UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone - Area Code 212-387-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ..X No ...
At October 31, 1999, the following shares of stock were outstanding:
AT&T common stock - 3,195,346,865 shares
Liberty Media Group Class A tracking stock - 1,156,753,606 shares
Liberty Media Group Class B tracking stock - 108,421,114 shares
<PAGE>
AT&T Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues................................... $16,270 $13,653 $46,057 $39,695
Operating Expenses
Access and other interconnection........... 3,654 3,819 11,054 11,649
Network and other communications services.. 3,869 2,648 10,515 7,746
Amortization of goodwill, franchise costs
and other purchased intangibles........... 358 62 900 188
Depreciation and other amortization........ 1,558 1,139 4,408 3,213
Selling, general and administrative........ 3,442 3,146 10,060 9,771
Restructuring and other charges, net....... - (517) 702 2,827
Total operating expenses................... 12,881 10,297 37,639 35,394
Operating income .......................... 3,389 3,356 8,418 4,301
Equity losses from Liberty Media Group..... 217 - 818 -
Other income (expense)..................... (409) 156 (334) 1,169
Interest expense........................... 459 114 1,108 322
Income from continuing operations
before income taxes....................... 2,304 3,398 6,158 5,148
Provision for income taxes................. 888 1,275 2,679 1,901
Income from continuing operations.......... 1,416 2,123 3,479 3,247
Income from discontinued operations
(net of taxes of $6)...................... - - - 10
Gain on sale of discontinued operations
(net of taxes of $799).................... - - - 1,290
Income before extraordinary loss .......... 1,416 2,123 3,479 4,547
Extraordinary loss (net of taxes of $80)... - 137 - 137
Net income................................. $ 1,416 $ 1,986 $ 3,479 $ 4,410
Per AT&T common share - basic:
Income from continuing operations......... $ 0.51 $ 0.79 $ 1.41 $ 1.21
Income from discontinued
operations....... - - - -
Gain on sale of discontinued operations... - - - 0.48
Extraordinary loss........................ - 0.05 - 0.05
Net income................................ $ 0.51 $ 0.74 $ 1.41 $ 1.64
Per AT&T common share - diluted:
Income from continuing operations......... $ 0.50 $ 0.78 $ 1.39 $ 1.20
Income from discontinued operations....... - - - -
Gain on sale of discontinued operations... - - - 0.47
Extraordinary loss........................ - 0.05 - 0.05
Net income................................ $ 0.50 $ 0.73 $ 1.39 $ 1.62
Dividends declared per AT&T common share... $ 0.22 $ 0.22 $ 0.66 $ 0.66
Liberty Media Group loss per share:
Basic and diluted......................... $ 0.17 $ - $ 0.65 $ -
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Amounts)
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................... $ - $ 3,160
Receivables, less allowances of $1,488 and $1,060.... 10,629 9,055
Deferred income taxes................................ 1,638 1,310
Other current assets................................. 773 593
TOTAL CURRENT ASSETS................................. 13,040 14,118
Property, plant and equipment, net of accumulated
depreciation of $28,886 and $25,374................ 36,475 26,903
Franchise costs, net of accumulated amortization
of $509............................................ 32,122 -
Licensing costs, net of accumulated amortization
of $1,430 and $1,266............................... 8,353 7,948
Goodwill, net of accumulated amortization of
$304 and $226...................................... 7,214 2,205
Investment in Liberty Media Group and related
receivables, net................................... 35,519 -
Other investments.................................... 20,211 4,434
Prepaid pension costs................................ 2,364 2,074
Other assets......................................... 6,508 1,868
TOTAL ASSETS......................................... $161,806 $59,550
</TABLE>
(CONT'D)
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Share Amounts)
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
LIABILITIES
Accounts payable..................................... $ 5,915 $ 6,226
Payroll and benefit-related liabilities.............. 2,278 1,986
Debt maturing within one year........................ 8,856 1,171
Dividends payable.................................... 703 581
Other current liabilities............................ 5,763 5,478
TOTAL CURRENT LIABILITIES............................ 23,515 15,442
Long-term debt....................................... 22,073 5,556
Long-term benefit-related liabilities................ 4,248 4,255
Deferred income taxes................................ 24,708 5,453
Other long-term liabilities and deferred credits..... 3,752 3,213
TOTAL LIABILITIES ................................... 78,296 33,919
Minority Interest in Equity of Consolidated
Subsidiaries....................................... 2,401 109
