financial Statements are computed based on basic weighted average
common shares outstanding.
FUTURE IMPLEMENTATION OF NEW ACCOUNTING STANDARDS. In the year 2000, the
Company will adopt SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. Among other
things, the statement requires that an entity recognize all derivative
instruments on the balance sheet as either assets or liabilities, and to account
for those instruments at fair value. The Company is evaluating the impact of
SFAS No. 133.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued in March 1998. SOP
98-1, among other things, requires that certain costs of internal use software,
whether purchased or developed internally, be capitalized and amortized over the
estimated useful life of the software. Adoption of SOP 98-1 is required as of
January 1, 1999 and will not have a material impact on the financial position or
results of operations of the Company.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," was issued in
April 1998. SOP 98-5 requires, among other things, that the costs related to
start-up activities of a new entity, facility, product or service be expensed.
Adoption of SOP 98-5 is required as of January 1, 1999 and will not have a
material impact on the results of operations of the Company.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: DOMESTIC ACQUISITIONS AND DISPOSITIONS
AIRTOUCH COMMUNICATIONS. On April 6, 1998, MediaOne Group sold its domestic
wireless businesses to AirTouch Communications, Inc. ("AirTouch") in a
tax-efficient transaction (the "AirTouch Transaction"). The AirTouch Transaction
was consummated pursuant to an agreement and plan of merger (the "AirTouch
Merger Agreement") dated as of January 29, 1998. The domestic wireless
businesses included cellular communication services provided to 2.6 million
customers in 12 western and midwestern states and a 25 percent interest in
PrimeCo Personal Communications, L.P. ("PrimeCo"). Pursuant to the AirTouch
Merger Agreement, AirTouch acquired these cellular and personal communications
services ("PCS") interests. Consideration under the AirTouch Transaction
consisted of (i) debt assumption of $1,350, (ii) the issuance to MediaOne Group
of $1,650 in liquidation preference of 5.143 percent dividend bearing AirTouch
preferred stock (fair value of $1,493), and (iii) the issuance to MediaOne Group
of 59,314,000 shares of AirTouch common stock. The transaction resulted in a
gain of $2,257, net of deferred taxes of $1,612.
MediaOne Group accounts for its investment in AirTouch stock under the cost
method of accounting, as available for sale securities. The AirTouch preferred
stock is stated at fair value on the Consolidated Balance Sheet, in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." To minimize MediaOne Group's exposure to fluctuations in the fair
value of the AirTouch preferred stock, the Company entered into an interest rate
swap agreement in April 1998 and an interest rate option agreement in October
1998. The interest rate swap agreement matured in October 1998, and the interest
rate option agreement in December 1998.
During September 1998, the change in the value of the AirTouch preferred
stock and interest rate swap did not achieve the required correlation to
continue deferral accounting. Consequently, the Company recognized a net loss of
$31 (net of income tax benefits of $19) in other income for the change in the
fair value of the AirTouch preferred stock not offset by the fair value of the
interest rate swap agreement in accordance with SFAS No. 80, "Accounting for
Futures Contracts." In addition, the Company recorded a charge of $12 (net of
income tax benefits of $8) for the purchase of the interest rate option offset
by a gain on the portion of the interest rate option associated with the
issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Company-guaranteed debentures ("Preferred
Securities"). The gain on the interest rate option associated with the Preferred
Securities was $6 (net of income tax expense of $4).
In January 1999, AirTouch entered into an agreement to merge its operations
with a subsidiary of Vodafone Group Public Limited Company ("Vodafone"). See
Note 22--Subsequent Events--to the Consolidated Financial Statements.
CABLE SYSTEMS. In December 1998, the Company acquired Time Warner, Inc.'s
("Time Warner") cable systems in the cities of Dearborn and Wayne, Michigan for
$57. The systems serve approximately 31,000 subscribers. In addition, during
1998, MediaOne Group sold various cable television systems in California, Idaho,
Iowa and Washington, serving approximately 33,000 subscribers, for total
proceeds of $50.
On October 13, 1998, MediaOne Group and Tele-Communications, Inc. ("TCI")
signed a definitive agreement to exchange certain of MediaOne Group's cable
television systems in Illinois and Michigan for certain of TCI's cable
television systems in South Florida and California. The cable systems each serve
approximately 500,000 subscribers. Consummation of the exchange is expected to
occur in mid-1999, subject to regulatory approvals. These cable systems had a
net book value of $521 at December 31, 1998,
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: DOMESTIC ACQUISITIONS AND DISPOSITIONS (CONTINUED)
and contributed revenues of $253 and operating income of $33 during 1998. In
addition, MediaOne Group entered into a definitive agreement to sell its cable
television systems in Reno, Nevada for approximately $21. The Nevada systems
served approximately 10,000 subscribers, and closed in the first quarter of
1999. In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
stopped depreciating and amortizing the systems held for sale.
In May 1997, pursuant to a Federal Communications Commission ("FCC") order,
the Company entered into an agreement to sell its cable systems in Minnesota
(the "Minnesota System") for proceeds of $600. Under the terms of the agreement,
the Company had the right to terminate the agreement at any time upon payment of
a $30 termination fee. As a result of the Separation, the Company was no longer
prohibited by federal law from owning the Minnesota System. In February 1998, in
response to Old U S WEST's petition, the FCC granted a waiver which permitted
the Company to retain the Minnesota System. The Company terminated the agreement
to sell the Minnesota System and otherwise settled all claims related thereto.
HIGH SPEED DATA JOINT VENTURE. On June 15, 1998, MediaOne Group formed a
joint venture with Time Warner, TWE and Time Warner
Entertainment-Advance/Newhouse Partnership ("TWE/AN") called "ServiceCo, LLC"
(the "HSD Joint Venture") to deliver high speed data ("HSD") services. The
parties to the joint venture contributed certain of their respective HSD assets
into the HSD Joint Venture in exchange for common equity interests of
approximately 31.4 percent for MediaOne Group, 10.7 percent for Time Warner,
25.0 percent for TWE and 32.9 percent for TWE/AN. In addition, Microsoft
Corporation and Compaq Computer Corporation each contributed $212.5 million for
a respective 10 percent preferred equity investment in the HSD Joint Venture.
The preferred shares are convertible into a combined 20 percent common equity
interest in the HSD Joint Venture. MediaOne Group will provide HSD services
under the "Road Runner" brand name.
Assuming the conversion of the preferred shares and taking into account
MediaOne Group's ownership in TWE, MediaOne Group would hold a proportionate
diluted common equity interest in the HSD Joint Venture of approximately 34.6
percent. MediaOne Group accounts for its investment in the HSD Joint Venture
under the equity method of accounting.
The HSD Joint Venture is responsible for maintaining connections to the
Internet, providing technical customer support and developing national content.
The parties to the joint venture operate their respective HSD businesses and are
responsible for their respective customers' billing and customer service issues.
Accordingly, MediaOne Group continues to reflect HSD service revenues in its
consolidated results, as well as a service fee payable to the HSD Joint Venture
for services provided.
COMPETITIVE LOCAL EXCHANGE BUSINESSES. During November 1998, MediaOne Group
entered into a definitive agreement with Hyperion Communications to sell the
Company's investments in Continental Fiber Technologies, Inc. and Alternet of
Virginia, Inc., providers of business telephony services in Jacksonville,
Florida and Richmond, Virginia, respectively, for approximately $80, (the "CLEC
Businesses"). The sale is expected to close in the first half of 1999. In
accordance with SFAS No. 121, the Company has stopped depreciating these assets.
The CLEC Businesses had a net book value at December 31, 1998 of $33, and
contributed revenues of $14 and operating losses of $3 during 1998.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: DOMESTIC ACQUISITIONS AND DISPOSITIONS (CONTINUED)
PRIMESTAR. Prior to April 1, 1998, the Company held a 10.4 percent interest
in PrimeStar Partners, L.P. ("Old PrimeStar"). In addition, MediaOne distributed
PrimeStar direct broadcast satellite ("DBS") services to subscribers in its
service areas and, as a result, reflected consolidated operating results with
respect to such subscribers. On April 1, 1998, the Company contributed its
interest in Old PrimeStar, as well as its PrimeStar subscribers and certain
related assets, to PrimeStar, Inc. ("PrimeStar"), a newly formed entity, in
exchange for an approximate 10 percent interest in PrimeStar and $77 in cash
(the "PrimeStar Contribution").
In December 1998, PrimeStar management provided a business plan to its board
of directors, of which MediaOne Group is a part. Additionally, in January 1999,
Hughes Electronics Corporation ("Hughes") entered into an agreement to purchase
PrimeStar's DBS assets. Based on its review of PrimeStar's business plan and on
the anticipated sale to Hughes, the Company believes it will not receive
proceeds on the sale of its investment in PrimeStar. As a result, MediaOne Group
recorded a charge of $163 ($100 after tax) to reduce the carrying amount of its
investment in PrimeStar to zero. MediaOne Group is currently a guarantor of
letters of credit for PrimeStar totaling approximately $100. See Note
22--Subsequent Events--to the Consolidated Financial Statements.
NOTE 5: OPERATING SEGMENTS
In fourth-quarter 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
disclosures about products and services and geographic areas. Operating segments
are components of an enterprise for which separate financial information is
available and which is evaluated regularly by the Company's chief operating
decision maker, or decision making group, in deciding how to allocate resources
and assess performance. Operating segments are managed separately and represent
strategic business units that offer different products and serve different
markets.
The Company's reportable segments include: (1) domestic cable and broadband,
(2) international services, and (3) corporate and other. The domestic cable and
broadband segment is comprised of MediaOne and Multimedia Ventures. MediaOne
consists of cable television properties serving 5.0 million domestic subscribers
and passing 8.5 million domestic homes. Multimedia Ventures includes the
Company's equity interest in Time Warner Entertainment. The international
services segment includes the cable and broadband and wireless communications
operations located abroad, in addition to international corporate overhead.
Corporate and other includes the discontinued operations of New U S WEST,
capital assets (which was held for sale until December 31, 1998), investments in
domestic interactive services, the domestic wireless business (which was sold in
April 1998 in conjunction with the AirTouch Transaction), the international
directories operations (of which the wholly owned operations in the United
Kingdom and Poland were sold in 1997), and corporate overhead.
MediaOne Group believes that proportionate financial data facilitates the
understanding and assessment of its results. Therefore, "Sales and Other
Revenues" for each segment is presented on a proportionate basis. Proportionate
results reflect the relative weight of MediaOne Group's ownership in each of its
respective domestic and international equity ventures together with the
consolidated results of its subsidiaries. In addition, the Company believes
earnings before interest, taxes, depreciation, amortization and other ("EBITDA")
is an important indicator of the operating performance of its businesses. As
such,
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: OPERATING SEGMENTS (CONTINUED)
EBITDA is also presented, on a proportionate basis, for each segment. The
computation of EBITDA also excludes gains on asset sales, equity losses,
guaranteed minority interest expense, and restructuring charges. Adjustments
made to "Sales and Other Revenues" and EBITDA to arrive at proportionate results
are reversed in the column labeled "Eliminations and Adjustments," in
conformance with SFAS 131, so that in total, "Sales and Other Revenues" and
EBITDA reflect consolidated results. All other line items presented in the
tables reflect consolidated results.
Consolidated results for the operating segments reflect the accounting
policies described in Note 3-- Summary of Significant Accounting Policies--to
the Consolidated Financial Statements. Intersegment sales and transfers are
accounted for at fair value as if the sales were to third parties. For
proportionate results, the venture's management determines its accounting
policies.
Industry segment financial information follows. Certain prior year
information has been reclassified to conform with the 1998 presentation.
<TABLE>
<CAPTION>
DOMESTIC CABLE
&
BROADBAND
------------------------ ELIMINATIONS
MULTIMEDIA &
MEDIAONE VENTURES(1) INTERNATIONAL OTHER ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998
Sales and other revenues.................... $ 2,467 $ 3,124 $ 1,456 $ 439 $ (4,604) $ 2,882
EBITDA(2)................................... 941 800 205 46 (1,049) 943
Net income (loss)........................... (536) (11) (317) 27,169 -- 26,305
Equity gains (losses) in unconsolidated
ventures.................................. (24) 7 (352) (48) -- (417)
Total assets................................ 16,003 2,551 2,308 7,330 -- 28,192
Investments in equity ventures.............. 46 2,442 1,083 71 -- 3,642
Capital expenditures........................ 1,618 -- 12 96 -- 1,726
----------- ----------- ------ --------- ------------ ------------
1997
Sales and other revenues.................... $ 2,323 $ 2,887 $ 1,230 $ 1,471 $ (4,064) $ 3,847
EBITDA(2)................................... 930 711 77 300 (731) 1,287
Net income (loss)........................... (402) (21) (488) 1,608 -- 697
Equity gains (losses) in unconsolidated
ventures.................................. (22) 13 (775) (125) -- (909)
Total assets................................ 15,719 2,534 2,164 6,366 -- 26,783
Investments in equity ventures.............. 61 2,486 624 523 -- 3,694
Capital expenditures........................ 1,216 -- 21 265 -- 1,502
----------- ----------- ------ --------- ------------ ------------
1996
Sales and other revenues.................... $ 499 $ 2,768 $ 687 $ 1,295 $ (3,412) $ 1,837
EBITDA(2)................................... 196 580 (52) 242 (536) 430
Net income (loss)........................... (77) (32) (304) 1,591 -- 1,178
Equity gains (losses) in unconsolidated
ventures.................................. (3) 13 (320) (36) -- (346)
Total assets................................ 16,348 2,558 2,327 6,494 -- 27,727
Investments in equity ventures.............. 64 2,477 1,458 439 -- 4,438
Capital expenditures........................ 348 -- 18 277 -- 643
----------- ----------- ------ --------- ------------ ------------
</TABLE>
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: OPERATING SEGMENTS (CONTINUED)
- ------------------------
(1) Multimedia Ventures includes MediaOne Group's 25.51 percent equity interest
in TWE, as well as domestic cable overheads. The reported TWE results are
prepared in accordance with GAAP and have not been adjusted to report TWE
investments accounted for under the equity method on a proportionate basis.
(2) EBITDA should not be considered an alternative to operating or net income as
an indicator of the performance of MediaOne Group's businesses, or as an
alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with GAAP.
A portion of general and administrative costs, including executive
management, legal, tax, accounting and auditing, treasury, strategic planning
and public policy services, are directly assigned to the Company's subsidiaries
based on actual utilization or are allocated based on operating expenses, number
of employees, external revenues, average capital and/or average equity.
Total assets are those assets and investments that are used in, or pertain
to, each segment's operations. The "Other" column includes primarily cash; debt
and equity securities; net assets of discontinued operations and net investment
in assets held for sale for the capital assets segment in 1997 and 1996; the
domestic wireless businesses; investments in domestic interactive services; and
other corporate assets.
The following table presents a geographic breakout for proportionate
revenues and EBITDA and a reconciliation to consolidated amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
PROPORTIONATE REVENUE:
United States............................................... $ 5,966 $ 6,571 $ 4,356
United Kingdom.............................................. 856 609 416
Central Europe.............................................. 510 378 301
Asia and other.............................................. 154 353 176
--------- --------- ---------
Proportionate revenue......................................... 7,486 7,911 5,249
Less: Proportionate adjustments............................... (4,604) (4,064) (3,412)
--------- --------- ---------
Consolidated revenues....................................... $ 2,882 $ 3,847 $ 1,837
--------- --------- ---------
--------- --------- ---------
PROPORTIONATE EBITDA:
United States............................................... $ 1,779 $ 1,937 $ 998
United Kingdom.............................................. 106 (23) (45)
Central Europe.............................................. 169 102 82
Asia and other.............................................. (62) 2 (69)
--------- --------- ---------
Proportionate EBITDA.......................................... 1,992 2,018 966
Less: Proportionate adjustments............................... (1,049) (731) (536)
--------- --------- ---------
Consolidated EBITDA......................................... $ 943 $ 1,287 $ 430
--------- --------- ---------
--------- --------- ---------
</TABLE>
CONTINENTAL ACQUISITION. On November 15, 1996, the Company acquired
Continental Cablevision, Inc. ("Continental"), the third largest cable operator
in the United States (the "Continental Acquisition" or the "Acquisition"), and
accounted for the Acquisition by the purchase method of accounting.
Continental's results of operations have been included in the consolidated
results of operations
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: OPERATING SEGMENTS (CONTINUED)
since the Acquisition date. Had the Acquisition occurred at the beginning of
1996, MediaOne Group's consolidated revenues would have been $3,543, loss from
continuing operations would have been $801, and basic loss per share of MediaOne
Group Stock would have been $1.37.
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, the Company acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment for an aggregate purchase price of $2.553 billion. TWE owns and
operates substantially all of the entertainment assets previously owned by Time
Warner, consisting primarily of its filmed entertainment, programming-HBO and
cable television businesses.
The Company has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is exercisable, in whole
or in part, between January 1, 1999 and May 31, 2005, for an aggregate cash
exercise price ranging from $1.25 billion to $1.8 billion, depending upon the
year of exercise. Either TWE or the Company may elect that the exercise price
for the option be paid with partnership interests rather than cash.
Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the general partners); A preferred priority capital (held pro rata by the
general and limited partners); B preferred priority capital (held by the general
partners); and residual equity capital (held pro rata by the general and limited
partners). Of the $2.553 billion contributed by the Company, $1.658 billion
represents a preferred priority capital and $895 represents residual equity
capital. The TWE Partnership Agreement provides for special allocations of
income and distributions of partnership capital. Partnership income, to the
extent earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax allocations");
(2) to the partners' preferred capital accounts in order of priority described
above, at various rates of return ranging from 8 percent to 13.25 percent; and
(3) to the partners' residual equity capital accounts according to their
residual partnership interests. To the extent partnership income is insufficient
to satisfy all special allocations in a particular accounting period, the
unearned portion is carried over until satisfied out of future partnership
income. Partnership losses generally are allocated in reverse order, first to
eliminate prior allocations of partnership income, except senior preferred and
special tax income, next to reduce initial capital amounts, other than senior
preferred, then to reduce the senior preferred account and finally, to eliminate
special tax allocations.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
A summary of the contributed capital and priority capital rates of return
follows:
<TABLE>
<CAPTION>
PRIORITY LIMITED PARTNERS
CAPITAL RATES (OWNERSHIP %)
OF RETURN(D) TIME ----------------------
UNDISTRIBUTED CUMULATIVE (% PER ANNUM WARNER MEDIA
CONTRIBUTED PRIORITY COMPOUNDED GENERAL TIME ONE
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) CAPITAL(B) QUARTERLY) PARTNERS WARNER GROUP
- ------------------------------------------ ------------- ----------- --------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Senior preferred.......................... $ 500 $ 600(c) 8.00% 100.00% -- --
A Preferred priority capital.............. 5,600 12,800 13.00% 63.27% 11.22% 25.51%
B Preferred priority capital.............. 2,900 6,800 13.25% 100.00% -- --
Residual equity capital................... 3,300 3,300 -- 63.27% 11.22% 25.51%
</TABLE>
- ------------------------
(a) Represents the estimated fair value of net assets contributed as of
formation of TWE, excluding partnership income or loss allocated thereto.
(b) Cumulative priority capital is not necessarily indicative of the fair value
of the underlying priority capital interests.
(c) Net of $1,500 of cumulative cash distributions received by Time Warner.
(d) To the extent income allocations are concurrently distributed, the priority
capital rates of return on the A preferred capital and the B preferred
capital are 11% and 11.25%, respectively.
Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is
computed generally by reference to the taxes that TWE would have been required
to pay if it were a corporation. Tax Distributions are paid to the partners on a
current basis. For distributions other than those related to taxes or the senior
preferred, the TWE Partnership Agreement requires certain cash distribution
thresholds be met to the limited partners before the general partners receive
their full share of distributions. No cash distributions have been made to the
Company.