Company-Obligated Convertible Quarterly Income
Preferred Securities of Subsidiary Trust Holding
Solely Subordinated Debt Securities of AT&T........ 4,697 -
Subsidiary-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
Subordinated Debt Securities of an AT&T
Subsidiary......................................... 1,649 -
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding
3,195,633,438 shares (net of 287,528,136 treasury
shares) at September 30, 1999 and 2,630,391,784
shares (net of 80,222,341 treasury shares) at
December 31, 1998.................................. 3,196 2,630
Liberty Media Group Class A Tracking Stock, $1 par
value, authorized 2,500,000,000 shares; issued
and outstanding 1,156,751,950 shares at
September 30, 1999................................. 1,157 -
Liberty Media Group Class B Tracking Stock, $1 par
value, authorized 250,000,000 shares; issued
and outstanding 108,421,708 shares at
September 30, 1999................................. 108 -
Additional Paid-in Capital:
AT&T Common Stock.................................. 27,506 15,195
Liberty Media Group Stock.......................... 32,663 -
Guaranteed ESOP obligation........................... (17) (44)
Retained Earnings (Accumulated Deficit):
AT&T Common Stock.................................. 8,409 7,800
Liberty Media Group Stock.......................... (818) -
Accumulated other comprehensive income............... 2,559 (59)
TOTAL SHAREOWNERS' EQUITY............................ 74,763 25,522
TOTAL LIABILITIES & SHAREOWNERS' EQUITY.............. $161,806 $59,550
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
<CAPTION>
Consolidated Statement of Shareowners' Equity (Dollars in Millions)
For the nine months ended September 30, 1999 (Unaudited)
Accumulated Total Total
Additional Guaranteed Other Comp- Share- Compre-
Paid-in ESOP Retained rehensive owners hensive
Common Shares Capital Obligation Earnings Income Equity Income
AT&T Liberty Liberty AT&T Liberty AT&T Liberty
Common Media Group Media Group Common Media Group Common Media Group
Stock Class A Class B Stock Stock Stock Stock
Tracking Tracking
Stock Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
Jan. 1, 1999 $2,630 - - 15,195 - (44) 7,800 - (59) $25,522
Shares issued
(acquired), net:
For employee plans - - - 37 - - - - - 37
For acquisitions* 565 1,140 110 11,359 32,265 - - - - 45,439
Other 1 17 (2) - 339 355
Common stock warrants
issued - - - 306 - - - - - 306
Gain on issuance of
common stock by
affiliates - - - 484 50 - - - - 534
Amortization - - - - - 27 - - - 27
Net income (loss) - - - - - - 4,297 (818) - 3,479 $3,479
Dividends
declared - - - - - - (2,104) - - (2,104)
Treasury shares
issued at less
than cost - - - - - - (1,584) - - (1,584)
Other - - - 125 9 - - - 134
Other
comprehensive
income (net of
taxes of $1,695)** - - - - - - - - 2,618 2,618 2,618
Balance at September
30, 1999 $3,196 1,157 108 27,506 32,663 (17) 8,409 (818) 2,559 $74,763 $6,097
<FN>
* AT&T accounts for treasury stock as retired stock, and at September 30,
1999, had 288 million treasury shares of which 216 million shares were owned
by Tele-Communications, Inc. (TCI) subsidiaries and 70 million shares
related to the purchase of AT&T shares previously held by Liberty Media
Group. ** Includes $2,408 ($3,974 pretax) of other comprehensive income for
Liberty Media Group.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
<CAPTION>
Consolidated Statement of Shareowners' Equity (Dollars in Millions) For the nine
months ended September 30, 1998 (Unaudited)
AT&T AT&T Accumulated
AT&T Additional Guaranteed AT&T Other Total Total
Common Paid-in ESOP Retained Comprehensive Shareowners' Comprehensive
Stock Capital Obligation Earnings Income Equity Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
Jan. 1, 1998 $2,684 17,121 (70) 3,981 (38) $23,678
Shares issued
(acquired), net:
For employee plans 3 65 - - - 68
For acquisition (56) (2,110) - - - (2,166)
Amortization - - 26 - - 26
Net income - - - 4,410 - 4,410 $4,410
Dividends
declared - - - (1,651) - (1,651)
Treasury shares
issued at less
than cost - - - (289) - (289)
Other changes - 94 - 21 - 115
Other
comprehensive
income (net of
taxes of $57) - - - - (28) (28) (28)
Balance at September
30, 1998 $2,631 15,170 (44) 6,472 (66) $24,163 $4,382
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
<CAPTION>
For the Nine
Months Ended
September 30,
1999 1998
<S> <C> <C>
Operating Activities
Net income................................... $ 3,479 $ 4,410
Deduct: Income from discontinued
operations......................... - 10
Gain on sale of discontinued
operations......................... - 1,290
Add: Extraordinary loss on retirement
of debt............................ - 137
Income from continuing operations............ 3,479 3,247
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Restructuring and other charges, net...... 581 2,732
Gains on sales............................ (351) (770)
Depreciation and amortization............. 5,308 3,401