Through the TWE management committee, the Company and Time Warner jointly
direct the businesses and affairs of TWE cable systems, subject in certain cases
to regulatory approval. The TWE management committee has full discretion and
final authority with respect to the businesses and affairs of such cable
systems. The TWE management committee consists of six voting members, of which
three members are designated by the Company and three members are designated by
Time Warner. Each voting member of the TWE management committee has one vote.
Any action required or permitted to be taken by the TWE management committee
must be approved by a majority of its members. Determinations of the TWE
management committee are binding upon TWE and the TWE board of representatives.
The Company accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by the Company's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
The Company's recorded share of TWE operating results represents allocated TWE
net income or loss adjusted for the amortization of the excess of fair market
value over the book value of the partnership net assets. As a result of this
amortization and the special income allocations described above, the Company's
recorded pretax share of TWE operating results before extraordinary item was $7,
$11 and $(4) in 1998, 1997 and 1996, respectively.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
As consideration for its expertise and participation in the cable operations
of TWE, the Company earned a management fee of $130 over five years, ending in
September 1998. The fee was payable over a four-year period beginning in 1995,
and final payment was received in September 1998. Management fees of $18, $26
and $26 were recorded to other income in 1998, 1997 and 1996. The Consolidated
Balance Sheets included a management fee receivable of $42 at December 31, 1997.
In addition, MediaOne purchases cable television programming from TWE and Time
Warner at market prices. These services totaled $142, $110 and $23 in 1998, 1997
and 1996, respectively.
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1998 1997 1996
- ------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues..................................................... $ 12,246 $ 11,318 $ 10,852
Operating expenses(1, 2)..................................... 10,527 9,874 9,774
Interest and other expense, net(3, 4)........................ (1,301) (722) (798)
Income before income taxes and extraordinary item............ 418 722 280
Income before extraordinary item............................. 326 637 210
Net income................................................... 326 614 210
</TABLE>
- ------------------------
(1) Includes depreciation and amortization of $1,436, $1,370 and $1,235, in
1998, 1997 and 1996, respectively.
(2) Operating expenses are reflected net of approximately $90 and $200 of net
gains related to the sale or exchange of certain cable television systems in
1998 and 1997, respectively.
(3) Includes corporate services of $72, $72 and $69 in 1998, 1997 and 1996,
respectively, and minority interest expense of $264, $305 and $207 in 1998,
1997 and 1996, respectively.
(4) 1998 interest and other expense includes a charge of approximately $210
principally to reduce the carrying value of TWE's interest in PrimeStar.
1997 interest and other expense includes a gain of approximately $250
related to the sale of TWE's interest in E! Entertainment Television, Inc.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
SUMMARIZED FINANCIAL POSITION 1998 1997
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets(5)........................................................................... $ 4,183 $ 3,622
Noncurrent assets(6)........................................................................ 18,047 17,109
Current liabilities......................................................................... 4,936 3,974
Noncurrent liabilities, including minority interests........................................ 11,584 9,306
Senior preferred capital.................................................................... 603 1,118
Partners' capital(7)........................................................................ 5,107 6,333
</TABLE>
- ------------------------
(5) Includes cash of $87 and $322 at December 31, 1998 and 1997, respectively.
(6) Includes a loan receivable from Time Warner of $400 at December 31, 1998 and
1997.
(7) Contributed capital is based on the estimated fair value of the net assets
that each partner contributed to the partnership. The aggregate of such
amounts is significantly higher than TWE's partners' capital as reflected in
this Summarized Financial Position, which is based on the historical cost of
the contributed net assets.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
TIME WARNER TELECOM. On July 14, 1998, TWE, TWE-A/N and Time Warner
contributed the assets and liabilities of the Time Warner competitive local
exchange business (the "Time Warner Telecom Business") into a newly formed
entity, Time Warner Telecom LLC ("TW Telecom"). The Time Warner Telecom Business
had been jointly operated by the parties to provide telephony services to
business customers in their respective cable markets. TWE and TWE-A/N
distributed their ownership interest in TW Telecom on a pro rata basis to Time
Warner, MediaOne Group and Advance/Newhouse. As a result, MediaOne Group now
holds an 18.85 percent interest in TW Telecom. Since the investment in TW
Telecom resulted from a distribution by TWE, MediaOne Group's investment balance
in TWE was reduced in 1998 by $48, the book value of the TW Telecom investment
attributable to MediaOne Group. As of December 31, 1998, the investment in TW
Telecom is included in "Other Assets" in the Consolidated Balance Sheet. The
Company uses the cost method of accounting for its investment in TW Telecom.
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES
COMBINED FINANCIAL RESULTS OF INTERNATIONAL EQUITY INVESTMENTS. The
following table reflects summarized combined financial information for the
Company's investments in international ventures, accounted for on the equity
method. Information for 1998 excludes activity related to the Company's
investment in Binariang SDN BHD in Malaysia and Aria WEST in Indonesia. Both
investments were determined to be impaired at the end of 1997 and the Company
terminated or suspended equity method accounting on such investments in 1998.
See additional discussion under "EVALUATION OF ASIAN INVESTMENTS."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMBINED RESULTS OF OPERATIONS 1998 1997 1996
- ------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................................ $ 4,031 $ 3,353 $ 1,869
Operating losses.................................................................... (161) (601) (540)
Net loss............................................................................ (948) (1,696) (857)
</TABLE>
- ------------------------
Note: Combined Results of Operations for Continental international ventures
have been included since the date of Acquisition.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
COMBINED FINANCIAL POSITION 1998 1997
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets............................................................................... $ 1,535 $ 1,140
Property, plant and equipment--net........................................................... 7,889 6,625
Other assets................................................................................. 2,541 1,610
--------- ---------
Total assets................................................................................. $ 11,965 $ 9,375
--------- ---------
--------- ---------
Current liabilities.......................................................................... $ 1,630 $ 1,570
Long-term debt............................................................................... 7,388 5,527
Other liabilities............................................................................ 1,177 389
Equity....................................................................................... 1,770 1,889
--------- ---------
Total liabilities and equity................................................................. $ 11,965 $ 9,375
--------- ---------
--------- ---------
</TABLE>
INTERNATIONAL ACQUISITIONS AND DISPOSITIONS. On September 1, 1998,
Telewest, a cable and telecommunications provider in the United Kingdom,
acquired General Cable PLC ("General Cable"), a cable
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
provider in the United Kingdom, for approximately $1.1 billion in stock and
cash. Telewest raised cash for the acquisition through a rights offering to its
existing shareholders, including MediaOne Group. MediaOne Group purchased 85
million new Telewest shares at a cost of $131. In addition, MediaOne Group
recorded an estimated gain in equity of $39, net of deferred taxes of $25,
related to Telewest's acquisition of General Cable. On November 10, 1998,
MediaOne Group purchased an additional 175 million Telewest shares from
Southwestern Bell International Holdings at a price of $2.25 per share, or $394.
The Company now holds a 29.9 percent interest in Telewest. Telewest, which is
the only equity method investment of the Company for which a quoted market price
is available, had a market value of $1,803 and $464 at December 31, 1998 and
1997, respectively.
In November 1998, MediaOne Group converted its note with Cable & Wireless
Optus Limited ("Optus") into 50 million Optus shares and entered into a put
option to lock in a floor price of Australian $1.44 per Optus share. The put
options expire during the first quarter of 1999. The Company also acquired 24.2
million Optus shares, related to MediaOne Group's anti-dilution rights, for $30.
Such shares were subsequently sold for $39, realizing an after tax gain on the
sale of $6. The Company accounts for its investment in Optus using the cost
method of accounting. At December 31, 1998, the investment is stated in the
Consolidated Balance Sheet at the investment's fair market value of $105. During
the first quarter of 1999, MediaOne Group sold its investment in the 50 million
Optus shares. See Note 22--Subsequent Events--to the Consolidated Financial
Statements.
In July 1998, Westel 900, a digital wireless service company in Hungary,
repurchased shares of its stock. This repurchase resulted in an increase in
MediaOne Group's interest in Westel 900 to 49.0 percent from 46.6 percent.
During the first quarter of 1997, the Company sold its five percent interest
in a French wireless venture for proceeds of $81. The Company recognized a gain
of $31, net of income tax expenses of $20. On October 27, 1997, the Company sold
its 90 percent interest in Fintelco, S.A. ("Fintelco"), a cable and
telecommunications venture located in Argentina, for proceeds of $641. The
Company acquired a 50 percent interest in Fintelco in connection with the
Continental Acquisition and then acquired an additional 40 percent interest in
August 1997, to bring its total interest in Fintelco to 90 percent. The Company
recognized a gain on the sale of $80, net of income tax expenses of $55.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
The Company's key equity method investments in international ventures
follow:
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP
DECEMBER 31,
--------------------
VENTURE(1) 1998 1997
- ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
CABLE AND BROADBAND
Telewest Communications, United Kingdom....................................... 29.9 26.8
A2000 (KTA), Netherlands...................................................... 50.0 50.0
Telenet, Belgium.............................................................. 25.0 25.0
Singapore Cablevision, Singapore.............................................. 25.0 25.0
Titus Communications Corp., Japan............................................. 25.0 25.0
Chofu Cable Television, Japan................................................. 19.1 19.1
WIRELESS
One 2 One, United Kingdom..................................................... 50.0 50.0
Delta Telecommunications, Russia(2)........................................... 42.5 42.5
Moscow Cellular Communications, Russia(2)..................................... 22.0 22.0
Westel Radiotelefon, Hungary.................................................. 49.0 49.0
Westel 900 GSM Mobile Telecommunications, Hungary............................. 49.0 46.6
Eurotel Praha, Czech Republic................................................. 24.5 24.5
Eurotel Bratislava, Slovak Republic........................................... 24.5 24.5
Polska Telefonia Cyfrowa, Poland.............................................. 22.5 22.5
BPL Cellular Limited, India................................................... 49.0 49.0
</TABLE>
- ------------------------
(1) MediaOne Group also holds a 50 percent investment in a South American
directory operation.
(2) Investments are held by Russian Telecommunications Development Corporation
owned 66.5 percent by the Company.
At December 31, 1998 and 1997, the difference between the carrying amount
and the Company's interest in the underlying equity of the international
ventures was approximately $160 and $23, respectively. The increase during 1998
was due primarily to a purchase premium of $136 related to Telewest shares
acquired during the year, which is being amortized over 20 years. The remaining
difference has been allocated primarily to licenses and is being amortized over
lives ranging from 5 to 20 years.
FOREIGN CURRENCY TRANSACTIONS. The Company selectively enters into forward
and purchased option contracts to manage the market risks associated with
fluctuations in foreign exchange rates after considering offsetting foreign
exposures among international operations. The use of forward and purchased
option contracts allows the Company to fix or cap the cost of firm foreign
investment commitments, the amount of foreign currency proceeds from sales of
foreign investments, the repayment of foreign currency denominated receivables
and the repatriation of dividends. All foreign exchange contracts have
maturities of one year or less. The use of such contracts was limited in 1998
and 1997. As of December 31, 1998, there were no foreign exchange contracts
outstanding. As of December 31, 1997, the market value of foreign exchange
contracts outstanding was not material.
Forward contracts were selectively used to hedge foreign denominated
proceeds from the sale of foreign investments and foreign denominated
receivables during 1998 and 1997. Foreign currency pretax hedging gains of $1
and $5 were included in earnings in the years ended December 31, 1998 and 1997,
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
respectively. The counterparties to these contracts are major financial
institutions. The Company is exposed to credit loss in the event of
nonperformance by these counterparties. The Company does not have significant
exposure to an individual counterparty and does not anticipate nonperformance by
any counterparty.
Foreign currency transaction pretax gains of $13 and pretax losses of $40
were included in earnings in the years ended December 31, 1998 and 1997,
respectively.
EVALUATION OF ASIAN INVESTMENTS. During 1997, the value of the Malaysian
currency declined 36 percent and the Indonesian currency declined 57 percent as
compared with the U. S. dollar. As a result of this significant decline, the
Company reviewed its investments in Malaysia and Indonesia and concluded that
each investment was impaired and in each case the fair value of the investment
was zero as of December 31, 1997. The Company recorded pretax charges of $145
and $55 in 1997 related to the ventures in Malaysia and Indonesia, respectively.
In the case of Malaysia, the charge of $145 in 1997 was to recognize that
the investment was impaired and to write down the carrying value of the
investment to its fair value of zero. The following factors were considered by
management in determining that the investment was impaired:
- The venture had negative cash flow and no ability to meet its debt
obligations of $482 due in 1998.
- As determined on a U. S. GAAP basis, the venture's liabilities exceeded
its assets as of December 31, 1997, making the venture insolvent at that
time.
- The business plan for the venture contemplated a significant contribution
to cash flows from the wireline business. The actual and potential cash
flows of the venture have been severely diminished by the inability of the
venture to effectively establish the wireline business.
During 1998, British Telecom acquired a 33.3 percent stake in Binariang SDN
BHD, the investment in Malaysia, and assumed MediaOne Group's loan guarantee of
the venture. As a result, the Company's interest in the venture was diluted to
12.6 percent from 19 percent, and the Company considers its investment to be a
cost method investment. MediaOne Group continues to evaluate opportunities to
exit this venture.
In the case of Indonesia, the net book value of the venture had been reduced
to its fair value of zero through recognition of $43 of equity losses during
1997. The $55 charge in 1997 was to recognize probable funding commitments in
connection with a shareholder support agreement. The probable funding
commitments consisted of the Company's remaining contractual commitment under
the shareholder support agreement of $19 and its partners' remaining commitments
of $36, as of December 31, 1997. Under the terms of the shareholder support
agreement, each shareholder is responsible for the full unfunded liability if
the other shareholders do not meet their proportionate obligations. As a result,
the Company has accrued for its partners' share of the commitment under the
shareholder support agreement. During 1998, MediaOne Group funded $6 under the
shareholder support agreement and the partners funded $10. The Company is
currently attempting to restructure its investment in Indonesia.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
The following factors were considered by management in 1997 in determining
that the Indonesian investment was impaired and that accrual of the Company's
and its partners' funding liabilities were necessary:
- As determined on a U. S. GAAP basis, the venture's liabilities,
predominantly U. S. dollar denominated debt, exceeded its assets as of
December 31, 1997.
- Management believed the venture was not viable given the political and
economic uncertainties in Indonesia.
- The venture had ceased funding capital projects.
The Company's other ventures in Asia, located in Japan, Singapore and India,
were evaluated for impairment at December 31, 1997. Such evaluation indicated
there was no impairment as the fair value of these ventures exceeded their
recorded values.
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Land and buildings......................................................... $ 117 $ 321
Cable distribution systems................................................. 3,736 2,787
Cellular systems........................................................... -- 1,124
General purpose computers and other........................................ 785 857
Construction in progress................................................... 299 482
--------- ---------
4,937 5,571
Less accumulated depreciation.............................................. 868 1,299
--------- ---------
Property, plant and equipment--net......................................... $ 4,069 $ 4,272
--------- ---------
--------- ---------
</TABLE>
Property, plant and equipment balances at December 31, 1998 reflect the
disposition of the assets of the domestic wireless businesses which were sold in
connection with the AirTouch Transaction. Depreciation expense was $657, $727
and $255 for the years ended 1998, 1997 and 1996, respectively.
NOTE 9: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Identified intangibles, primarily franchise value....................... $ 9,089 $ 9,185
Goodwill................................................................ 3,741 4,159
--------- ---------
12,830 13,344
Less accumulated amortization........................................... 1,183 747
--------- ---------
Total intangible assets--net............................................ $ 11,647 $ 12,597
--------- ---------
--------- ---------
</TABLE>
Intangible assets at December 31, 1998 reflect the disposition of the assets
of the domestic wireless businesses which were sold in connection with the
AirTouch Transaction. Amortization expense for 1998, 1997 and 1996 was $525,
$530 and $131, respectively.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT
On June 12, 1998, $4.9 billion notional medium and long-term debt was
redeemed as part of the Refinancing for a total cash redemption amount of $5.5
billion. MediaOne Group extinguished the debt by issuing commercial paper at a
weighted-average interest rate of 5.85 percent. In accordance with the
Separation Agreement, New U S WEST funded to MediaOne Group $3.9 billion related
to the Dex Alignment. The Company used the funds to repay a portion of the
amount of commercial paper issued in connection with the Refinancing. Debt
extinguishment costs related to the Refinancing totaled $333 (net of income tax
benefits of $209) and are reflected in the Consolidated Statements of Operations
as an extraordinary item. In addition to refinancing costs, such costs included
the difference between the market and face value of the debt redeemed and a
charge for unamortized debt issuance costs. MediaOne Group financed the debt
extinguishment costs by issuing commercial paper, net of a $140 reimbursement by
New U S WEST for shared costs.
Remaining commercial paper issued in connection with the Refinancing was
subsequently repaid with proceeds generated from the Exchangeable Notes
offering, as described below in "Long-term Debt."
In connection with the AirTouch Transaction, AirTouch assumed $1,350 of
short-term debt from MediaOne Group.
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper............................................................ $ 216 $ 750
Bank loan................................................................... -- 17
Current portion of long-term debt............................................. 353 266
Allocated to the capital assets segment-net................................... -- (100)
Allocated to discontinued operations.......................................... -- (198)
--------- ---------
Total......................................................................... $ 569 $ 735
--------- ---------
--------- ---------
</TABLE>
The weighted-average interest rate on commercial paper was 6.09 percent and
6.15 percent at December 31, 1998 and 1997, respectively. In May 1998, MediaOne
Group entered into 365-day and 5-year bank credit facilities totaling $4.0
billion to support its commercial paper program. The facilities were reduced
effective December 1998 to a total of $3.0 billion. At December 31, 1998, $2.8
billion was available on the facilities.
The bank loan at December 31, 1997 was a floating-rate loan denominated in
Czech Koruna. In January 1997, the Company paid the cash portion of the
Continental Acquisition consideration totaling $1,150. This payment was financed
with commercial paper.
On December 15, 1998, $130 of Debt Exchangeable for Common Stock ("DECS")
matured. Effective with the Separation, the DECS became the obligation of
MediaOne Group. In accordance with the terms of the original debt issuance, the
DECS were redeemed for shares of Enhance Financial Services Group, Inc.
("Enhance") held by MediaOne Group. In addition, the Company settled an option
issued in 1997 for the purchase of MediaOne Group's residual shares of Enhance
common stock at the DECS
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
maturity, resulting in a pretax gain of $9. As a result of both transactions,
the Company has disposed of its ownership in shares of Enhance.
On May 13, 1996, Old U S WEST issued $254 of DECS due May 15, 1999, in the
principal amount of $26.63 per note. The notes bear annual interest at 7.625
percent. Effective with the Separation, the DECS became the obligation of
MediaOne Group. Upon maturity, the DECS will be mandatorily redeemed by the
Company for shares of Financial Security Assurance Holdings Ltd. ("FSA") held by
MediaOne Group or the cash equivalent, at MediaOne Group's option. The number of
shares to be delivered at maturity varies based on the per share market price of
FSA. If the market price is $26.63 per share or less, one share of FSA will be
delivered for each note; if the market price is between $26.63 and $32.48 per
share, a fractional share is delivered so that the value at maturity is equal to
$26.63; if the market price is greater than $32.48 per share, .8197 of a share
is delivered for each note. At December 31, 1998, the FSA shares had a market
price of $54.25 per share.
LONG-TERM DEBT
In August and September 1998, MediaOne Group issued 29 million shares of
6.25 percent Exchangeable Notes (the "Exchangeable Notes") for an issuance price
of $58.125 per note, or gross proceeds of $1,686. The notes mature on August 15,
2001 and are mandatorily redeemable at MediaOne Group's option into (i) shares
of AirTouch common stock held by MediaOne Group, (ii) the cash equivalent, or
(iii) a combination of cash and AirTouch common stock. The number of shares of
AirTouch common stock to be exchanged at maturity for each Exchangeable Note,
and/or the cash equivalent, varies based upon the fair value of the AirTouch
common stock, as follows:
(a) If the fair value of AirTouch common stock is greater than or equal to
$71.75 per share, each Exchangeable Note is equivalent to .8101 of a
share of AirTouch common stock;
(b) If the fair value of AirTouch common stock is less than or equal to
$58.125 per share, each Exchangeable Note is equivalent to one share of
AirTouch common stock; or
(c) If the fair value of AirTouch common stock is less than $71.75 per share
but greater than $58.125 per share, each Exchangeable Note is equivalent
to a fractional share of AirTouch common stock equal to the percent of
the initial issuance price per Exchangeable Note versus the fair value of
the AirTouch common stock per share.