Provision for uncollectibles.............. 1,077 1,050
Equity losses from Liberty Media Group.... 818 -
Increase in accounts receivable........... (2,529) (1,414)
Decrease in accounts payable.............. (318) (366)
Net decrease in other operating assets
and liabilities......................... (1,535) (78)
Other adjustments........................... 707 (804)
Net cash provided by operating
activities of continuing operations........ 7,237 6,998
Investing Activities
Capital expenditures....................... (8,770) (5,136)
Proceeds from sale or disposal of
property, plant and equipment............ 192 56
Decrease in other receivables.............. 11 6,403
Net dispositions (acquisitions) of
licenses................................. 1 (53)
Sales of marketable securities............. - 2,003
Purchases of marketable securities......... - (1,696)
Equity investment distributions and sales.. 936 1,272
Equity investment contributions and
purchases................................ (6,878) (86)
(Acquisitions) dispositions of businesses
including cash acquired in acquisitions.. (6,830) 4,119
Other investing activities, net............ (15) (74)
Net cash (used in) provided by investing
activities of continuing operations........ (21,353) 6,808
</TABLE>
(CONT'D)
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
<CAPTION>
For the Nine
Months Ended
September 30,
1999 1998
<S> <C> <C>
Financing Activities
Proceeds from long-term debt issuance..... 8,396 17
Retirements of long-term debt............. (2,124) (2,230)
Issuance of convertible securities........ 4,638 -
Issuance of common shares................. - 32
Acquisition of treasury shares............ (4,476) (3,235)
Dividends paid on common stocks........... (2,009) (1,608)
Increase (decrease) in short-term
borrowings, net......................... 6,313 (3,030)
Other financing activities, net........... 218 28
Net cash provided by (used in) financing
activities of continuing operations....... 10,956 (10,026)
Net cash provided by discontinued
operations................................ - 92
Net (decrease) increase in cash and
cash equivalents.......................... (3,160) 3,872
Cash and cash equivalents
at beginning of year...................... 3,160 318
Cash and cash equivalents
at end of period.......................... $ - $ 4,190
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T
Corp. (AT&T) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and, in the opinion of
management, include all adjustments necessary for a fair statement
of the consolidated results of operations, financial position and
cash flows for each period presented. The consolidated results for
interim periods are not necessarily indicative of results for the
full year. These financial results should be read in conjunction
with AT&T's Form 10-K/A for the year ended December 31, 1998, and
AT&T's previously filed Forms 10-Q. AT&T's Form 10-Q for the
period ended June 30, 1999, includes the financial results of
Liberty Media Group (LMG) and Tele-Communications Inc. (TCI) for
the period ended June 30, 1999, attached as exhibits thereto.
AT&T's Form 10-Q for the period ended March 31, 1999, includes the
financial results of LMG for the period ended March 31, 1999,
attached as an exhibit thereto. These financial statements should
also be read in conjunction with TCI's Form 10-K for the year
ended December 31, 1998, TCI's Form 10-Q for the quarter ended
March 31, 1999, the financial statements of LMG for the year ended
December 31, 1998, included in AT&T's Form 8-K filed on March 22,
1999, and the financial statements of LMG and TCI for the quarter
and year-to-date periods ended September 30, 1999, included as
Exhibits 99.1 and 99.2, respectively, to this AT&T quarterly
report on Form 10-Q.
We have reclassified certain prior period amounts to conform to
our current presentation and have restated share and per share
information to reflect the first quarter three for two split of
AT&T's common stock and the second quarter two for one stock split
of Liberty Media Group tracking stock.
(b) MERGER WITH TCI
The merger with TCI (renamed AT&T broadband and Internet services
or "AB&IS") was completed on March 9, 1999, in an all-stock
transaction valued at approximately $52 billion. AT&T issued
approximately 664 million shares of AT&T common stock in the
transaction, of which approximately 149 million were treasury
shares. Also in the first quarter of 1999 in connection with the
merger and the formation of LMG from TCI's former programming
business and technology investments business, AT&T issued a
separate tracking stock designed to reflect the separate economic
performance of LMG. A total of 1,080 million shares of Class A
Liberty Media Group Tracking Stock and 110 million shares of Class
B Liberty Media Group Tracking Stock were issued by AT&T. AT&T
also issued an additional 60 million shares of Class A Liberty
Media Group Tracking Stock in connection with the conversion of
certain convertible notes.
<PAGE>
AT&T Form 10-Q - Part I
AT&T does not have a controlling financial interest for financial
accounting purposes in LMG, therefore AT&T's investment in LMG has
been reflected as an equity method investment in the accompanying
consolidated financial statements. The amounts attributable to LMG
are reflected in separate line items "Equity losses from Liberty
Media Group" and "Investment in Liberty Media Group and related
receivables, net", in the accompanying consolidated financial
statements. As a separate tracking stock, all of the earnings or
losses related to LMG are excluded from the earnings available to
the holders of AT&T common stock. AB&IS' cable and certain other
operations, including its ownership interest in At Home
Corporation were combined with the existing AT&T operations to
form the AT&T common stock group (AT&T Group).
The merger was recorded as a purchase. Accordingly, the operating
results of AB&IS have been included in the accompanying
consolidated financial statements since March 1, 1999, the deemed
effective date of acquisition for accounting purposes. The impact
of the results from March 1, 1999, through March 9, 1999, is
deemed immaterial to our consolidated results. The $52 billion
aggregate value assigned to AB&IS' net assets was comprised of
AT&T common stock of $27 billion, Liberty Media Group tracking
stock of $23 billion, and assumption of convertible notes and
preferred stock of $2 billion.
As a result of the ongoing appraisal process, in the third quarter
of 1999 approximately $19 billion of the purchase price of $52
billion has been allocated to a franchise intangible and is being
amortized on a straight-line basis over 40 years. Pursuant to
Financial Accounting Standards Board (SFAS) No. 109, "Accounting
for Income Taxes", AT&T recorded an approximate $12 billion
deferred tax liability in connection with this franchise
intangible which resulted in an increase to franchise costs. We do
not expect that this deferred tax liability will ever be paid.
This deferred tax liability is being amortized on a straight-line
basis over 40 years and is included in the provision for income
taxes. Prior quarters' amortization and income tax expense have
been reclassified for this change which caused a decrease to
AT&T's previously reported 1999 effective tax rates. The benefit
to the provision for income taxes is offset by an increase in
amortization of franchise costs which is recorded as a component
of amortization of goodwill, franchise costs and other purchased
intangibles, resulting in no impact to net income. Also,
approximately $11 billion of goodwill related to LMG was recorded
as part of our investment and is being amortized on a
straight-line basis over 20 years as a component of equity
earnings (losses) from Liberty Media Group. Approximately $2
billion of goodwill related to our investment in Excite@Home was
recorded in other investments and is being amortized on a
straight-line basis over 7 years.
<PAGE>
AT&T Form 10-Q - Part I
Following is a summary of the pro forma results of AT&T as if the
merger had closed effective January 1, 1998:
<TABLE>
<CAPTION>
Nine
Months Ended
September 30,
1999 1998
<S> <C> <C>
Revenues $46,998 $44,370
Income from continuing operations 2,896 1,732
Income from continuing operations,
available to AT&T Group shareowners 3,937 2,687
Income from continuing operations,
available to Liberty Media Group
shareowners (1,041) (955)
Net income 2,896 2,895
Income available to AT&T Group
shareowners 3,937 3,850
Income available to Liberty Media
Group shareowners (1,041) (955)
Weighted-average AT&T common shares
(millions) 3,177 3,144
Weighted-average AT&T common shares
and potential common shares
(millions) 3,288 3,248
Weighted-average Liberty Media Group
shares (millions) 1,257 1,190
Basic earnings per AT&T common share:
Income from continuing operations $ 1.24 $ 0.85
Total income $ 1.24 $ 1.22
Diluted earnings per AT&T common share:
Income from continuing operations $ 1.22 $ 0.83
Total income $ 1.22 $ 1.19
Basic and diluted loss per Liberty
Media Group share $ 0.82 $ 0.80
</TABLE>
Pro forma data may not be indicative of the results that would
have been obtained had these events actually occurred at the
beginning of the periods presented, nor does it intend to be a
projection of future results.