The Exchangeable Notes are unsecured obligations of MediaOne Group, ranking
equally in right of payment with all other unsecured and unsubordinated
obligations of MediaOne Group. MediaOne Group used the proceeds from the debt
issuance to reduce outstanding commercial paper and for general corporate
purposes.
The Exchangeable Notes are being accounted for as an indexed debt instrument
since the maturity value of the Exchangeable Notes is dependent upon the fair
value of the underlying AirTouch common stock. The Company has, therefore,
eliminated the market risk on a decline in the AirTouch common stock value below
$58.125 per share on 29 million of the 59.3 million shares held by the Company.
The maturity value of the Exchangeable Notes was increased by $16 from its
original issuance value to reflect the corresponding increase in the fair value
of the underlying AirTouch common stock at December 31, 1998. At December 31,
1998, the AirTouch common stock had a fair value of $72.4375 per share; MediaOne
Group would be entitled to 19 percent of the fair value in excess of $71.75 per
share on 29 million shares of AirTouch common stock. Since the AirTouch common
stock is a cost method investment being accounted
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
for as "available for sale" securities under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," changes in the maturity
value of the Exchangeable Notes are being recorded in equity as unrealized gains
or losses. See Note 22--Subsequent Events--to the Consolidated Financial
Statements for a discussion of the potential merger of AirTouch with Vodafone.
In conjunction with the Refinancing, MediaOne Group assumed from Old U S
WEST $351 of medium and long-term debt securities which remained outstanding
after the Refinancing. The debt securities were already reflected in the
outstanding debt balances of MediaOne Group's restated Consolidated Balance
Sheet as of December 31, 1997.
Since the capital assets segment is no longer being accounted for as assets
held for sale as of the end of 1998, its debt balances are now reflected in the
Company's consolidated debt balances. As such, long-term debt of the Company
increased $155 and short-term debt increased $43 at December 31, 1998, related
to debt balances of the capital assets segment. See Note 23--Net Investment in
Assets Held for Sale--to the Consolidated Financial Statements. The long-term
debt increase primarily represents non recourse loans issued in September 1997
by MediaOne Financial Services, Inc. ("Financial Services"), a subsidiary of the
Company and a member of the capital assets segment, which are securitized by
certain finance receivables of Financial Services. The loans bear interest at an
average rate of 6.9 percent and mature in April, 2009.
In January 1997, the Company issued medium- and long-term debt totaling $4.1
billion, at a weighted-average interest rate of 7.47 percent, related to the
refinancing of outstanding commercial paper issued in conjunction with the
refinancing of $3,657 of the debt assumed from Continental in the Continental
Acquisition. As discussed above, the majority of such debt was extinguished in
1998 as a result of the Separation and the Refinancing.
The components of long-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Senior unsecured notes, debentures and medium-term notes................... $ 2,346 $ 7,275
Senior subordinated debt................................................... 300 300
Exchangeable Notes......................................................... 1,702 --
Debt exchangeable for common stock......................................... -- 254
Securitized loans.......................................................... 154 --
Insurance company notes.................................................... -- 36
Capital lease obligations.................................................. 1 6
Other...................................................................... 89 81
Unamortized discount--net.................................................. -- (8)
Unamortized premium--net................................................... 261 284
--------- ---------
Total...................................................................... $ 4,853 $ 8,228
--------- ---------
--------- ---------
</TABLE>
Senior unsecured notes and debentures and senior subordinated debt totaling
$2.3 billion as of December 31, 1998 were assumed by the Company in connection
with the Continental Acquisition and are not guaranteed by the Company. These
notes and debentures limit MediaOne's ability to, among other things, pay
dividends, create liens, incur additional debt, dispose of property, investments
and leases, and require certain minimum ratios of cash flow to debt and cash
flow to related fixed charges.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
During 1997, the Company redeemed its zero coupon subordinated notes due
June 25, 2011. Upon redemption, the notes had a recorded value of $268. The debt
extinguishment resulted in a loss of $3 (net of income tax benefits of $2)
primarily related to the write-off of deferred debt issuance costs. Also during
1997, MediaOne redeemed a 10.625 percent senior subordinated note with a
recorded value of $110, including a premium of $10. The debt extinguishment
resulted in a gain of $3 (net of income tax expenses of $2). The Company
financed the redemptions with floating-rate commercial paper.
Interest rates and maturities of long-term debt at December 31st follow:
<TABLE>
<CAPTION>
MATURITIES
-----------------------------------------------------
THERE- TOTAL TOTAL
INTEREST RATES 2000 2001 2002 2003 AFTER 1998 1997
- --------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Above 5% to 6%............................... $ -- $ -- $ -- $ 1 $ -- $ 1 $ 10
Above 6% to 7%............................... 5 1,705 42 24 172 1,948 2,498
Above 7% to 8%............................... -- -- 1 -- 44 45 2,730
Above 8% to 9%............................... 1 204 -- 100 1,375 1,680 1,717
Above 9% to 10%.............................. 2 1 -- -- 525 528 575
Above 10%.................................... -- -- -- -- 300 300 335
--------- --------- --------- --------- --------- --------- ---------
$ 8 $ 1,910 $ 43 $ 125 $ 2,416 4,502 7,865
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Capital lease obligations and other.......... 90 87
Unamortized discount--net.................... -- (8)
Unamortized premium--net..................... 261 284
--------- ---------
Total........................................ $ 4,853 $ 8,228
--------- ---------
--------- ---------
</TABLE>
Interest payments, net of amounts capitalized, were $709, $572 and $232 for
1998, 1997 and 1996, respectively, of which $33, $47 and $59, respectively,
related to the capital assets segment.
INTEREST RATE RISK MANAGEMENT
The objective of an interest rate risk management program is to minimize the
total cost of debt over time and the interest rate variability. This is achieved
through the use of interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt. Under an interest rate swap, the Company agrees with another
party to exchange interest payments at specified intervals over a defined term.
Interest payments are calculated by reference to the notional amount based on
the fixed- and variable-rate terms of the swap agreements. MediaOne Group had no
swaps or interest rate contracts outstanding as of December 31, 1998.
During fourth-quarter 1996, the Company purchased $1.5 billion notional of
put options on U. S. Treasury Bonds to protect against an increase in interest
rates in conjunction with the 1997 refinancing of debt assumed from Continental
in connection with the Continental Acquisition. The contracts closed in January
1997 and a deferred gain of $5 was recognized. The gain was recognized in 1998
in conjunction with the Refinancing as part of the loss on debt extinguishment.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.
The carrying values of mandatorily redeemable preferred stock and long-term
receivables approximate the fair values based on quoted market prices or
discounting future cash flows. The carrying value of foreign exchange contracts
approximate the fair values based on estimated amounts the Company would receive
or pay to terminate such agreements. It is not practicable to estimate the fair
value of financial guarantees because there are no quoted market prices for
similar transactions.
The fair values of interest rate swaps are based on estimated amounts the
Company would receive or pay to terminate such agreements taking into account
current interest rates and creditworthiness of the counterparties.
The fair values of long-term debt, including debt associated with the
capital assets segment, and Preferred Securities and Minority interest in
Centaur Funding, are based on quoted market prices where available or, if not
available, are based on discounting future cash flows using current interest
rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)....................................... $ 5,422 $ 5,861 $ 9,335 $ 9,910
Interest rate swap agreements--assets.................................... -- -- -- --
Interest rate swap agreements--liabilities............................... -- -- -- 19
----------- --------- ----------- ---------
Debt--net................................................................ $ 5,422 $ 5,861 $ 9,335 $ 9,929
----------- --------- ----------- ---------
Minority interest in Centaur Funding..................................... $ 1,099 $ 1,169 $ -- $ --
Preferred Securities..................................................... $ 1,061 $ 1,073 $ 1,080 $ 1,110
</TABLE>
The unamortized cost and estimated market value of debt and equity
securities follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------------------ --------------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED
SECURITIES COST GAINS LOSSES VALUE COST GAINS
- ---------------------------------------------- --------- ----------- ------------- --------- --- -------------
<S> <C> <C> <C> <C> <C> <C>
Equity securities............................. $ 3,045 $ 1,609 $ -- $ 4,654 $ 21 $ 19
Debt securities............................... 1,782 2 (19) 1,765 18 --
Securitized loan.............................. -- -- -- -- 55 --
--------- ----------- ----- --------- --- ---
Total......................................... $ 4,827 $ 1,611 $ (19) $ 6,419 $ 94 $ 19
--------- ----------- ----- --------- --- ---
--------- ----------- ----- --------- --- ---
<CAPTION>
GROSS
UNREALIZED FAIR
SECURITIES LOSSES VALUE
- ---------------------------------------------- ------------- ---------
<S> <C> <C>
Equity securities............................. $ -- $ 40
Debt securities............................... -- 18
Securitized loan.............................. (3) 52
----- ---------
Total......................................... $ (3) $ 110
----- ---------
----- ---------
</TABLE>
Investments in debt and equity securities are classified as available for
sale and are carried at market value. Debt and equity securities for 1998
primarily represent AirTouch preferred and common securities received during the
year in connection with the AirTouch Transaction. Net unrealized gains
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
and losses on marketable securities are included in comprehensive income. The
market value of these securities is based on quoted market prices where
available or, if not available, is based on discounting future cash flows using
current interest rates.
As of December 31, 1998, MediaOne Group held investments in debt securities
of $33 with contractual maturities less than one year, $37 with contractual
maturities greater than one year through five years, and $1,695 with contractual
maturities greater than five years through the year 2020. Investments in debt
securities may not be held to their contractual maturities as the Company may
sell these securities in response to liquidity needs and changes in interest
rates.
During 1997, the Company received proceeds of $898 from the sales of
Teleport Communications Group, Inc. ("TCG") and Time Warner shares, and realized
pretax gains totaling $206.
NOTE 12: LEASING ARRANGEMENTS
The Company has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $56, $74 and
$42 in 1998, 1997 and 1996, respectively. Future minimum lease payments as of
December 31, 1998, under noncancelable operating leases follow:
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------------------
<S> <C>
1999.................................................................................. $ 32
2000.................................................................................. 24
2001.................................................................................. 22
2002.................................................................................. 18
2003.................................................................................. 16
Thereafter............................................................................ 37
---------
Total................................................................................. $ 149
---------
---------
</TABLE>
NOTE 13: MINORITY INTEREST IN CENTAUR FUNDING
On December 15, 1998, Centaur Funding Corporation ("Centaur"), a special
purpose entity consolidated by MediaOne Group, issued three series of preferred
shares to external investors (the "Preference Shares") as well as $25 of common
securities. The Company owns all of the outstanding common securities,
representing a 9.9 percent voting interest in Centaur. Centaur was formed for
the principal purpose of raising capital through the issuance of the Preference
Shares. The net proceeds from the issuance of the Preference Shares were loaned
to MediaOne SPCII, LLC ("MediaOne SPCII"), a subsidiary of MediaOne Group (the
"MediaOne SPC II Notes"). Principal and interest payments on the MediaOne SPC II
Notes are expected to be Centaur's principal source of funds to make dividend
and redemption payments on the Preference Shares. In addition, the dividend
payments and certain redemption payments on the Preference Shares will be
determined by reference to the dividend and redemption activity of the 5.143
percent Class D Cumulative Preferred Shares, Series 1998 of AirTouch (the "Class
D ATI Shares") and the 5.143 percent Class E Cumulative Preferred Shares, Series
1998 of AirTouch (the "Class E ATI Shares" and collectively with the Class D ATI
Shares, the "AirTouch Preferred Shares"). The AirTouch Preferred Shares are
owned by MediaOne SPCII. Payments on the Preference Shares are neither
guaranteed nor secured by MediaOne Group. The sole assets of Centaur are the
MediaOne SPC II Notes
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: MINORITY INTEREST IN CENTAUR FUNDING (CONTINUED)
and the proceeds from the sale of the common securities, which may be invested
in certain eligible investments as outlined in Centaur's articles of
incorporation.
The AirTouch Preferred Shares, 75 percent of the outstanding common stock of
MediaOne International Holdings, Inc., (the "International Stock"), and a
certain intercompany note receivable from MediaOne of Colorado, a wholly owned
subsidiary of the Company, to MediaOne SPCII and certain other assets are
properties of MediaOne SPCII and are not available to pay creditors of any
member of the Company, other than creditors of MediaOne SPCII. The International
Stock owned by MediaOne SPCII may be transferred or dividended by MediaOne SPCII
to another member of the MediaOne Group if such transfer or dividend is in
compliance with certain covenants and limitations. MediaOne SPCII is a limited
liability company, the membership interest of which is owned by MediaOne SPCI
LLC ("MediaOne SPCI"), a wholly owned subsidiary of the Company. That membership
interest is the property of MediaOne SPCI and is not available to pay creditors
of any member of MediaOne Group, other than creditors of MediaOne SPCI.
The three series of Centaur preferred shares are as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C TOTAL
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Dividend Rate.................................................... Variable 9.08% None
Maturity Date.................................................... None 4/21/2020(1) 4/21/2020(1)
Shares Outstanding............................................... 400 934,500 715,500
Book Value....................................................... $ 97 $ 909 $ 93 $ 1,099
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
Liquidation Value................................................ $ 100 $ 934 $ 716 $ 1,750
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
Voting Interest in Centaur....................................... 11.1% 49.0% 30.0%
</TABLE>
- ------------------------
(1) Maturity dates of the Series B and Series C Preference Shares are referenced
to the AirTouch Preferred Shares.
The Auction Market Preference Shares, Series A (the "Series A Preference
Shares") have a liquidation value of two hundred and fifty thousand dollars per
share, and were recorded at their liquidation value less issuance costs of $3.
Dividends on the Series A Preference Shares are payable quarterly as and when
declared by Centaur's Board of Directors out of funds legally available.
The 9.08 percent Cumulative Preference Shares, Series B (the "Series B
Preference Shares") have a liquidation value of one thousand dollars per share,
and were recorded at their liquidation value less issuance costs of $25.
Dividends on the Series B Preference Shares are payable quarterly in arrears
when declared by Centaur's Board of Directors out of funds legally available. In
addition, dividends may be declared and paid only to the extent that dividends
have been declared and paid on the AirTouch Preferred Shares.
The Preference Shares, Series C (the "Series C Preference Shares") have a
liquidation value of one thousand dollars per share at maturity, and were
recorded at their fair value less issuance costs of $3. The value of the Series
C Preference Shares will be accreted to reach its liquidation value upon
maturity.
Certain redemption payments on the Series B and Series C Preference Shares
will be determined by reference to the redemption of the AirTouch Preferred
Shares. On April 7, 2018, all of the outstanding shares of the Class E ATI
Shares must be redeemed. The Class E ATI Shares represent 50 percent of the
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: MINORITY INTEREST IN CENTAUR FUNDING (CONTINUED)
AirTouch Preferred Shares. Consequently, if AirTouch redeems all of the Class E
ATI Shares, Centaur must redeem 50 percent of the outstanding Series B and
Series C Preference Shares. In addition, AirTouch has the option on or after
April 7, 2018, to redeem the Class D ATI Shares. If AirTouch redeems all or a
portion of the Class D ATI Shares, then Centaur would be obligated to redeem the
same percentage of the Series B and Series C Preference Shares. Any remaining
Series B and Series C Preference Shares would be redeemed upon maturity on April
21, 2020, to the extent that AirTouch has redeemed the remaining Class D ATI
Shares.
The Series A, Series B and Series C Preference Shares are recorded as
"Minority Interest in Centaur Funding" on the Consolidated Balance Sheets of the
Company. The Series B Preference Shares rank equally with the Series C
Preference Shares as to redemption payments and upon liquidation, and the Series
B and Series C Preference Shares rank senior to the Series A Preference Shares
and the common shares of Centaur as to redemption payments and upon liquidation.
The Series B Preference Shares rank senior to the Series A Preference Shares
and the common shares with respect to dividend payments. Centaur may only pay a
dividend to its common shareholder when its assets, including the MediaOne SPC
II Notes, exceed the liquidation preference and accumulated and unpaid dividends
on the Series B and Series C Preference Shares by $28 after paying the common
dividends, and when it has a cash balance, including qualified investments, in
excess of $28 after paying the common dividend.
At December 31, 1998, Centaur held $26 in cash for its exclusive use. Since
Centaur's cash management options are limited to non-affiliated, risk-free
investments, and it is restricted from loaning the $26 in cash to MediaOne Group
and its subsidiaries, Centaur's cash balance is not included in the Company's
cash and cash equivalents balance. Instead, Centaur's cash balance has been
classified in the Consolidated Balance Sheets of the Company as part of "Other
Assets."
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
The following table summarizes the Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely Company-guaranteed
debentures (the "Preferred Securities") outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
PREFERRED SECURITIES 7.96% 8.25% 9.30% 9.50% 9.04% TOTAL
- ------------------------ ---------------- --------------- ---------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Subsidiary.............. Financing I Financing II Finance I Finance II Finance III
Maturity Date........... Sept. 30, 2025 Oct. 29, 2036 Sept. 30, 2025 Oct. 29, 2036 Dec. 31, 2038
Shares Outstanding...... 1,312,910 1,185,618 10,658,108 8,520,289 20,000,000
Book Value.............. $33 $30 $274 $224 $500 $1,061
---------------- --------------- ---------------- --------------- --------------- ---------
---------------- --------------- ---------------- --------------- --------------- ---------
Liquidation Value....... $33 $30 $266 $213 $500 $1,042
---------------- --------------- ---------------- --------------- --------------- ---------
---------------- --------------- ---------------- --------------- --------------- ---------
Value at Issuance....... $33 $30 $274 $224 $500
Common Securities....... 19 15 9 7 15
---------------- --------------- ---------------- --------------- ---------------
Subordinated Debt
Securities............ $52 $45 $283 $231 $515
---------------- --------------- ---------------- --------------- ---------------
---------------- --------------- ---------------- --------------- ---------------
</TABLE>
THE EXCHANGE OFFER
On June 12, 1998, MediaOne Group tendered for cash or exchange all of the
outstanding Preferred Securities (the "Exchange Offer"). At that time, the
Company had outstanding $600 face value of 7.96 percent Preferred Securities of
Old U S WEST Financing I ("Financing I"), a subsidiary of Old U S WEST, and $480
face value of 8.25 percent Preferred Securities of Old U S WEST Financing II
("Financing II"), a subsidiary of Old U S WEST. Of the total outstanding, $301
face value of 7.96 percent Preferred Securities and $237 face value of 8.25
percent Preferred Securities were redeemed for cash. The cash redemption amount
of $570 was financed by issuing commercial paper at a weighted average interest
rate of 5.85 percent, which was subsequently repaid with net proceeds from the
Exchangeable Notes issuance. See Note 10--Debt--to the Consolidated Financial
Statements.
In addition, $266 face value of 7.96 percent Preferred Securities of
Financing I were exchanged for $274 fair value of 9.30 percent Preferred
Securities issued by MediaOne Finance Trust I ("Finance I"), a subsidiary of
MediaOne Group, and $213 face value of 8.25 percent Preferred Securities of
Financing II were exchanged for $224 fair value of 9.50 percent Preferred
Securities issued by MediaOne Finance Trust II ("Finance II"), a subsidiary of
MediaOne Group. The Preferred Securities of Finance I and Finance II were
recorded as issued at fair value of $25.75 and $26.30 per security,
respectively. Finance I and Finance II also issued $9 and $7, respectively, of
common securities which are held by MediaOne Group. With the exception of the
dividend rates, the terms and maturity of the Finance I and Finance II Preferred
Securities are substantially the same as those of the Financing I and Financing
II Preferred Securities, respectively.
The Preferred Securities of Financing I and Financing II which were neither
redeemed for cash nor exchanged for new Preferred Securities remain outstanding
and their respective common securities were retained by MediaOne Group.
As a result of the Exchange Offer, MediaOne Group recorded a charge to
equity of $53, after tax benefits of $28. Such charge represented redemption
costs, including the difference between the face and
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES (CONTINUED)
market value of the securities, and a charge for unamortized issuance costs.
Also included was a charge of $19 related to market value premiums on the
exchanged securities.
On October 23, 1998, MediaOne Finance Trust III ("Finance III"), a
subsidiary of MediaOne Group, issued $500 of 9.04 percent Preferred Securities
and $15 of common securities. The common securities are held by MediaOne Group.
Total proceeds from the issuance of the Preferred Securities and the common
securities of Financing I and Financing II (the "Old Trusts"), and Finance I,
Finance II and Finance III, (the "New Trusts", and collectively with the Old
Trusts, "the Trusts"), were used to purchase Subordinated Deferrable Interest
Notes (the "Subordinated Debt Securities") from MediaOne Group Funding, Inc.
("MediaOne Funding"), a wholly owned subsidiary of MediaOne Group, the
obligations under which are fully and unconditionally guaranteed by MediaOne
Group (the "Debt Guarantees"). The Subordinated Debt Securities have the same
interest rate and maturity date as the Preferred Securities to which they
relate. The sole assets of the Trusts are and will be the Subordinated Debt
Securities and the Debt Guarantees. In the Exchange Offer, the Subordinated Debt
Securities that relate to the remaining outstanding Preferred Securities of the
Old Trusts were assumed by MediaOne Group and the related Debt Guarantees were
extinguished.
MediaOne Group has guaranteed the payment of interest and redemption amounts
to holders of the Preferred Securities when the Trusts have funds available for
such payments (the "Payment Guarantee") as well as the Company's and MediaOne
Funding's undertaking to pay all of the costs, expenses and other obligations
(the "Expense Undertaking") of the Old Trusts and the New Trusts, respectively.
The Payment Guarantee and the Expense Undertaking, including MediaOne Group's
guarantee with respect thereto, considered together with MediaOne Funding's
obligations under the indenture and Subordinated Debt Securities and MediaOne
Group's obligations under the indenture, declaration and Debt Guarantees,
constitute a full and unconditional guarantee by MediaOne Group of the Trusts'
obligations under the Preferred Securities. The interest and other payment dates
on the Subordinated Debt Securities are the same as the distribution and other
payment dates on the Preferred Securities. Under certain circumstances, the
Subordinated Debt Securities may be distributed to the holders of Preferred
Securities and common securities in liquidation of the Trusts.
All of the Subordinated Debt Securities are redeemable by the Company or
MediaOne Funding at a redemption price of $25.00 per security, plus accrued and
unpaid interest. If the Company or MediaOne Funding redeems the Subordinated
Debt Securities, the Trusts are required to concurrently redeem their respective
Preferred Securities at $25.00 per share plus accrued and unpaid distributions.
The 9.30 percent and the 7.96 percent Subordinated Debt Securities are
redeemable in whole or in part at any time on or after September 11, 2000. The
9.50 percent and the 8.25 percent Subordinated Debt Securities are redeemable in
whole or in part at any time on or after October 29, 2001. The 9.04 percent
Subordinated Debt Securities are redeemable in whole or in part at any time on
or after October 28, 2003.
NOTE 15: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On June 30, 1997, Old U S WEST acquired cable systems serving approximately
40,000 subscribers in Michigan for cash of $25 and the issuance of 994,082
shares of Old U S WEST Series E Preferred Stock (the "Series E Preferred Stock")
with a fair value of $50. Dividends are payable quarterly at the annual rate of
6.34 percent. Effective with the Separation, the Old U S WEST Series E Preferred
Stock remains outstanding and represents shares of MediaOne Group Series E
Preferred Stock. The Series E Preferred
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION (CONTINUED)
Stock was recorded at fair value of $50.00 per share at June 30, 1997, which was
equal to its liquidation value. Upon redemption, the preferred stockholders may
elect to receive cash or convert their Series E Preferred Stock into MediaOne
Group Stock. Cash redemption is equal to the Series E Preferred Stock's
liquidation value of $50.00 per share, plus accrued dividends. The number of
shares of MediaOne Group Stock to be received upon conversion is $47.50 per
share divided by the then current market price of MediaOne Group Stock. The
conversion rate is subject to adjustment by the Company under certain
circumstances.
The Series E Preferred Stock is redeemable as follows: (a) the Company may
call for redemption all or any part of the Series E Preferred Stock beginning on
June 30, 2002; (b) on a yearly basis beginning August 1, 2007, and continuing
through August 1, 2016, the Company will redeem 49,704 shares of Series E
Preferred Stock, and on June 30, 2017, all of the remaining outstanding shares
of Series E Preferred Stock; or (c) all of the outstanding Series E Preferred
Stock shall be redeemed upon the occurrence of certain events, including the
dissolution or sale of all or substantially all of MediaOne Group.
On September 2, 1994, Old U S WEST issued to Fund American Enterprises
Holdings Inc. ("FFC") 50,000 shares of a class of 7 percent Series C Cumulative
Redeemable Preferred Stock (the "Series C Preferred Stock") for a total of $50.
See Note 23--Net Investment in Assets Held for Sale--to the Consolidated
Financial Statements. Effective with the Separation, the Series C Preferred
Stock remains outstanding and represents shares of Series C Preferred Stock of
MediaOne Group. The Series C Preferred Stock was recorded at the fair market
value of $51 at the issue date. The Company has the right commencing September
2, 1999, to redeem the shares for one thousand dollars per share plus unpaid
dividends and a redemption premium. The shares are mandatorily redeemable in
2004 at face value plus unpaid dividends. At the option of FFC, the preferred
stock also can be redeemed for common shares of FSA. The market value of the
option was $79 and $71 (based on the Black-Scholes model) at December 31, 1998
and 1997, respectively, with no carrying value.
The Series E and Series C Preferred Stocks rank senior to all classes of
MediaOne Group's common stock, are subordinated to any senior debt and the
Preferred Securities, and rank equally with the Series D Preferred Stock. See
Note 16--Shareowners' Equity--to the Consolidated Financial Statements.
NOTE 16: SHAREOWNERS' EQUITY
Prior to the Separation, Old U S WEST had outstanding two separate classes
of common stock. Upon Separation, and in accordance with the terms of the
Separation Agreement, each outstanding share of Media Stock remains outstanding
and represents one share of MediaOne Group Stock. Each share of Media Stock held
as treasury stock by Old U S WEST now represents one share of MediaOne Group
Stock held as treasury stock by MediaOne Group. All issued and outstanding
shares of Communications Stock were redeemed for shares of New U S WEST common
stock. In addition, since the distribution of New U S WEST was accounted for at
fair value, retained earnings were reduced by $24,924 and common stock was
reduced by $421, representing the fair value of the businesses comprising New U
S WEST previously held by Old U S WEST.
COMMON STOCK. For 1998, other activity includes $44 for tax benefits on
stock option exercises, a $39 gain related to the acquisition of General Cable
by Telewest, a $39 gain on the exercise of a call option on shares of the
Company's stock, and miscellaneous activity of $25. In connection with the
November 15,
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: SHAREOWNERS' EQUITY (CONTINUED)
1996, Continental Acquisition, the Company issued 150,615,000 shares of MediaOne
Group Stock to Continental shareowners, valued at $2,590.
SHARE REPURCHASE. On August 7, 1998, the Board of Directors of MediaOne
Group authorized the repurchase of up to 25 million shares of the Company's
common stock over the next three years, dependent on market and financial
conditions. During 1998, MediaOne Group purchased and placed into treasury
approximately 8,682,000 shares of MediaOne Group stock at an average purchase
price of $40.51 per share, or a total cost basis of $352. Prior to the
Separation, Old U S WEST purchased and placed into treasury $31 of
Communications Stock. All outstanding shares of Communications Stock held as
treasury stock by Old U S WEST were canceled as of the Separation date. During
1997 and 1996, the Company purchased and placed into treasury 2,838,000 and
15,919,000 shares of MediaOne Group Stock, at an average purchase price per
share of $18.71 and $18.66, and a total cost basis of $53 and $297,
respectively.
Following is a roll-forward of share activity during the three years ended
December 31, 1998:
<TABLE>
<CAPTION>
COMMON SHARES
---------------------------------
MEDIAONE GROUP COMMUNICATIONS
STOCK STOCK
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE DECEMBER 31, 1995................................. 472,314 473,635
Issuance of Communications Stock........................ 6,822
Issuance of MediaOne Group Stock for Continental
Acquisition........................................... 150,615
Other issuances of MediaOne Group Stock................. 1,853
Purchase of treasury stock.............................. (15,919)
------- ---------------
BALANCE DECEMBER 31, 1996................................. 608,863 480,457
Issuance of Communications Stock........................ 4,058
Issuances of MediaOne Group Stock....................... 1,783
Purchase of treasury stock.............................. (2,838)
------- ---------------
BALANCE DECEMBER 31, 1997................................. 607,808 484,515
Issuance of Communications Stock........................ 1,101
Distribution of New U S WEST............................ (485,042)
Issuance of MediaOne Group Stock........................ 4,350
Purchase of treasury stock.............................. (8,682) (574)
------- ---------------
BALANCE DECEMBER 31, 1998................................. 603,476 --
------- ---------------
------- ---------------
</TABLE>
SERIES D PREFERRED STOCK. On November 15, 1996, Old U S WEST issued
19,999,478 shares of 4.5 percent, 20 year, Series D Preferred Stock (the "Series
D Preferred Stock") to Continental shareowners as partial consideration for the
Continental Acquisition. Dividends are payable quarterly on the nonvoting Series
D Preferred Stock as and when declared by the Board of Directors of MediaOne
Group (the "Board of Directors") out of funds legally available. Effective with
the Separation, the Series D Preferred Stock remains outstanding and represents
Series D Preferred Stock of MediaOne Group. The Series D Preferred Stock has a
liquidation value of $50 per share and was recorded at the November 15, 1996
fair value of $46 per share. The Series D Preferred Stock is convertible at any
time at the option of the holder into 1.98052 shares of MediaOne Group Common
Stock per share of Series D Preferred Stock. Since
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: SHAREOWNERS' EQUITY (CONTINUED)
holders of the Series D Preferred Stock did not participate in the Dex Dividend
upon Separation, the Board of Directors adjusted the conversion rate of the
Series D Preferred Stock from 1.905 shares of MediaOne Group Common Stock per
share of Series D Preferred Stock to 1.98052 per share. Between November 15,
1999 and November 15, 2001, the Series D Preferred Stock is redeemable at par,
at the option of the Company, into shares of MediaOne Group Stock if the market
price of MediaOne Group common shares has closed at or above $34.08 per share
for at least 20 of the 30 consecutive trading days prior to the notice of
redemption. After November 15, 2001, the Series D Preferred Stock is redeemable
at par, at the option of the Company, in cash, MediaOne Group Stock, or any
combination of cash and stock. If MediaOne Group Stock is elected, the number of
shares to be issued will be determined based on the average market price for the
ten consecutive trading days ending on the third business day prior to
redemption, reduced by five percent. On November 15, 2016, the Company is
required to redeem the Series D Preferred Stock, at its election, for cash,
MediaOne Group Stock, or any combination of cash and stock. Upon certain events,
including the disposition of all or substantially all of the properties and
assets attributed to MediaOne Group, the Series D Preferred Stock becomes
mandatorily redeemable. The Series D Preferred Stock ranks senior to all classes
of MediaOne Group common stock, is subordinated to any senior debt and the
Preferred Securities, and ranks equally with the Series E and C Preferred
Stocks.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP"). MediaOne Group sponsors
a defined contribution savings plan for substantially all employees of MediaOne
Group, except for foreign national employees. Effective in 1997, employees of
the Atlanta cable systems also became eligible to participate in the defined
contribution savings plan. Borrowings associated with the LESOP were repaid in
May 1998. Prior to that time, the borrowings associated with the LESOP, which
were unconditionally guaranteed by Old U S WEST, were included in the
Consolidated Balance Sheets of the Company and corresponding amounts were
recorded as reductions to shareowners' equity. Contributions from Old U S WEST
as well as dividends on unallocated shares held by the LESOP ($1, $3 and $5 in
1998, 1997 and 1996, respectively) were used for debt service.
The Company matched a percentage of eligible employee contributions with
shares of MediaOne Group Stock. Shares in the LESOP were released as principal
and interest were paid on the debt. At December 31, 1998, 12,831,958 shares of
MediaOne Group Stock and 12,537,710 shares of Communications Stock had been
allocated from the LESOP to participants' accounts. At December 31, 1998, there
are no remaining MediaOne Group shares to be allocated.
The Company recognizes expense based on the cash payments method. MediaOne
Group's contributions to the plan (excluding dividends) were $8, $9 and $10 in
1998, 1997 and 1996, respectively, of which $1, $1 and $2, respectively, have
been classified as interest expense.
SHAREHOLDER RIGHTS PLAN. The Board of Directors has adopted a shareholder
rights plan which, in the event of a takeover attempt, would entitle existing
shareowners to certain preferential rights. The rights expire on April 6, 1999,
and are redeemable by MediaOne Group at any time prior to the date they would
become effective. The expiration date for the rights has been extended to the
year 2009. See Note 22-- Subsequent Events--to the Consolidated Financial
Statements.
COMPREHENSIVE INCOME. During 1998, MediaOne Group adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting comprehensive income and its components within the
financial statements. Comprehensive income includes net income
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: SHAREOWNERS' EQUITY (CONTINUED)
and other changes to equity not included in net income, such as foreign currency
translation and unrealized gains or losses on debt and equity securities.
Of the total net unrealized gains on debt and equity securities during 1998,
$826 (net of deferred taxes of $530), relates to the Company's investment in
AirTouch common and preferred stock acquired in connection with the AirTouch
Transaction. During 1998, MediaOne Group recorded an unrealized gain of $147
related to its investment in AirTouch preferred stock. This unrealized gain was
fully offset by a loss on an interest rate swap agreement which was designed to
minimize the Company's exposure to fluctuations in the fair value of the
AirTouch preferred stock as a result of interest rate changes.
The following table presents the components of other comprehensive income
and their related tax impacts. It also presents reclassification adjustments
related to gains realized on the sale of debt and equity securities.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
PRE- AFTER- PRE- AFTER-
TAX TAX TAX TAX TAX TAX
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss) on debt and equity securities
and Exchangeable Notes.............................. $ 1,556 $ (601) $ 955 $ 271 $ (109) $ 162
Less: Reclassification for gains realized in net
income.............................................. (20) 8 (12) (231) 93 (138)
--------- --------- --------- --------- --------- ---------
Net unrealized gain (loss)............................ 1,536 (593) 943 40 (16) 24
Foreign currency translation.......................... (6) 2 (4) (92) 36 (56)
--------- --------- --------- --------- --------- ---------
Other comprehensive income (loss)..................... $ 1,530 $ (591) $ 939 $ (52) $ 20 $ (32)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
1996
-----------------
PRE- TAX TAX AFTER- TAX
--- --- -----
<S> <C> <C> <C>
Unrealized gain (loss) on debt and equity securities
and Exchangeable Notes.............................. $ (6) $ 1 $ (5)
Less: Reclassification for gains realized in net
income.............................................. -- -- --
-- -- --
Net unrealized gain (loss)............................ (6) 1 (5)
Foreign currency translation.......................... (2) 1 (1)
-- -- --
Other comprehensive income (loss)..................... $ (8) $ 2 $ (6)
-- -- --
-- -- --
</TABLE>
NOTE 17: EARNINGS PER SHARE
The following table reflects the computation of basic and diluted earnings
(loss) per share for MediaOne Group Stock and Communications Stock, in
accordance with the provisions of SFAS No. 128, "Earnings Per Share." The
dilutive securities for 1998 represent the incremental weighted average shares
from potential share issuances associated with stock options for MediaOne Group
Stock and Communications Stock, and the assumed conversion of the convertible
Series D Preferred Stock for MediaOne Group Stock. The diluted earnings (loss)
and related per share amounts for 1997 and 1996 do not include potential share
issuances associated with stock options and the convertible Series D Preferred
Stock since the effect would have been antidilutive on the loss from continuing
operations.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
MEDIAONE GROUP STOCK:
Income (loss) from continuing operations..................................... $ 1,430 $ (827) $ (357)
Preferred stock dividends and accretion.................................... (55) (52) (9)
Loss on redemption of Preferred Securities................................. (53) -- --
---------- ---------- ----------
Income (loss) from continuing operations available to MediaOne Group Stock
shareowners used for basic earnings (loss) per share....................... 1,322 (879) (366)
Preferred stock dividends and accretion on assumed conversion.............. 49 -- --
---------- ---------- ----------
Income (loss) from continuing operations available to MediaOne Group Stock
shareowners used for diluted earnings (loss) per share..................... $ 1,371 $ (879) $ (366)
---------- ---------- ----------
---------- ---------- ----------
Income from discontinued operations used for basic and diluted earnings per
share
Results of operations(1)................................................... $ 158 $ 347 $ 286
---------- ---------- ----------
---------- ---------- ----------
Gain on Separation......................................................... $ 24,461 -- --
---------- ---------- ----------
---------- ---------- ----------
Extraordinary item--early extinguishment of debt--net of tax................. $ (333) $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares used for basic earnings (loss) per share... 607,648 606,749 491,924
Effect of dilutive securities:
Stock options.............................................................. 6,368 -- --
Series D Preferred Stock................................................... 38,939 -- --
---------- ---------- ----------
Weighted average number of shares used for diluted earnings (loss) per
share...................................................................... 652,955 606,749 491,924
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Represents the operations of Dex, which were discontinued on June 12, 1998.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
MEDIAONE GROUP STOCK:
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations........................................................ $ 2.18 $ (1.45) $ (0.74)
---------- ---------- ----------
---------- ---------- ----------
Discontinued operations--results of operations(1)............................ $ 0.26 $ 0.57 $ 0.58
---------- ---------- ----------
---------- ---------- ----------
Discontinued operations--gain on Separation.................................. $ 40.25 -- --
---------- ---------- ----------
---------- ---------- ----------
Extraordinary item--early extinguishment of debt--net of tax................. $ (0.55) -- --
---------- ---------- ----------
---------- ---------- ----------
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations........................................................ $ 2.10 $ (1.45) $ (0.74)
---------- ---------- ----------
---------- ---------- ----------
Discontinued operations--results of operations(1)............................ $ 0.24 $ 0.57 $ 0.58
---------- ---------- ----------
---------- ---------- ----------
Discontinued operations--gain on Separation.................................. $ 37.46 -- --
---------- ---------- ----------
---------- ---------- ----------
Extraordinary item--early extinguishment of debt--net of tax................. $ (0.51) -- --
---------- ---------- ----------
---------- ---------- ----------
COMMUNICATIONS STOCK:(2)
Income from discontinued operations used for basic and diluted earnings per
share(3)................................................................... $ 589 $ 1,177 $ 1,249
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares used for basic earnings per share.......... 484,972 482,751 477,549
Effect of dilutive securities:
Stock options................................................................ 4,097 -- --
---------- ---------- ----------
Weighted average number of shares used for diluted earnings per share........ 489,069 482,751 477,549
---------- ---------- ----------
---------- ---------- ----------
BASIC AND DILUTED EARNINGS PER SHARE:
Basic earnings per share from discontinued operations(3)..................... $ 1.21 $ 2.43 $ 2.62
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share from discontinued operations(3)................... $ 1.20 $ 2.43 $ 2.62
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Represents the operations of Dex, which were discontinued on June 12, 1998.
(2) The Communications Stock was canceled on June 12, 1998, effective with the
Separation.
(3) Represents the operations of the Communications Group, which were
discontinued on June 12, 1998, and included with New U S WEST.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: STOCK INCENTIVE PLANS
MediaOne Group maintains stock incentive plans for executives and other
employees and nonemployees, primarily members of the Board of Directors. The
Amended MediaOne Group 1994 Stock Plan (the "Plan") is a successor plan to the
Amended 1994 Stock Plan which was maintained by Old U S WEST. Under the Amended
1994 Stock Plan, each outstanding Old U S WEST stock option was converted into
one Media Group and one Communications Group stock option. Subsequently, each
group granted options primarily in its own stock. Effective on the Separation,
stock options, whether held by individuals who became MediaOne Group or New U S
WEST employees, continued to be outstanding as stock options for MediaOne Group
and New U S WEST. The number of MediaOne Group stock options and the exercise
prices were adjusted to preserve the economic value of the options before and
after the Dex Dividend. The Plan is administered by the Human Resources
Committee of the Board of Directors with respect to officers, executive officers
and outside directors and by a special committee with respect to all other
eligible employees and eligible nonemployees.
As of December 31, 1998, the maximum aggregate number of shares of MediaOne
Group Stock that could have been granted in any calendar year for all purposes
under the Plan was three-quarters of one percent (0.75 percent) of the shares
outstanding (excluding shares held in treasury) on the first day of such
calendar year. In the event that fewer than the full aggregate number of shares
available for issuance in any calendar year were issued in any such year, the
shares not issued may be added to the shares available for issuance in any
subsequent year or years. Options granted vest over periods up to three years
and may be exercised no later than 10 years after the grant date.
The compensation cost that has been included in income in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees," was $26, zero
and $1 in 1998, 1997 and 1996, respectively, all of which related to
modifications of stock option terms.
MediaOne Group has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but continues to account for the Plan
under APB Opinion No. 25. Had compensation cost for the Plan been determined
consistent with the fair value based accounting method under SFAS No. 123, the
pro forma net income and earnings per share for both the MediaOne Group Stock
and Communications Stock would have been the following.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: STOCK INCENTIVE PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996
1998 ---------------------- ----------------------
---------------------- BASIC BASIC
BASIC NET EARNINGS NET EARNINGS
NET EARNINGS INCOME (LOSS) PER INCOME (LOSS) PER
INCOME PER SHARE (LOSS) SHARE (LOSS) SHARE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
MEDIAONE GROUP STOCK:
As reported................................... $ 25,716 $ 42.14 $ (480) $ (0.88) $ (71) $ (0.16)
Pro forma..................................... $ 25,681 42.08 (501) (0.91) (82) (0.18)
COMMUNICATIONS STOCK:
As reported................................... -- -- 1,177 2.43 1,249 2.62
Pro forma..................................... -- -- 1,164 2.41 1,247 2.61
</TABLE>
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the options' vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
MEDIAONE GROUP STOCK:
Risk-free interest rate.................................. 5.53% 6.40% 6.30%
Expected life............................................ 4.5 years 5.0 years 5.0 years
Expected volatility...................................... 30.0% 30.0% 28.5%
Weighted average grant date fair value................... $12.53 $7.81 $7.23
COMMUNICATIONS STOCK:
Risk-free interest rate.................................. 6.40% 6.50%
Expected dividend yield.................................. 5.80% 6.70%
Expected life............................................ 4.0 years 4.5 years
Expected volatility...................................... 25.0% 19.6%
Weighted average grant date fair value................... $5.70 $3.67
</TABLE>
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
MEDIAONE GROUP STOCK COMMUNICATIONS STOCK
------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Outstanding December 31, 1995................................. 9,708,166 $ 16.33 9,423,101 $ 24.39
------------ ----------- ------------- -----------
Granted..................................................... 5,523,728 19.36 3,624,602 30.97
Exercised................................................... (507,329) 14.93 (1,205,730) 22.37
Canceled or expired......................................... (610,471) 17.86 (429,058) 25.01
------------ ----------- ------------- -----------
Outstanding December 31, 1996................................. 14,114,094 $ 17.49 11,412,915 $ 26.67
------------ ----------- ------------- -----------
Granted..................................................... 8,733,782 20.33 9,491,642 34.87
Exercised................................................... (1,371,529) 16.30 (2,648,569) 25.41
Canceled or expired......................................... (1,027,388) 18.35 (637,411) 27.54
------------ ----------- ------------- -----------
Outstanding December 31, 1997................................. 20,448,959 $ 18.74 17,618,577 $ 31.23
------------ ----------- ------------- -----------
Granted..................................................... 6,088,849 36.40
Dex Adjustment.............................................. 827,038 0.90
Separation.................................................. -- -- (17,618,577) --
Exercised................................................... (4,391,697) 17.46
Canceled or expired......................................... (1,239,154) 21.84
------------ ----------- ------------- -----------
Outstanding December 31, 1998................................. 21,733,995 $ 23.13 -- --
------------ ----------- ------------- -----------
------------ ----------- ------------- -----------
</TABLE>
The number of exercisable options under the Plan and the weighted-average
exercise prices follow:
<TABLE>
<CAPTION>
MEDIAONE GROUP STOCK COMMUNICATIONS STOCK
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
EXERCISABLE OPTIONS AT: OF SHARES PRICE OF SHARES PRICE
- ----------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1996................................................ 4,867,207 $ 16.74 3,881,100 $ 25.71
December 31, 1997................................................ 7,235,685 16.54 5,299,955 25.72
December 31, 1998................................................ 9,742,450 18.30 -- --
</TABLE>
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1998. The total options outstanding
represent 3.6 percent of the MediaOne Group common shares outstanding.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------ EXERCISABLE OPTIONS
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------------------------------------- ------------ --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
MEDIAONE GROUP STOCK
$9.81 - $14.87..................................... 2,190,892 4.37 $ 14.08 2,190,892 $ 14.08
$14.97 - $16.95.................................... 2,741,956 6.47 16.46 2,431,411 16.57
$17.06 - $17.78.................................... 2,991,600 8.08 17.75 251,696 17.50
$17.82 - $19.03.................................... 2,472,984 6.95 18.32 1,557,634 18.50
$19.10 - $19.83.................................... 2,449,508 6.55 19.74 1,837,436 19.77
$19.89 - $21.51.................................... 2,443,590 7.99 21.27 798,946 21.26
$21.75 - $33.40.................................... 2,647,064 8.65 29.16 622,030 30.03
$33.52 - $37.43.................................... 2,518,320 9.22 37.06 52,363 35.96
$37.49 - $49.13.................................... 1,277,731 9.54 44.93 42 44.38
$49.63 - $49.63.................................... 350 9.58 49.63 -- --
------------ --- ----------- ---------- -----------
21,733,995 7.48 $ 23.13 9,742,450 $ 18.30
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 6,088,849, 8,733,782 and 5,523,728 MediaOne Group Stock options
were granted in 1998, 1997 and 1996, respectively. A total of 9,491,642 and
3,624,602 Communications Stock options were granted in 1997 and 1996,
respectively. Included in the total grants were 249,827 of modified MediaOne
Group Stock options and 198,027 of modified Communications Stock options
revalued as new grants during 1996. The modified MediaOne Group Stock options
were not significant in 1998 and 1997, and the Communications Stock options were
not significant during 1997. Including the modified options, the
weighted-average grant date fair value was $7.10 for MediaOne Group Stock
options and $3.87 for Communications Stock options in 1996. The exercise price
of MediaOne Group and Communications Stock options, excluding modified options,
equals the market price on the grant date. The exercise prices of modified stock
options may be greater or less than the market price on the revaluation date.
Approximately 4,046,000 and 2,700,000 shares of MediaOne Group Stock were
available for grant under the plans in effect at December 31, 1998 and 1997,
respectively, and 3,100,000 shares of Communications Stock were available for
grant under the plans in effect at December 31, 1997. Approximately 25,780,000
shares of MediaOne Group Stock were reserved for issuance under the Plan at
December 31, 1998.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: EMPLOYEE BENEFITS
MEDIAONE GROUP PLANS
Effective on the Separation, MediaOne Group established a new defined
benefit pension plan and a new retiree health care and life insurance plan for
certain of its employees. A portion of the existing assets of the Old U S WEST
pension plan were transferred at fair value to the MediaOne Group pension plan
such that the ratio of plan assets to plan liabilities, calculated on a
projected benefit obligation basis, was the same for the MediaOne Group and New
U S WEST pension plans. The existing assets of the Old U S WEST postretirement
plan were transferred to MediaOne Group in a similar manner, such that the ratio
of plan assets to plan liabilities, calculated on an accumulated postretirement
benefit obligation basis, was the same for MediaOne Group and New U S WEST.
The MediaOne Group defined benefit pension plan covers substantially all of
its employees, except for foreign national employees. Management benefits are
based on a final pay formula and MediaOne Group uses the projected unit credit
method for the determination of pension cost for financial reporting and funding
purposes. MediaOne Group's policy is to fund amounts required under the Employee
Retirement Income Security Act of 1974; no funding was required in 1998, 1997
nor 1996.
MediaOne Group also sponsors a nonqualified pension plan which pays
supplemental pension benefits to key executives in addition to amounts received
under the MediaOne Group pension plan. The obligation and annual expense for
this plan are included in the 1998 pension detail below.
MediaOne Group provides certain health care and life insurance benefits to
retired employees. MediaOne Group uses the projected unit credit method for the
determination of postretirement medical and life costs for financial reporting
purposes.
The components of the 1998 net periodic benefit cost for pension benefits
and for other postretirement benefits were $3 and $2, respectively, during the
year.
Below is a reconciliation of the change in the fair value of the plan assets
for the pension and postretirement plans for 1998:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
<S> <C> <C>
Fair value of plan assets at beginning of year....................... $ -- $ --
Actual return on plan assets....................................... 10 --
Contributions for non-qualified plan............................... 4 --
Assets transferred from Old U S WEST............................... 194 4
Assets due from Old U S WEST....................................... 19 1
Benefits paid...................................................... (9) --
----- -----
Fair value of plan assets at end of year(1) $ 218 $ 5
----- -----
----- -----
</TABLE>
- ------------------------
(1) Pension assets include MediaOne Group stock of $1.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: EMPLOYEE BENEFITS (CONTINUED)
Below is a reconciliation of the change in the benefit obligation for the
pension and postretirement plans for 1998:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
<S> <C> <C>
Net benefit obligation at beginning of year.......................... $ -- $ --
Service cost....................................................... 8 1
Interest cost...................................................... 6 --
Liability transferred from Old U S WEST............................ 190 23
Actuarial loss..................................................... 5 1
Benefits paid...................................................... (9) --
----- -----
Net benefit obligation at end of year................................ $ 200 $ 25
----- -----
----- -----
</TABLE>
The following table represents the funded status of the pension and
postretirement plans at December 31, 1998:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
<S> <C> <C>
Funded status at end of year......................................... $ 18 $ (20)
Unrecognized actuarial (gain) loss................................. (47) 5
Unrecognized prior service cost.................................... 20 1
Unrecognized net transition (asset) obligation..................... (7) --
----- -----
Net accrued liability at end of year................................. $ (16) $ (14)
----- -----
----- -----
</TABLE>
The actuarial assumptions used to account for the plans are as follows:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
--------------- ------------------------
<S> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
1998
Discount rate...................................... 6.75% 6.75%
Expected return on assets.......................... 8.75% 8.75%
Rate of compensation increase...................... 4.00% N/A
Health care cost trend on covered charges.......... N/A 8% decreasing to an
ultimate trend of 5% in
2011
</TABLE>
A one percent change in the assumed healthcare cost trend rate would have
increased the accumulated postretirement benefit obligation by $4 and decreased
it by $3. The impact on service and interest cost components would not have been
material.
OLD U S WEST PLANS
Prior to the Separation, MediaOne Group participated in the employee
benefits plans sponsored by Old U S WEST. Since both MediaOne Group and New U S
WEST belonged to a single pension and postretirement plan, assets were not
segregated until Separation. Pension and postretirement benefit costs were
allocated to MediaOne Group based on the ratio of MediaOne Group's service cost
to
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: EMPLOYEE BENEFITS (CONTINUED)
the total service cost. MediaOne Group's share of the net pension cost (credit)
for 1997 and 1996 was $(3) and zero, respectively. MediaOne Group's share of the
net postretirement costs for 1997 and 1996 was $4 and $2, respectively.
NOTE 20: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
FEDERAL:
Current.......................................................... $ (372) $ (210) $ (96)
Deferred......................................................... 1,358 (137) (88)
--------- --------- ---------
986 (347) (184)
--------- --------- ---------
STATE AND LOCAL:
Current.......................................................... (14) (20) (17)
Deferred......................................................... 203 (26) (11)
--------- --------- ---------
189 (46) (28)
--------- --------- ---------
FOREIGN:
Current.......................................................... 15 (1) 2
Deferred......................................................... 18 14 30
--------- --------- ---------
33 13 32
--------- --------- ---------
Provision (benefit) for income taxes............................... $ 1,208 $ (380) $ (180)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company paid $24, $636 and $693 for income taxes in 1998, 1997 and 1996,
respectively, inclusive of the discontinued operations of New U S WEST and the
capital assets segment. Income taxes paid for the discontinued operations of New
U S WEST, through the Separation date of June 12, 1998, were $379, $906 and $814
in 1998, 1997 and 1996, respectively.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN PERCENT)
<S> <C> <C> <C>
Federal statutory tax rate.............................................. 35.0 35.0 35.0
State income taxes--net of federal effect............................... 3.5 2.5 3.3
Foreign taxes--net of federal effect.................................... (1.8) (0.7) (3.9)
Goodwill amortization................................................... (4.5) (4.7) (2.4)
Other................................................................... 0.6 (0.6) 1.5
--- --- ---
Subtotal without gain on sale of domestic wireless...................... 32.8 31.5 33.5
Gain on sale of domestic wireless....................................... 13.0 -- --
--- --- ---
Effective tax rate...................................................... 45.8 31.5 33.5
--- --- ---
--- --- ---
</TABLE>
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Intangible assets.......................................................... $ 2,685 $ 2,605
Property, plant and equipment.............................................. 284 270
State deferred tax liability-- net of federal effect....................... 867 667
Leases..................................................................... 557 585
Investment in AirTouch Communications...................................... 1,978 --
Other...................................................................... 95 253
--------- ---------
Deferred tax liabilities................................................. 6,466 4,380
--------- ---------
Postemployment benefits, including pension................................. -- 23
State deferred tax asset--net of federal effect............................ 87 74
Reserves................................................................... 189 45
Investments................................................................ 203 203
Net operating loss and tax credit carryforwards............................ 127 155
Valuation allowance........................................................ (279) (320)
Foreign currency translation adjustment.................................... 57 --
Other...................................................................... 121 357
--------- ---------
Deferred tax assets...................................................... 505 537
--------- ---------
Net deferred tax liability................................................. $ 5,961 $ 3,843
--------- ---------
--------- ---------
</TABLE>
In connection with the Continental Acquisition, the Company has acquired
operating loss carryforwards of approximately $217 for federal income tax
purposes, expiring in various years through 2011. The Company also acquired
investment tax credit carryforwards of approximately $50, expiring in various
years through 2005. Due to potential use limitations, a valuation allowance of
$279 has been established for the carryforwards and for a deferred tax asset
associated with an investment. If the realization of the carryforwards or
deferred tax asset becomes more likely than not in future periods, any reduction
in the valuation allowance will be allocated to reduce goodwill and acquired
intangible assets.
The current portion of the deferred tax asset was $74 and $102 at December
31, 1998 and 1997, respectively, resulting primarily from compensation-related
items and other accrued expenses. The net deferred tax liability includes $669
in 1997 related to the capital assets segment. Foreign operations contributed
pretax losses of $336, $604 and $362 during 1998, 1997 and 1996, respectively.
NOTE 21: COMMITMENTS AND CONTINGENCIES
MediaOne Group commitments and debt guarantees associated with its
investments totaled approximately $310 for its international investments and
$240 for its domestic investments. In addition, a MediaOne Group subsidiary
guarantees debt, non-recourse to MediaOne Group, associated with its
international investment of approximately $880.
Certain cable subsidiaries of the Company in Florida, Michigan, Minnesota
and Ohio have been named as defendants in various class action lawsuits
challenging such subsidiaries' policies for charging late payment fees when
customers fail to pay for subscriber services in a timely manner. MediaOne Group
is
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: COMMITMENTS AND CONTINGENCIES (CONTINUED)
currently reviewing the lawsuits to determine what impact, if any, such lawsuits
may have on the operations of the Company.
NOTE 22: SUBSEQUENT EVENTS
CABLE SYSTEMS. On February 2, 1999, MediaOne Group and Time Warner Cable, a
division of Time Warner and TWE, signed a definitive agreement to trade certain
cable systems. MediaOne Group will trade cable systems in Ohio, Maine and
California serving approximately 350,000 subscribers, while Time Warner Cable
will trade cable systems in Massachusetts, New Hampshire and Georgia serving
approximately 310,000 subscribers. MediaOne Group will also receive cash from
the trade. The transaction is expected to close in 1999.
On March 2, 1999, MediaOne Group and Cox Communications, Inc. ("Cox") signed
a definitive agreement to trade certain cable systems. MediaOne Group will trade
cable systems in Connecticut and Rhode Island serving approximately 51,000
subscribers, while Cox will trade cable systems in Massachusetts serving
approximately 54,000 subscribers. MediaOne Group will also pay cash for the
trade. The transaction is expected to close during the third quarter of 1999,
subject to legal and regulatory approval.
SHAREHOLDER RIGHTS PLAN. On February 9, 1999, the Board of Directors
approved a new shareholder rights plan to replace the existing plan upon
expiration. The new rights expire on April 6, 2009. The new shareholder rights
plan contains terms similar to the original plan.
INVESTMENT IN AIRTOUCH COMMUNICATIONS. On January 15, 1999, AirTouch
entered into a preliminary agreement with Vodafone Group Public Limited Company
("Vodafone") to merge its operations with a subsidiary of Vodafone. The proposed
terms of the preliminary merger agreement indicate that the outstanding common
shares of AirTouch would be converted into the right to receive five ordinary
shares of Vodafone and $9.00 in cash per AirTouch common share held. MediaOne
Group currently owns approximately 59.3 million shares of AirTouch common stock,
of which a maximum of 29 million shares could be used in the future to
extinguish the Exchangeable Notes outstanding. See Note 10--Debt--to the
Consolidated Financial Statements.
INVESTMENT IN PRIMESTAR. On January 22, 1999, PrimeStar announced that it
had reached an agreement with Hughes Electronics Corporation ("Hughes") to sell
its rights to acquire certain high-power satellite assets to Hughes for
approximately $35 in cash and the assumption by Hughes of $465 of certain
advances made by Old PrimeStar to Tempo Satellites, Inc. In addition, PrimeStar
agreed to sell its DBS medium-power business and assets to Hughes for
approximately $1.1 billion in cash and 4.871 million shares of General Motors
Class H common stock. The sales are contingent upon the receipt of various
regulatory approvals and the consent of certain third parties, including
PrimeStar lenders.
OPTUS SHARES. During the first quarter of 1999, MediaOne Group sold its
investment in the 50 million Optus shares held as of year-end 1998, for net
proceeds of $121 and a pre-tax gain of $119. In addition, during the first
quarter of 1999, MediaOne Group received 13.6 million Optus shares as a result
of having met certain performance measures at Optus, and purchased 5.6 million
additional Optus shares related to the Company's anti-dilution rights. MediaOne
Group is currently in the process of disposing of its remaining investment in
Optus shares.
COMCAST MERGER. On March 22, 1999, MediaOne Group announced that it had
entered into a merger agreement with Comcast Corporation ("Comcast") whereby
MediaOne Group would be merged into
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22: SUBSEQUENT EVENTS (CONTINUED)
Comcast. The merger agreement calls for MediaOne Group common shareowners to
receive 1.1 shares of Comcast Class A Special Common Stock for each share of
MediaOne Group common stock held. The transaction will be tax-free to MediaOne
Group shareowners. Subject to the approval of both shareowner groups, and
various federal, state and local regulatory bodies, the merger could be
completed as early as year-end 1999. While the merger agreement prohibits
MediaOne Group from soliciting competing acquisition proposals, MediaOne Group
may, subject to compliance with the terms of the merger agreement and payment of
a $1.5 billion fee to Comcast, accept a superior proposal that is submitted
within 45 days of the date of the merger agreement.
NOTE 23: NET INVESTMENT IN ASSETS HELD FOR SALE
As of December 31, 1998, the disposal of assets held for sale of the capital
assets segment was substantially completed. Therefore, the Consolidated Balance
Sheet at December 31, 1998 includes the accounts of the capital assets segment.
Prior to this time, the capital assets segment had been accounted for in
accordance with Staff Accounting Bulletin No. 93, issued by the SEC, which
required discontinued operations not disposed of within one year of the
measurement date to be accounted for prospectively in continuing operations as a
"net investment in assets held for sale." The remaining assets of the capital
assets segment primarily represent long term lease finance receivables which
will be run-off. These receivables are reflected in "Other Assets" in the
Consolidated Balance Sheet for 1998. Beginning in 1999, the operations of the
capital assets segment will also be reflected in the Consolidated Statements of
Operations.
MediaOne Real Estate, Inc. ("Real Estate") sold various assets during 1998,
1997 and 1996 for proceeds of $182, $88 and $156, respectively. The sales
proceeds were in line with estimates. Proceeds from sales were primarily used to
repay related debt. As of December 31, 1998, the Company had substantially
completed the liquidation of this portfolio.
Building sales and operating revenues of the capital assets segment were
$208, $116 and $223 in 1998, 1997 and 1996 , respectively. During 1998, 1997 and
1996, income or losses from the capital assets segment were deferred and
included within the reserve for assets held for sale.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The components of net investment in assets held for sale as of December 31,
1997 follow:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
ASSETS
Cash and cash equivalents........................................................................... $ 54
Finance receivables--net............................................................................ 777
Investment in real estate--net of valuation allowance............................................... 156
Bonds, at market value.............................................................................. 119
Investment in FSA................................................................................... 365
Other assets........................................................................................ 197
------
Total assets........................................................................................ $ 1,668
------
------
LIABILITIES
Debt................................................................................................ $ 372
Deferred income taxes............................................................................... 669
Accounts payable, accrued liabilities and other..................................................... 197
Minority interests.................................................................................. 11
------
Total liabilities................................................................................... 1,249
------
Net investment in assets held for sale.............................................................. $ 419
------
------
</TABLE>
Finance receivables primarily consist of contractual obligations under
long-term leases with maturity dates ranging from 1999 to 2016 that MediaOne
Group intends to run off. Certain leases contain renewal options and buyout
provisions. These long-term leases consist mostly of leveraged leases related to
aircraft and power plants. For leveraged leases, the cost of the assets leased
is financed primarily through nonrecourse debt which is netted against the
related lease receivable. The components of finance receivables follow.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Receivables.................................................................................... $ 671 $ 719
Unguaranteed estimated residual values......................................................... 431 431
--------- ---------
1,102 1,150
Less: Unearned income.......................................................................... 338 355
Credit loss and other allowances(1).......................................................... 138 18
--------- ---------
Finance receivables--net....................................................................... $ 626 $ 777
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Includes allowance for credit losses of $13 in 1998 and 1997, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK--FINANCIAL GUARANTEES
MediaOne Group retained certain risks in asset-backed obligations related to
the commercial real estate portfolio. As of December 31, 1998, the principal
amounts insured on asset-backed obligations were
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
$146 for maturity terms up to five years and $138 for maturity terms ranging
from 5 to 10 years, for a total principal amount insured of $284. As of December
31, 1997, the amounts were $449 for terms up to 5 years, and $266 for terms
ranging from 5 to 10 years, for a total amount of $715.
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1998 1997
- -------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate.......................................................................... $ 37 $ 319
Corporate secured............................................................................... 247 396
--------- ---------
Total............................................................................................. $ 284 $ 715
--------- ---------
--------- ---------
</TABLE>
ADDITIONAL FINANCIAL INFORMATION
Information for Financial Services, a member of the capital assets segment,
follows:
<TABLE>
<CAPTION>
YEAR ENDED OR AS OF
DECEMBER 31,
-------------------------------
SUMMARIZED FINANCIAL INFORMATION 1998 1997 1996
- ------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue............................................................ $ 17 $ 23 $ 26
Net finance receivables............................................ 625 824 859
Total assets....................................................... 858 1,208 1,058
Total debt......................................................... 199 363 236
Total liabilities.................................................. 846 1,121 998
Equity............................................................. 12 87 60
</TABLE>
NOTE 24: DISCONTINUED OPERATIONS
In accordance with Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the Consolidated Financial Statements reflect New U S WEST as a
discontinued operation. The assets and liabilities, revenues and expenses, and
the cash flows of New U S WEST have been separately classified in the
Consolidated Balance Sheets, Statements of Operations, and Statements of Cash
Flows.
The Company has accounted for the distribution of New U S WEST common stock
to the holders of Communications Stock, and to the holders of MediaOne Group
Stock for the Dex Alignment as a discontinuance of the businesses comprising New
U S WEST. The measurement date for discontinued operations accounting purposes
is June 4, 1998, the date upon which Old U S WEST's shareowners approved the
Separation. Because the distribution was non pro-rata, as compared with the
businesses previously attributed to Old U S WEST's two classes of shareowners,
it was accounted for at fair value. The distribution resulted in a gain of
$24,461, net of $114 of Separation costs (net of tax benefits of $37).
Separation costs included cash payments under severance agreements of $45 and
financial advisory, legal, registration fee, printing and mailing costs.
Separation costs also included a one-time payment to terminate the sale of the
Minnesota cable systems.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: DISCONTINUED OPERATIONS (CONTINUED)
Summarized financial information for the discontinued operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
SUMMARIZED FINANCIAL POSITION 1997
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
ASSETS
Cash and cash equivalents........................................................................... $ 27
Accounts and notes receivable--net.................................................................. 1,717
Property, plant and equipment--net.................................................................. 14,308
Other assets........................................................................................ 1,344
------------
Total assets........................................................................................ $ 17,396
------------
------------
LIABILITIES
Debt................................................................................................ $ 5,715
Accounts payable, accrued liabilities and other..................................................... 4,260
Postretirement and other postemployment benefit obligation.......................................... 2,534
Deferred income taxes and credits................................................................... 520
------------
Total liabilities................................................................................... $ 13,029
------------
------------
Net investment in assets of discontinued operations................................................. $ 4,367
------------
------------
</TABLE>
<TABLE>
<CAPTION>
SUMMARIZED OPERATING RESULTS 1998 1997 1996
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues.......................................................................... $ 5,454 $ 11,479 $ 11,168
Operating income.................................................................. 1,412 2,776 2,812
Income before income taxes, extraordinary item and cumulative effect of change in
accounting principle............................................................ 1,187 2,429 2,377
Income tax expense................................................................ (440) (902) (876)
--------- --------- ---------
Income before extraordinary item and cumulative effect of change in accounting
principle....................................................................... 747 1,527 1,501
Extraordinary item--debt extinguishment--net of tax............................... -- (3) --
Cumulative effect of change in accounting principle--net of tax................... -- -- 34
--------- --------- ---------
Net income of discontinued operations............................................. $ 747 $ 1,524 $ 1,535
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
1998
Sales and other revenues(1).............................................. $ 972 $ 641 $ 626 $ 643
Income (loss) from continuing operations before income taxes............. (328) 3,716 (244) (506)
Income (loss) from continuing operations................................. (222) 2,174 (184) (338)
Income from discontinued operations - net of tax(2)...................... 434 24,774 -- --
Net income (loss)(2)..................................................... 212 26,615 (184) (338)
MEDIAONE GROUP STOCK:
Basic earnings (loss) per common share:
Income (loss) from continuing operations............................... $ (0.38) $ 3.46 $ (0.32) $ (0.58)
Income from discontinued operations per common share................... 0.14 40.28 -- --
Total basic earnings (loss) per common share........................... (0.24) 43.19 (0.32) (0.58)
Diluted earnings (loss) per common shares................................
Income (loss) from continuing operations............................... $ (0.38) $ 3.24 $ (0.32) $ (0.58)
Income from discontinued operations per common share................... 0.14 37.53 -- --
Total diluted earnings (loss) per common share......................... (0.24) 40.27 (0.32) (0.58)
COMMUNICATIONS STOCK:
Earnings from discontinued operations per common share:
Basic earnings......................................................... $ 0.72 $ 0.50 $ -- $ --
Diluted earnings....................................................... 0.72 0.49 -- --
1997
Sales and other revenues(3).............................................. $ 920 $ 981 $ 974 $ 972
Loss from continuing operations before income taxes...................... (270) (252) (342) (343)
Loss from continuing operations.......................................... (190) (181) (226) (230)
Income from discontinued operations--net of tax(4)....................... 420 416 420 268
Net income............................................................... 230 238 191 38
MEDIAONE GROUP STOCK:
Basic and diluted loss from continuing operations per common share..... $ (0.33) $ (0.31) $ (0.40) $ (0.40)
Basic and diluted earnings from discontinued operations per common
share................................................................ 0.13 0.14 0.14 0.16
----------- --------- ----------- -----------
Total basic and diluted loss per MediaOne Group Stock common share..... $ (0.20) $ (0.17) $ (0.26) $ (0.24)
----------- --------- ----------- -----------
----------- --------- ----------- -----------
COMMUNICATIONS STOCK:
Basic and diluted earnings from discontinued operations per common
share................................................................ $ 0.70 $ 0.69 $ 0.69 $ 0.35
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
- ------------------------
(1) Sales and other revenues include revenues related to the domestic wireless
operations of $341 and $20 for the first and second quarters of 1998,
respectively. The domestic wireless operations were sold on April 6, 1998.
(2) Income from discontinued operations includes $87 and $72 related to Dex, and
$347 and $241 related to the Communications Group for the first and second
quarters of 1998, respectively.
(3) Sales and other revenues include revenues related to the domestic wireless
operations of $335, $363, $373 and $357 for the first, second, third and
fourth quarters of 1997, respectively
(4) Income from discontinued operations includes $81, $84, $84 and $98 related
to Dex, and $339, $332, $336 and $170 related to the Communications Group
for the first, second, third and fourth quarters of 1997, respectively.
First-quarter 1998 net income includes net income of $15 ($0.03 per share of
MediaOne Group Stock) related to the domestic wireless businesses and a gain of
$10 ($0.02 per share of MediaOne Group Stock) related to the sale of a cable
programming investment. Second-quarter 1998 net income includes a gain of
$24,461 ($40.16 per share of MediaOne Group Stock) related to the Separation, a
gain of $2,257 ($3.71 per share of MediaOne Group Stock) related to the sale of
MediaOne Group's domestic wireless businesses, gains of $14 ($0.02 per share of
MediaOne Group Stock) related to various investment sales, net income of $5
($0.01 per share of MediaOne Group Stock) related to the domestic wireless
businesses, and a charge of $333 ($0.55 per share of MediaOne Group Stock) for
the early extinguishment of debt. Third-quarter 1998 net income includes gains
of $2 (no per share impact) on sales of miscellaneous domestic cable systems and
a charge of $25 ($0.04 per share of MediaOne Group Stock) related to an interest
rate swap agreement which did not qualify for deferral accounting.
Fourth-quarter 1998 net income includes gains of $18 ($0.03 per share of
MediaOne Group Stock) related to sales of various investments, a charge of $100
($0.16 per share of MediaOne Group Stock) related to a write-down to zero of the
Company's investment in PrimeStar, and a charge of $18 ($0.03 per share of
MediaOne Group Stock) related to the termination of an interest rate swap
agreement and the purchase of an interest rate option.
First-quarter 1997 net income includes a gain of $31 ($0.05 per share of
MediaOne Group Stock) related to the sale of MediaOne Group's wireless interest
in France and net income of $25 ($0.04 per MediaOne Group Stock) related to the
domestic wireless businesses. Second-quarter 1997 net income includes net income
of $29 ($0.05 per MediaOne Group Stock) related to the domestic wireless
businesses, a gain of $25 ($0.04 per share of MediaOne Group Stock) related to
the sales of TCG and Time Warner shares and a gain of $3 (no per share MediaOne
Group Stock impact) on the early extinguishment of debt. Third-quarter 1997 net
income includes net income of $32 ($0.05 per MediaOne Group Stock) related to
the domestic wireless businesses, a gain of $7 ($0.01 per share of MediaOne
Group Stock) related to sales of TCG shares and a charge of $3 (no per share
MediaOne Group Stock impact) for the early extinguishment of debt.
Fourth-quarter 1997 net income includes a $120 charge ($0.20 per share of
MediaOne Group Stock) related to Asian investments. Also included is a gain of
$89 ($0.15 per share of MediaOne Group Stock) related to the sale of TCG shares,
a gain of $80 ($0.13 per share of MediaOne Group Stock) on the sale of Fintelco,
a gain of $17 ($0.03 per share of MediaOne Group Stock) from the sale of an
international directories investment and a net loss of $3 ($0.01 per share of
MediaOne Group Stock) related to the domestic wireless businesses.
<PAGE>
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
MARKET PRICE
(WHOLE DOLLARS)
----------------------------------
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- ------------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
MEDIAONE GROUP STOCK
First quarter................................................... $ 37.1875 $ 27.0000 $ 34.7500 $ --
Second quarter.................................................. 44.2500 34.1875 43.9375 --
Third quarter................................................... 50.1250 40.0000 44.4375 --
Fourth quarter.................................................. 47.0000 33.4375 47.0000 --
COMMUNICATIONS STOCK
First quarter................................................... $ 56.7500 $ 43.3750 $ 54.6250 $ 0.5350
Second quarter (thru 6/12/98)(1)................................ 58.0000 49.5625 50.5000 --
1997
MEDIAONE GROUP STOCK
First quarter................................................... $ 20.6250 $ 17.6250 $ 18.5000 $ --
Second quarter.................................................. 22.3750 16.0000 20.2500 --
Third quarter................................................... 24.2500 19.8125 22.3125 --
Fourth quarter.................................................. 29.1250 22.3125 28.8750 --
COMMUNICATIONS STOCK
First quarter................................................... $ 37.2500 $ 31.7500 $ 33.8750 $ 0.5350
Second quarter.................................................. 38.5000 31.1250 37.6875 0.5350
Third quarter................................................... 39.4375 35.6250 38.5000 0.5350
Fourth quarter.................................................. 46.9375 36.8750 45.1250 0.5350
</TABLE>
- ------------------------
(1) The Communications Stock was canceled on June 12, 1998, effective with the
Separation.
<PAGE>
MediaOne Group, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------- ----------------------------- -----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
Dollars in millions 1999 1998 1999 1998
- ------------------------------------------------------------- ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales and other revenues:
Cable and broadband $ 665 $ 613 $ 1,326 $ 1,237
Corporate (3) 8 1 15
Wireless communications - 20 - 361
------------- --------------- -------------- --------------
Total sales and other revenues 662 641 1,327 1,613
------------- --------------- -------------- --------------
Operating expenses:
Cost of sales and other revenues 265 241 534 558
Selling, general and administrative expenses 179 195 364 502
Depreciation and amortization 328 258 578 606
------------- --------------- -------------- --------------
Total operating expenses 772 694 1,476 1,666
------------- --------------- -------------- --------------
Loss from operations (110) (53) (149) (53)
Interest expense (103) (143) (199) (293)
Equity losses in unconsolidated ventures (87) (69) (202) (205)
Gains (losses) on investments:
Sale and redemption of domestic investments 22 22 92 39
Sale and exit costs of international investments - net 8 - 132 -
Exchange of AirTouch investment 2,482 - 2,482 -
Sale of domestic wireless investment - 3,869 - 3,869
PrimeStar investment - - (65) -
Minority interest expense in Centaur Funding (46) - (71) -
Guaranteed minority interest expense (23) (20) (47) (42)
Merger costs (1,507) - (1,522) -
Other income - net 31 110 68 73
------------- --------------- -------------- --------------
Income from continuing operations before income taxes
667 3,716 519 3,388
Provision for income taxes (843) (1,542) (806) (1,436)
------------- --------------- -------------- --------------
Income (loss) from continuing operations (176) 2,174 (287) 1,952
Income from discontinued operations - net of tax
Results of operations (Note 12) - 313 - 747
Gain on separation - 24,461 - 24,461
------------- --------------- -------------- --------------
Income (loss) before extraordinary item (176) 26,948 (287) 27,160
Extraordinary item:
Gain (loss) on extinguishment of debt - net of tax 17 (333) 17 (333)
------------- --------------- -------------- --------------
------------- --------------- -------------- --------------
NET INCOME (LOSS) $ (159) $ 26,615 $ (270) $ 26,827
------------- --------------- -------------- --------------
------------- --------------- -------------- --------------
Preferred stock dividends and accretion (14) (13) (28) (26)
Loss on redemption of Preferred Securities - (53) - (53)
------------- --------------- -------------- --------------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK
$ (173) $ 26,549 $ (298) $ 26,748
------------- --------------- -------------- --------------
- ------------------------------------------------------------- ------------- --------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MediaOne Group, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------- ------------------------------ -----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
In thousands, except per share amounts 1999 (1) 1998 (1) 1999 1998
- ----------------------------------------------------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
MEDIAONE GROUP STOCK (2)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.31) $ 3.46 $ (0.52) $ 3.08
Income from discontinued operations (3) - 0.12 - 0.26
Gain on separation - 40.16 - 40.19
Extraordinary item - early extinguishment of debt
0.03 (0.55) 0.03 (0.55)
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
Basic earnings (loss) per common share $ (0.29) $ 43.19 $ (0.49) $ 42.98
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
BASIC AVERAGE COMMON SHARES OUTSTANDING
605,726 609,098 604,775 608,699
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.31) $ 3.24 $ (0.52) $ 2.91
Income from discontinued operations (3) - 0.11 - 0.24
Gain on separation - 37.42 - 37.48
Extraordinary item - early extinguishment of debt
0.03 (0.51) 0.03 (0.51)
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
Diluted earnings (loss) per common share $ (0.29) $ 40.27 $ (0.49) $ 40.12
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
DILUTED AVERAGE COMMON SHARES OUTSTANDING
605,726 653,611 604,775 652,601
-------------- --------------- -------------- --------------
- ----------------------------------------------------------- -------------- --------------- -------------- --------------
</TABLE>
(1) Column does not add due to rounding of individual components.
(2) For 1998 earnings per share information of Communications Stock see
Note 10 - Earnings Per Share - to the Consolidated Financial Statements.
(3) Amounts represent the operations of U S WEST Dex, Inc., the domestic
directory business, which were discontinued as of June 12, 1998.
See Notes to Consolidated Financial Statements.
<PAGE>
MediaOne Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------- ------------------- ---------------------
June 30, December 31,
Dollars in millions 1999 1998
- -------------------------------------------------------------------------------- ------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,032 $ 415
Accounts and notes receivable - net 409 255
Income tax receivable 546 375
Current portion of deferred tax asset 67 74
Prepaid and other 21 33
Marketable securities 56 48
------------------- ---------------------
Total current assets 2,131 1,200
------------------- ---------------------
Property, plant and equipment - net 4,501 4,069
Investment in Vodafone Group /AirTouch Communications 7,310 5,919
Investment in Time Warner Entertainment 2,479 2,442
Net investment in international ventures held for sale 643 -
Net investment in international ventures - 1,344
Intangible assets - net 11,371 11,647
Other assets 2,076 1,571
------------------- ---------------------
Total assets $ 30,511 $ 28,192
------------------- ---------------------
- -------------------------------------------------------------------------------- ------------------- ---------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MediaOne Group, Inc.
Consolidated Balance Sheets
(Continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------- ------------------- --------------------
June 30, December 31,
Dollars in millions 1999 1998
- -------------------------------------------------------------------------------- ------------------- --------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 1,718 $ 569
Accounts payable 301 332
Employee compensation 98 80
Deferred revenues and customer deposits 168 87
Other 618 546
------------------- --------------------
Total current liabilities 2,903 1,614
------------------- --------------------
Long-term debt 6,245 4,853
Deferred income taxes 6,954 6,035
Deferred credits and other 142 641
Commitments and contingencies
Minority interest in Centaur Funding 1,107 1,099
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely Company-guaranteed debentures
1,060 1,061
Preferred stock subject to mandatory redemption 100 100
Shareowners' equity:
Preferred stock 929 927
Common shares 10,409 10,324
Retained earnings 371 669
Accumulated other comprehensive income 291 869
------------------- --------------------
Total shareowners' equity 12,000 12,789
------------------- --------------------
Total liabilities and shareowners' equity $ 30,511 $ 28,192
------------------- --------------------
- -------------------------------------------------------------------------------- ------------------- --------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MediaOne Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------- --------------- ---------------
Six Months Ended June 30, 1999 1998
- ----------------------------------------------------------------------------------- --------------- ---------------
Dollars in millions
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (270) $ 26,827
Adjustments to net income (loss):
Discontinued operations - (747)
Gain on Separation - (24,461)
Extraordinary (gain) loss on debt extinguishment (17) 333
Depreciation and amortization 578 606
Equity losses in unconsolidated ventures 202 205
Merger costs 1,522 -
Gains on investments - net (2,641) (3,908)
Deferred income taxes 1,298 1,557
Distribution from unconsolidated ventures - 28
Separation costs paid - (97)
Changes in operating assets and liabilities:
Accounts and notes receivable (147) 56
Prepaid and other current assets (12) (46)
Accounts payable and accrued liabilities 92 (286)
Other - net (127) 91
--------------- ---------------
Cash provided by operating activities 478 158
--------------- ---------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (900) (725)
Investment in international ventures (73) (13)
Investment in domestic ventures (91) (79)
Purchase of miscellaneous assets - (35)
Proceeds from sales of investments 397 187
Proceeds on exchange of investment in AirTouch 534 -
Cash to net investment in assets held for sale - (101)
Other - net 25 6
--------------- ---------------
Cash used for investing activities (108) (760)
--------------- ---------------
FINANCING ACTIVITIES
Net (repayments of) proceeds from short-term debt (112) 2,405
Net proceeds from issuance of long-term debt 702 -
Repayments of long-term debt (332) (5,447)
Repayments of Preferred Securities - (582)
Proceeds from issuance of common stock 61 104
Dividends paid on common stock - (519)
Dividends paid on preferred stock (26) (27)
Purchases of treasury stock (46) (85)
--------------- ---------------
Cash provided by (used for) financing activities 247 (4,151)
--------------- ---------------
Cash provided by discontinued operations - 4,953
--------------- ---------------
CASH AND CASH EQUIVALENTS
Increase 617 200
Beginning balance 415 184
--------------- ---------------
--------------- ---------------
Ending balance $ 1,032 $ 384
--------------- ---------------
- ------------------------------------------------------------------------------------- --------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
For the Three and Six Months Ended June 30, 1999
(Dollars in millions, except per share amounts)
(Unaudited)
NOTE 1: AT&T MERGER
On May 6, 1999, MediaOne Group, Inc. ("MediaOne Group" or the "Company") entered
into an agreement with AT&T Corp. ("AT&T") to merge its operations with those of
AT&T, and terminated the merger agreement previously entered into with Comcast
Corporation ("Comcast"). Under the terms of the AT&T definitive merger
agreement, MediaOne Group shareowners will have the right to receive, for each
share of MediaOne Group common stock ("MediaOne Group Stock"), (i) 1.4912 shares
of AT&T common stock, (ii) $85.00 in cash, or (iii) .95 of a share of AT&T
common stock and cash of $30.85. Since AT&T has agreed to pay a set amount of
cash and AT&T common stock in the merger, MediaOne Group shareowners who elect
to receive all AT&T common stock or all cash may be subject to proration in the
event that the respective category elected is oversubscribed. With respect to
MediaOne Group shareowners who receive AT&T common stock, if the volume-weighted
average sale price of the AT&T common stock for the 20 trading days ending three
trading days prior to the effective date of the merger (the "AT&T Price") is
between $51.30 and $57.00 per share, an additional amount in cash will be paid
so that the total value of the AT&T common stock (based on the AT&T Price) and
cash received per share of MediaOne Group Stock will be $85.00. If the AT&T
Price is less than $51.30 per share, the additional cash payment will be made
based on an assumed AT&T Price of $51.30 per share, and the total value of cash
and AT&T common stock (based on the AT&T Price) received per share of MediaOne
Group Stock will be less than $85.00. If the AT&T Price is above $57.00 per
share, the total value of cash and AT&T common stock (based on the AT&T Price)
received per share of MediaOne Group Stock will be more than $85.00. If a
shareowner chooses the AT&T stock plus cash election, the maximum additional
cash payment would be $5.42 per share of MediaOne Group Stock. If a shareowner
chooses the AT&T stock election, the maximum additional cash payment would be
$8.50 per share of MediaOne Group Stock. The transaction is expected to close
in the first quarter of 2000, subject to legal and regulatory approvals, as
well as the approval of MediaOne Group shareowners.
In anticipation of the merger with AT&T, MediaOne Group has agreed to redeem
the Company's Series C Cumulative Redeemable Preferred Stock (the "Series C
Preferred Stock") and the 4.5 percent Series D Convertible Preferred Stock (the
"Series D Preferred Stock") as promptly as possible under the terms of each
series of preferred stock. The Company has the right commencing September 2,
1999 to redeem the Series C Preferred Stock for one thousand dollars per share
plus unpaid dividends and a redemption premium. Prior to any redemption,
holders of Series C Preferred Stock may exercise options to receive common
shares of Financial Security Assurance Holdings Ltd. ("FSA"). The Company will
redeem the Series C Preferred Stock in connection with any exercise of the
options.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Beginning on November 15, 1999, the Company has the option to exchange the
Series D Preferred Stock at par, or fifty dollars per share, for shares of
MediaOne Group Stock. The Series D Preferred Stock is convertible at any time at
the option of the holder into 1.98052 shares of MediaOne Group Stock per share
of Series D Preferred Stock.
As a result of the termination of the Comcast merger, the Company paid Comcast
a termination fee of $1.5 billion as outlined in the Comcast merger agreement.
The termination fee was funded by AT&T in exchange for a note payable from
MediaOne Group. The AT&T note bears interest at 3-month LIBOR plus 0.15 percent
and matures on December 31, 2000. The note is due on demand at any time
following consummation of the merger between the Company and AT&T, and was
therefore recorded on MediaOne Group's Consolidated Balance Sheet as short-term
debt.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The Consolidated Financial Statements have been prepared
by the Company pursuant to the interim reporting rules and regulations of the
Securities and Exchange Commission ("SEC") and include the accounts of MediaOne
Group and its consolidated subsidiaries. Certain information and footnote
disclosures normally accompanying financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted pursuant to such SEC rules and regulations.
In the opinion of MediaOne Group's management, the Consolidated Financial
Statements include all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial information set forth therein. It is
suggested that these Consolidated Financial Statements be read in conjunction
with the 1998 MediaOne Group Consolidated Financial Statements and notes
thereto included in MediaOne Group's proxy statement mailed to all shareowners
on April 5, 1999.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
New Accounting Standards. In June 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement No.
133," which deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. As a result, the Company will adopt SFAS No. 133
in the year 2001.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 3: DOMESTIC ACQUISITIONS, DISPOSITIONS AND OTHER
Cable System Trades. Effective on June 1, 1999, due to the proposed merger of
MediaOne Group with AT&T, the companies deferred closing on the trade of certain
MediaOne Group cable systems in Illinois and Michigan for certain cable systems
in South Florida and California now owned by AT&T, and formerly owned by
Tele-Communications, Inc. (the "TCI trade"). The TCI trade will be deferred
until the merger with AT&T is completed. If the merger with AT&T does not occur,
the TCI trade will take place as planned. In the meantime, the Company's cable
systems in Illinois and Michigan will continue to be owned by MediaOne Group,
but will be managed by AT&T, and the AT&T cable systems in South Florida and
California will remain under both the ownership and management of AT&T.
As a result of the deferral of the TCI trade, the Company recorded a one-time
depreciation and amortization charge during the second quarter of 1999 to
catch-up for $25 of depreciation and amortization expense not recorded in each
of the fourth quarter of 1998 and the first quarter of 1999. Depreciation and
amortization expense had been suspended on these properties while they were
held for sale.
PrimeStar Investment. On March 31, 1999, certain PrimeStar, Inc. ("PrimeStar")
shareholders, including MediaOne Group, signed a separate funding agreement to
cover various operating and transition costs of the PrimeStar direct broadcast
services ("DBS") medium-power business. On April 28, 1999, PrimeStar received
required consents from lenders and closed the DBS medium-powered business sale.
MediaOne Group funded $54 to PrimeStar during April and June 1999 related to
the funding agreement, which had been accrued in the first quarter of 1999. As
a result of these transactions, MediaOne Group was released as guarantor on a
$75 letter of credit for PrimeStar. The Company remains a guarantor for
PrimeStar on a $25 letter of credit.
NOTE 4: OPERATING SEGMENTS
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," the following table presents selected information for
MediaOne Group's operating segments for the three and six month periods ended
June 30, 1999 and 1998. "Sales and Other Revenues" and earnings before interest,
taxes, depreciation, amortization and other ("EBITDA") for each segment are
presented on a proportionate basis. Proportionate results reflect the relative
weight of MediaOne Group's ownership in each of its respective domestic and
international equity ventures together with the consolidated results of its
subsidiaries. The computation of EBITDA also excludes gains on asset sales,
equity losses, guaranteed minority interest expense and minority interest
expense in Centaur Funding. Adjustments made to Sales and Other Revenues and
EBITDA to arrive at proportionate results are reversed in the column labeled
"Eliminations and Adjustments," in conformity with SFAS No. 131, so that in
total, Sales and Other Revenues and EBITDA reflect consolidated results.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Operating Results:
---------------------------
Domestic Cable & Broadband
---------------------------
<TABLE>
<CAPTION>
Eliminations
MediaOne of Multimedia &
Delaware (1) Ventures (2) International Other Adjustments Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months ended June 30, 1999
Sales and other revenues $ 665 $ 781 $ 456 $ 3 $ (1,243) $ 662
EBITDA (3) 248 393 98 (19) (502) 218
Net income (loss) (4) (78) 16 (104) 7 - (159)
- -------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1998
Sales and other revenues $ 607 $ 728 $ 341 $ 45 $ (1,080) $ 641
EBITDA (3) 239 206 51 (11) (280) 205
Net income (loss) (5) (111) (2) (70) 26,798 - 26,615
- -------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1999
Sales and other revenues $ 1,319 $ 1,529 $ 896 $ 7 $ (2,424) $ 1,327
EBITDA (3) 489 636 199 (38) (857) 429
Net income (loss) (4) (152) 20 (118) (20) - (270)
- -------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1998
Sales and other revenues $ 1,226 $ 1,470 $ 659 $ 396 $ (2,138) $ 1,613
EBITDA (3) 479 394 68 84 (472) 553
Net income (loss) (5) (236) (8) (149) 27,220 - 26,827
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) MediaOne of Delaware represents the operations of the Company's domestic
cable and broadband subsidiary.
(2) Multimedia Ventures includes MediaOne Group's 25.51 percent equity interest
in Time Warner Entertainment Company, L.P. ("TWE"), as well as related
overheads. The reported TWE results are prepared in accordance with GAAP
and have not been adjusted to report TWE's investments accounted for under
the equity method on a proportionate basis.
(3) The Company believes EBITDA is an important indicator of the operating
performance of its businesses and should not be considered an alternative
to operating or net income as an indicator of the performance of MediaOne
Group's businesses, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance
with GAAP.
(4) MediaOne of Delaware net income during 1999 includes an extraordinary gain
of $17 on the early extinguishment of debt.
(5) Other net income during 1998 includes a gain of $24,461 on the separation
of the telecommunications businesses and the domestic directory business
from the Company, a gain of $2,257 on the sale of the domestic wireless
businesses, and an extraordinary loss of $333 on the early extinguishment
of debt in conjunction with the separation discussed above. Other net
income during the three and six month periods ended June 30, 1998 includes
$313 and $747, respectively, related to discontinued operations.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
The following table presents a geographic breakout for proportionate revenues
and EBITDA and a reconciliation to consolidated
amounts:
<TABLE>
<CAPTION>
------------------------------------ -----------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proportionate Revenue:
United States (1) $ 1,441 $ 1,360 $ 2,844 $ 3,061
United Kingdom 282 196 557 385
Central Europe 152 121 295 227
Asia and other 30 44 55 78
---------------------------------- ------------------------------
Proportionate revenue 1,905 1,721 3,751 3,751
Less: Proportionate adjustment (1,243) (1,080) (2,424) (2,138)
---------------------------------- ------------------------------
---------------------------------- ------------------------------
Consolidated revenues $ 662 $ 641 $ 1,327 $ 1,613
------------------------------------------------------------------------
------------------------------------------------------------------------
Proportionate EBITDA:
United States (1) $ 621 $ 429 $ 1,089 $ 952
United Kingdom 59 27 123 31
Central Europe 46 40 89 68
Asia and other (6) (11) (15) (26)
---------------------------------- ------------------------------
Proportionate EBITDA 720 485 1,286 1,025
Less: Proportionate adjustment (502) (280) (857) (472)
---------------------------------- ------------------------------
---------------------------------- ------------------------------
Consolidated EBITDA $ 218 $ 205 $ 429 $ 553
------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts include proportionate revenue of $19 and $354, and proportionate
EBITDA of $6 and $114 for the domestic wireless operations during the
three and six month periods ended June 30, 1998, respectively. These
operations were sold in April 1998.
Total Assets:
Total assets are those assets and investments that are used in, or pertain to,
each segment's operations, as follows:
----------------------------------------------------------------------------
Domestic Cable & Broadband
------------------------------
------------------------------
<TABLE>
<CAPTION>
MediaOne of Multimedia
Delaware (1) Ventures (2) International Other Consolidated
-------------------------------------- ------------ ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Total assets as of:
June 30, 1999 $16,445 $2,984 $1,538 $9,544 $30,511
December 31, 1998 16,003 2,551 2,308 7,330 28,192
</TABLE>
- -------------------------------------------------------------------------------
(1) MediaOne of Delaware represents the operations of the Company's domestic
cable and broadband subsidiary.
(2) Multimedia Ventures includes MediaOne Group's 25.51 percent equity interest
in TWE.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
International assets decreased $770, or 33.4 percent, during 1999 primarily due
to the reclassification of international investment assets and liabilities to a
net investment in international assets held for sale, and to the sale of the
Company's investment in Optus shares. The "Other" column includes primarily
cash; debt and equity securities; investments in domestic interactive services;
and other corporate assets. The increase in Other total assets of $2,214, or
30.2 percent, during 1999 is due primarily to the marking to market of the
Company's investments in marketable equity securities, including AirTouch
Communications, Inc. ("AirTouch") stock which was exchanged into Vodafone ADRs.
See Note 5 - Investment in Vodafone Group / AirTouch Communications - to the
Consolidated Financial Statements.
NOTE 5: INVESTMENT IN VODAFONE GROUP / AIRTOUCH COMMUNICATIONS
Vodafone / AirTouch Merger. Effective on June 30, 1999, AirTouch merged its
operations into a subsidiary of Vodafone Group Public Limited Company
("Vodafone"). Prior to the merger, MediaOne Group held 59,314,000 shares of
AirTouch common stock and 825,000 shares each of AirTouch 5.143 percent Class D
Cumulative Preferred Stock, Series 1998, (the "Class D ATI Shares") and 5.143
percent Class E Cumulative Preferred Stock, Series 1998, (the Class E ATI
Shares" and together with the Class D ATI Shares, the "ATI Shares"). Under the
terms of the Vodafone merger, each share of AirTouch common stock was converted
into $9.00 in cash plus 1/2 of a Vodafone American Depository Receipt ("ADR"),
and as a result, MediaOne Group now holds 29,657,000 Vodafone ADRs. The ATI
Shares remain outstanding as preferred shares of AirTouch, a subsidiary of
Vodafone, with the following modifications: (a) the early redemption option on
the Class D ATI Shares was eliminated, (b) the maturity date on the Class E ATI
Shares was extended to April 1, 2020, and (c) an extraordinary dividend of
$25.00 per share, or a total of $21, will be paid for each Class E ATI Share on
August 16, 1999.
MediaOne Group recognized a net pretax gain of $2,482 ($1,530 after tax) on the
exchange and modification of its AirTouch common and preferred shares into
Vodafone ADRs and preferred shares, and received $534 in cash related to its
investment in AirTouch common stock. The net pretax gain was the result of the
difference between the cost basis and fair market value of the investment in
AirTouch as of the effective date. The investment in Vodafone is being
accounted for under the cost method of accounting as available for sale
securities.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
AirTouch Collar. During May 1999, the Company contributed 11,662,000 shares of
AirTouch common stock to MediaOne SPC IV ("SPC IV"), a wholly-owned subsidiary
of MediaOne Group. SPC IV subsequently entered into a series of purchased and
written options (the "Collar") on its AirTouch common shares and issued $1,128
in debt. See Note 7 - Debt - to the Consolidated Financial Statements. Upon the
Vodafone merger, the Collar was automatically transferred to Vodafone ADRs and
the put and call price were adjusted accordingly. SPC IV now holds 5,831,000
Vodafone ADRs.
The Collar has been designated and is effective as a hedge of the market risk
associated with the Company's investment in Vodafone ADRs. The Collar is
therefore carried at market value with gains or losses recorded in equity as a
component of other comprehensive income together with any change in the fair
value of the Vodafone ADRs. No gain or loss was recognized on the Collar as of
June 30, 1999.
At expiration of the Collar, the Company will receive cash if the market value
of a Vodafone ADR is less than approximately $169.00 per share, effectively
eliminating downside risk on the stock below $169.00. Conversely, if the market
value of a Vodafone ADR is greater than approximately $244.00 per share, the
Company will be required to pay cash which will be offset by the corresponding
increase in the value of the Vodafone ADRs. MediaOne Group intends to use
proceeds from the sale of Vodafone ADRs to fund any cash obligations related to
the Collar. The Collar expires quarterly, in equal installments, starting in
the second quarter of 2003 and ending in the second quarter of 2005.
NOTE 6: INVESTMENT IN INTERNATIONAL VENTURES
As a result of the anticipated merger with AT&T, MediaOne Group formalized a
plan during the second quarter of 1999 to sell all of its international
broadband and wireless investments, including its international consolidated
entities, Cable Plus a.s. ("Cable Plus"), a cable operator in the Czech
Republic, and Russian Telecommunications Development Corporation ("RTDC"), a
Russian venture which holds various wireless investments. The carrying value of
the net investments in international ventures, as well as the net assets of
Cable Plus and RTDC, are reflected as "net investment in international ventures
held for sale" in the June 30, 1999 Consolidated Balance Sheet. In addition,
effective April 1999, the results of operations of Cable Plus and RTDC are no
longer consolidated with MediaOne Group's results but are rather reflected as
part of "equity losses in unconsolidated ventures" in the Consolidated
Statements of Operations. Of the total equity losses in unconsolidated ventures,
international operations contributed losses of $(111) and $(67) for the three
month periods ended June 30, 1999 and 1998, respectively, and $(218) and $(162)
for the six month periods ended June 30, 1999 and 1998, respectively.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
As a result of the decision to exit its international businesses, the Company
recorded a $43 charge ($28 after tax) during the second quarter of 1999. The
exit charge includes employee severance costs of $33 for 122 people, and lease
termination, relocation and other costs of $10. The charge is reflected as a
component of "gains on investments - sale and exit costs of international
investments - net" in the Consolidated Statement of Operations. The Company
continues to negotiate the sale of its remaining international investments and
anticipates that the majority of the employee relocation and severance, and the
related office closures will be completed by year-end 1999.
Optus Shares. During the second quarter of 1999, MediaOne Group sold its
remaining investment in Optus shares, resulting in net proceeds and a pretax
gain of $31.
Listel. On June 2, 1999, the Company sold its interest in Listel, an
international directories operation located in South America, for proceeds of
$55 and a pretax gain of $20.
Cable Plus and A2000. On June 24,1999, United Pan-Europe Communications N.V.
agreed to purchase MediaOne Group's interests in Cable Plus and A2000, a cable
operator located in the Netherlands, for approximately $380. The sale of Cable
Plus is contingent upon regulatory approval. Both sales are expected to close
later this year.
Telewest. Shortly after the Company entered into its definitive merger agreement
with AT&T, AT&T and Microsoft Corporation ("Microsoft") announced that they had
entered into a series of agreements, which, among other things, involved the
sale of the Company's interest in Telewest Communications plc ("Telewest") to
Microsoft. The terms and conditions of any such sale will be subject to certain
approvals, including the approval of the Company's Board of Directors if the
sale is to occur prior to the merger of the Company's operations with those of
AT&T.
Ariawest. On May 13, 1999, PT Ariawest International, ("Ariawest"), the
Company's investment in Indonesia, reached an agreement to restructure its debt
into a non-recourse debt facility. MediaOne Group is evaluating its probable
funding commitments related to its investment in Ariawest as a result of the
non-recourse facility.
Telenet. On June 30, 1999, MediaOne Group entered into an agreement giving the
other shareholders of Telenet an option to purchase the Company's interest in
Telenet for approximately the cost of capital contributions plus 7 percent.
This option expires on December 31, 1999. In exchange, the Company received the
right to sell its interest to the current shareholders at the cost of capital
contributions less 25 percent through January 31, 2000. If neither option is
exercised, MediaOne Group may sell its interest to a third party. In
conjunction with this agreement, the Company entered into a put option to lock
in the floor price of 93 million Euros, or $100, which expires on January 31,
2000.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Titus and Chofu. On June 30, 1999, the Company increased its ownership in TITUS
Communication Corporation ("Titus"), a broadband network operation in Japan,
and Chofu Cable Television ("Chofu"), a cable operation in Japan. As part of
the acquisition, MediaOne Group assumed outstanding debt guarantees totaling
approximately $50. MediaOne Group now holds a 50 percent investment in Titus
and a 33 percent investment in Chofu.
NOTE 7: DEBT
Debt Issuance. On June 3, 1999, SPC IV issued $1,128 of floating rate debt at
3-month LIBOR plus 0.5 percent and paid $321 to fix and pre-fund interest
payments on $1.1 billion notional amount of the debt through an interest rate
swap agreement (the "Zero Coupon Swap"). The debt and Zero Coupon Swap mature
in equal quarterly installments starting in the second quarter of 2003 and
ending with the second quarter of 2005. The index, maturity and notional amount
of the Zero Coupon Swap match the terms of the floating rate debt issued by SPC
IV. The Company has therefore deferred the $321 cost of the Zero Coupon Swap
and will amortize the cost as an adjustment of interest expense associated with
the floating rate debt. As a result of the amortization and payments received
under the Zero Coupon Swap, the Company expects the floating rate debt of SPC
IV to have a fixed effective interest rate of approximately 6.945 percent.
As a result of the Vodafone merger, SPC IV will redeem approximately $105 of
the debt in August 1999 and will terminate a corresponding portion of the Zero
Coupon Swap with a cost of approximately $30. Funding for the redemption of the
debt will come from the $9.00 per share cash proceeds received on the exchange
of the AirTouch common stock into Vodafone ADRs.
The assets of SPC IV, which are primarily the 5,831,000 Vodafone ADRs, are not
available to pay the creditors of any member of the Company except the
creditors of SPC IV.
Debt Extinguishment. On June 1, 1999, the Company redeemed the 11.0 percent
senior subordinated debentures of MediaOne of Delaware, Inc., the domestic
cable and broadband subsidiary of the Company, with a carrying value of $345.
The debt extinguishment resulted in an after tax gain of $17 (net of income tax
expense of $11) primarily related to the write-off of excess debt premiums. The
gain is reflected as an extraordinary item in the Consolidated Statements of
Operations. MediaOne Group also redeemed a third-party note for its carrying
value of $12. MediaOne Group financed the redemptions with cash on hand.
Debt Maturity. On May 15, 1999, $254 of debt exchangeable into common stock
("DECS") matured. The DECS were redeemed for FSA shares held by MediaOne Group,
resulting in a pretax gain of $21 ($14 after tax).
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Exchangeable Notes. As a result of the Vodafone merger, the terms of the 6.25
percent Exchangeable Notes (the "Exchangeable Notes") issued in late 1998 have
been modified so that upon maturity, they are mandatorily redeemable into
Vodafone ADRs and/or cash, rather than AirTouch common stock and/or cash. The
redemption formula was also modified so that the redemption value of each
Exchangeable Note is equivalent to $9.00 in cash plus 1/2 of the fair market
value of a Vodafone ADR (the "Maturity Price"), as follows:
(a) If the Maturity Price is greater than or equal to $71.75, each
Exchangeable Note is equivalent to .8101 of the Maturity Price;
(b) If the Maturity Price is less than or equal to $58.125, each Exchangeable
Note is equivalent to the Maturity Price; or
(c) If the Maturity Price is greater than $58.125 but less than $71.75, each
Exchangeable Note is equivalent to $58.125.
In all three scenarios above, a minimum of $7.29 of the $9.00 cash
consideration will be funded in cash.
NOTE 8: MINORITY INTEREST IN CENTAUR FUNDING
On December 15, 1998, Centaur Funding Corporation ("Centaur"), a special
purpose entity consolidated by MediaOne Group, issued three series of preferred
shares (the "Preference Shares"), including Cumulative Preference Shares,
Series B (the "Series B Preference Shares") and Preference Shares, Series C
(the "Series C Preference Shares"). Dividend payments on the Series B
Preference Shares and certain redemption payments on the Series B and Series C
Preference Shares are to be determined by reference to the dividend and
redemption activity of the ATI Shares.
As a result of the Vodafone merger, on May 13, 1999, Centaur mailed notices to
the holders of the Series B and Series C Preference Shares that described the
manner in which the terms of the Series B and Series C Preference Shares would
be deemed modified to reflect the changes to the ATI Shares, pursuant to the
Articles of Association of Centaur, without any action of the holders of such
shares. See Note 5 - Investment in Vodafone Group / AirTouch Communications -
to the Consolidated Financial Statements for a description of the changes to the
ATI Shares.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
The $21 extraordinary dividend payment on the Class E ATI Shares was allocated
to the Series B and Series C Preference Shares on a pro-rata basis based on the
liquidation value of the Series B Preference Shares and on the accreted value
of the Series C Preference Shares as of June 30, 1999, and is reflected as
"minority interest expense in Centaur Funding" in the Consolidated Statements
of Operations. The amount allocated to the Series B Preference Shares was
reflected as a one-time extraordinary dividend and will be paid with the first
regularly scheduled dividend following the payment in August 1999 on the Class
E ATI Shares. Since the Series C Preference Shares do not pay dividends, the
amount allocated to these shares will be invested by Centaur, in accordance
with its Articles of Association, and will be added to the redemption value of
the Series C Preference Shares at maturity.
NOTE 9: SHAREOWNERS' EQUITY
Following is a rollforward of shareowners' equity since the end of 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------- ------------ ------------- ------------ -------------------
Accumulated Other
Comprehensive
Preferred Common Retained Income
Stock Shares Earnings
- --------------------------------------------------------- ------------ ------------- ------------ -------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 927 $ 10,324 $ 669 $ 869
Net loss (270)
Issuance of MediaOne Group common stock 64
Purchase of treasury stock (46)
Preferred stock dividends (28)
Market value adjustments for debt and
equity securities, and Exchangeable Notes,
net of income taxes (560)
Foreign currency translation, net of income taxes (18)
Other 2 67
------------ ------------- ------------ -------------------
------------ ------------- ------------ -------------------
Balance at June 30, 1999 $ 929 $ 10,409 $ 371 $ 291
------------ ------------- ------------ -------------------
- --------------------------------------------------------- ------------ ------------- ------------ -------------------
</TABLE>
Common Stock. Other activity during 1999 primarily represents tax benefits on
stock option exercises.
Series D Preferred Stock. During the six month period ended June 30, 1999,
8,350 shares of Series D Preferred Stock were converted into 16,537 shares of
MediaOne Group Stock. In addition, 1,953 shares of Series D Preferred Stock
were cancelled during the period. As of June 30, 1999, MediaOne Group had
19,989,175 shares of Series D Preferred Stock outstanding.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Comprehensive Income. Total comprehensive income and the components of
comprehensive income follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- ----------------------------- --------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- --------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------- -------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (159) $ 26,615 $ (270) $ 26,827
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment 36 (8) (34) 9
Unrealized gains on debt and equity securities, and
Exchangeable Notes 447 571 1,345 690
Reclassification for gains realized in net income (loss)
(2,153) (11) (2,252) (11)
Income tax provision (benefit) related to items of other
comprehensive income (loss) 644 (219) 363 (271)
-------------- -------------- ------------- ------------
Total other comprehensive income (loss), net of tax (1,026) 333 (578) 417
-------------- -------------- ------------- ------------
-------------- -------------- ------------- ------------
Total comprehensive income (loss) $ (1,185) $ 26,948 $ (848) $ 27,244
-------------- -------------- ------------- ------------
- ------------------------------------------------------------------- -------------- -------------- ------------- ------------
</TABLE>
The majority of the unrealized gains on debt and equity securities during the
three month period of 1999 relate to the Company's investment in Time Warner
Telecom LLC, a competitive local exchange business, which offered its shares in
an initial public offering in May 1999. The majority of the unrealized gains on
debt and equity securities during the six month period of 1999 relate to the
Company's investment in AirTouch common and preferred stock, which were
subsequently exchanged for Vodafone ADRs and preferred stock, and the
Company's investment in Time Warner Telecom LLC. The reclassification in 1999
for gains realized in net loss is due to gains realized in the Company's
results of operations upon the exchange of AirTouch common and preferred stock
into Vodafone ADRs and preferred stock.
NOTE 10: EARNINGS PER SHARE
The following table reflects the computation of basic and diluted earnings
(loss) per share in accordance with SFAS No. 128, "Earnings Per Share." The
1999 diluted loss per share and related share amounts do not include potential
share issuances associated with stock options and the Series D Preferred Stock
since the effect would have been antidilutive on the loss from continuing
operations. The 1998 dilutive securities represent the incremental weighted
average shares from potential share issuances associated with stock options of
MediaOne Group Stock and Communications Stock, and the conversion of the
Series D Preferred Stock into MediaOne Group Stock.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
In 1998, the Company had outstanding two separate classes of common stock which
reflected the performance of its two groups: the MediaOne Group Stock and the
Communications Stock. The MediaOne Group Stock reflected the performance of the
multimedia businesses of the Company, as well as the domestic directory
business. The Communications Stock reflected the performance of the Company's
telecommunications businesses. Effective on June 12, 1998, the
telecommunications businesses and the domestic directory business were
separated from MediaOne Group and became an independent public company. The
Communications Stock was cancelled as of the effective date of the separation.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- ----------------------------- -----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
MEDIAONE GROUP STOCK :
Income (loss) from continuing operations $ (176) $ 2,174 $ (287) $ 1,952
Preferred stock dividends and accretion (14) (13) (28) (26)
Loss on redemption of Preferred Securities (1) - (53) - (53)
--------------- ------------- ------------- ---------------
Income (loss) from continuing operations available to MediaOne
Group Stock shareowners used for basic earnings (loss) per
share $ (190) $ 2,108 $ (315) $ 1,873
Preferred stock dividends and accretion on assumed conversion - 12 - 24
--------------- ------------- ------------- ---------------
--------------- ------------- ------------- ---------------
Income (loss) from continuing operations available to MediaOne
Group Stock shareowners used for diluted earnings (loss)
per share $ (190) $ 2,120 $ (315) $ 1,897
--------------- ------------- ------------- ---------------
--------------- ------------- ------------- ---------------
Income from discontinued operations (2)
Results of operations - $ 71 - $ 158
--------------- ------------- ------------- ---------------
--------------- ------------- ------------- ---------------
Gain on separation - $ 24,461 - $ 24,461
--------------- ------------- ------------- ---------------
--------------- ------------- ------------- ---------------
Extraordinary item - early extinguishment of debt $ 17 $ (333) $ 17 $ (333)
--------------- ------------- ------------- ---------------
- ---------------------------------------------------------------- --------------- ------------- ------------- ---------------
</TABLE>
(1) Represents the after tax charge to equity related to the tender or
exchange of certain Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely Company-guaranteed
debentures ("Preferred Securities") on June 12, 1998, in conjunction with
the separation of the telecommunications businesses and the domestic
directory business from the Company.
(2) Represents the operations of the domestic directory business, which were
discontinued effective June 12, 1998.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ----------------------------- -------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------ --------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
MEDIAONE GROUP STOCK :
Weighted average number of shares used for basic earnings (loss)
per share 605,726 609,098 604,775 608,699
Effect of dilutive securities:
Stock options - 6,112 - 5,651
Series D Preferred Stock - 38,401 - 38,251
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Weighted average number of shares used for diluted earnings
(loss) per share 605,726 653,611 604,775 652,601
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.31) $ 3.46 $ (0.52) $ 3.08
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Income from discontinued operations (1) - $ 0.12 - $ 0.26
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Gain on separation - $ 40.16 - $ 40.19
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Extraordinary item - early extinguishment of debt $ 0.03 $ (0.55) $ 0.03 $ (0.55)
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.31) $ 3.24 $ (0.52) $ 2.91
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Income from discontinued operations (1) - $ 0.11 - $ 0.24
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Gain on separation - $ 37.42 - $ 37.48
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Extraordinary item - early extinguishment of debt $ 0.03 $ (0.51) $ 0.03 $ (0.51)
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
COMMUNICATIONS STOCK:
Income from discontinued operations used for basic and diluted
earnings per share (2) - $ 242 - $ 589
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Weighted average number of shares used for basic earnings per
share - 484,982 - 484,972
Effect of dilutive securities - stock options - 4,075 - 4,097
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Weighted average number of shares used for diluted earnings per
share - 489,057 - 489,069
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
BASIC AND DILUTED EARNINGS PER SHARE:
Basic earnings per share from discontinued operations (2)
- $ 0.50 - $ 1.21
--------------- ------------- ------------ ------------
--------------- ------------- ------------ ------------
Diluted earnings per share from discontinued operations
- $ 0.49 - $ 1.20
--------------- ------------- ------------ ------------
- ------------------------------------------------------------------ --------------- ------------- ------------ ------------
</TABLE>
(1) Represents the operations of the domestic directory business, which were
discontinued effective June 12, 1998.
(2) Represents the operations of the telecommunications businesses which were
discontinued effective June 12, 1998.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 11: SUBSEQUENT EVENTS
International Investment Sales. On July 16, 1999, MediaOne Group sold Watchmark,
a wholly owned wireless network management software operation, to Lucent
Technologies for net proceeds of $5.
On August 6, 1999, MediaOne Group agreed to sell its 50 percent ownership in
Mercury Personal Communications ("One 2 One"), a wireless operation in the
United Kingdom, to Deutsche Telekom for approximately $5.5 billion, which
includes approximately $190 for the repayment of shareholder loans owed to the
Company. The sale is expected to close later this year. In connection with the
sale, the Company entered into put options to lock in a floor price of
approximately $5.5 billion. The put options expire at the end of third quarter
1999.
Cable System Trades. Effective July 31, 1999, MediaOne Group and Time Warner
Cable, a division of Time Warner, Inc. ("Time Warner") and TWE, completed a
trade of certain cable systems. MediaOne Group traded cable systems in Ohio and
Maine serving approximately 280,000 subscribers, while Time Warner Cable traded
cable systems in Massachusetts and New Hampshire serving approximately 240,000
subscribers plus approximately $40 in cash. The definitive agreement entered
into by the companies in February 1999 also included properties in California
and Georgia. That portion of the trade is also expected to occur in the third
quarter of 1999.
Investment in TWE. MediaOne Group currently holds a 25.51 percent interest in
TWE. The remaining interest in TWE is owned by Time Warner. In order to avoid
disputes as to whether the AT&T merger would violate the non-competition
provisions of the TWE partnership agreement, on August 3, 1999, MediaOne Group
sent a notice of termination to TWE which will terminate these non-competition
provisions as to MediaOne Group. The non-competition provisions will continue
to apply to Time Warner. Delivery of the notice of termination permitted TWE to
terminate most of MediaOne Group's management rights in TWE, which it did on
August 4, 1999. Most of these rights would have terminated in any event upon
the change of control of MediaOne Group in the merger. The delivery of the
termination notice and the resulting termination of management rights is
irrevocable, however, even if the merger does not occur. The loss of these
management rights may have a material adverse effect on the value of MediaOne
Group's interest in TWE. Notwithstanding the notice of termination, MediaOne
Group retains certain rights under the partnership agreement, including the
right to approve such matters as the merger of TWE, TWE's entrance into new
lines of business and the issuance of new partnership interests.
<PAGE>
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
In addition, Time Warner has expressed its view that, absent Time Warner's
consent, completion of the AT&T merger will violate the TWE partnership
agreement unless AT&T and MediaOne Group delay completion of the merger at
least until August 3, 2000, one year following delivery of the termination
notice. While AT&T and MediaOne Group disagree with this view, if Time Warner's
view prevails and if Time Warner does not consent to an earlier closing, AT&T
and MediaOne Group may have to delay completing the merger to August 3, 2000.
Any such delay could delay our ability to realize the expected financial and
operating benefits of the merger.
NOTE 12: DISCONTINUED OPERATIONS
In accordance with Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the Consolidated Financial Statements reflect the
telecommunications businesses and the domestic directory business as
discontinued operations since these businesses were separated from the Company
effective on June 12, 1998. The revenues and expenses, and the cash flows of the
discontinued operations have been separately classified in the Consolidated
Statements of Operations and Cash Flows. Summarized operating results for the
discontinued operations for the three and six month periods of 1998 were as
follows: Revenues were $2,445 and $5,454; operating income was $597 and $1,412;
income before income taxes was $494 and $1,187; income tax expense was $(181)
and $(440); and net income from discontinued operations was $313 and $747,
respectively.
<PAGE>
NEWS RELEASE [LOGO]
FOR IMMEDIATE RELEASE: Monday, August 30, 1999
AT&T REAFFIRMS FULL YEAR FINANCIAL GUIDANCE
New York, NY -- In a conference call with financial analysts today, AT&T
reaffirmed its confidence in meeting stated 1999 target ranges for earnings
per share, top line revenues, cost reductions, and earnings before interest,
taxes, depreciation and amortization (EBITDA).
As stated earlier this year, AT&T expects total pro-forma revenue to grow
between 5 to 7 percent in 1999. While wireless, professional services,
outsourcing and data revenue are growing at higher rates than previously
projected, consumer and business long distance voice revenue will be slightly
lower than expected because of intensifying competitive pricing pressure
across the industry.
As a result, consumer revenue for the year is expected to decline between
4 to 5 percent and business revenue is expected to increase between 6 to 7
percent. AT&T said it anticipates third quarter total pro forma revenue will
grow 4 to 5 percent while fourth quarter revenue will grow at a higher level.
The company reaffirmed that 1999 earnings per share will be in a range of
$2.13 to $2.20. EBITDA is expected to be at the high end of the previously
announced range of $18 to $20 billion. And AT&T said it remains committed to
reducing the cost of doing business including, as previously stated, cutting
$2 billion in costs by the end of next year.
###
The foregoing are "forward-looking statements" which are based on
management's beliefs as well as on a number of assumptions concerning future
events made by and information currently available to management. Readers are
cautioned not to put undue reliance on such forward-looking statements, which
are not a guarantee of performance and 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 detailed description of the factors that could cause such a
difference, please see AT&T's filings with the Securities and Exchange
Commission. 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.