<PAGE>
AT&T Form 10-Q - Part I
(c) OTHER MERGERS, ACQUISITIONS AND VENTURES
On April 30, 1999, AT&T completed its acquisition of the IBM
Global Network business (renamed AT&T Global Network Services or
"AGNS") and its assets in the United States. The acquisition is
occurring in phases throughout 1999 as legal and regulatory
requirements are met in each of the 59 countries in which the
business operates. As of the end of the third quarter, we had
completed acquisitions representing approximately 95% of the
revenues generated by businesses which comprise AGNS. The
acquisition has been accounted for as a purchase. Accordingly, the
operating results of AGNS have been included in the accompanying
consolidated financial statements since the date of acquisition.
Intangible assets of approximately $4.1 billion including customer
lists and the excess of the purchase price over the fair value of
net assets acquired are being amortized on a straight-line basis
over periods ranging from five to 30 years. The pro forma impact
of AGNS on historical AT&T results are not material.
On May 28, 1999, At Home Corporation consummated a merger
agreement with Excite, Inc. (Excite), a global Internet media
company that offers consumers and advertisers comprehensive
Internet navigation services with extensive personalization
capabilities. Under the terms of the merger agreement, At Home
Corporation issued approximately 116 million shares of its common
stock for all of the outstanding common stock of Excite. As a
result, AT&T's economic interest in At Home Corporation
(Excite@Home) decreased from 38% to 26% following the merger. Due
to the resulting increase in Excite@Home's equity after the
merger, net of the dilution of AT&T's ownership interest in
Excite@Home, AT&T recorded an increase to additional paid-in
capital of $488 at September 30, 1999. In the fourth quarter of
1999, Excite@Home agreed to acquire an online greeting card
company. Upon completion of that merger, AT&T will record
additional amounts to its additional paid-in capital as the share
of its ownership of Excite@Home is diluted. At September 30, 1999,
AT&T owned 94.5 million shares of Excite@Home common stock and has
an approximate 58% voting interest on certain matters.
<PAGE>
AT&T Form 10-Q - Part I
On August 2, 1999, AT&T completed its acquisition of Honolulu
Cellular Telephone Company from BellSouth.
In August 1999, AT&T and British Telecommunications plc (BT)
jointly acquired a 33.3% stake in Rogers Cantel Mobile
Communications Inc. (Rogers Cantel) in Canada for approximately
$934 in cash. The investment is owned equally by AT&T and BT.
Rogers Cantel is Canada's largest mobile company serving two
million customers from coast to coast. Rogers Cantel provides a
complete range of wireless solutions including cellular, paging
and interactive messaging, digital PCS and wireless data services
marketed under the co-brand Cantel AT&T. Also in August 1999, AT&T
sold 30% of its 31% ownership interest in AT&T Canada to BT for
approximately $402 resulting in a $110 pretax gain and a 22%
beneficial ownership by AT&T. AT&T and BT both contributed their
ownership interest of AT&T Canada to a joint venture that is 70%
owned by AT&T and 30% owned by BT.
On September 2, 1999, AT&T and BT acquired a 30% stake in Japan
Telecom for $1.83 billion.
The previously announced global venture between AT&T and BT has
received approval from the Federal Communications Commission
(FCC), the U.S. Justice Department and the European Commission.
The venture, which will be called Concert, will combine
transborder assets and operations of each company and will be
equally owned by both companies when operations begin. The venture
is expected to be completed in the fourth quarter of 1999 and to
begin operations on January 1, 2000.
<PAGE>
AT&T Form 10-Q - Part I
(d) DEBT OFFERING
On September 14, 1999, we completed a $450 all-minority led and
underwritten bond offering in connection with a registration
statement filed with the SEC on January 26, 1999. The bond
offering consisted of three-year notes due September 15, 2002,
with a coupon rate of 6.5%. The proceeds were utilized for general
corporate purposes.
On October 30, 1999, we redeemed $350 of long-term debt which was
funded with cash from operations. The early redemption did not
have a material impact on our financial results.
(e) RESTRUCTURING AND OTHER CHARGES, NET
Restructuring and other charges, net for the three months ended
September 30, 1998 were a net benefit of $517 pretax. The benefit
was primarily related to a $602 pretax gain related to the
settlement of pension obligations for former employees who
accepted AT&T's voluntary retirement incentive program (VRIP)
offer, partially offset by $85 of expenses associated with the
merger with Teleport Communications Group Inc. (TCG), which closed
in the third quarter of 1998.
Restructuring and other charges for the nine months ended
September 30, 1999, were $702 pretax. Included in the $702 was an
in-process research and development charge of $594 related to
AB&IS as well as a $128 net charge primarily related to the exit
of certain joint ventures that would have competed directly with
Concert. Additionally, a $50 charge was recorded in the second
quarter related to a contribution agreement AB&IS entered into
with Phoenixstar, Inc. (formerly Primestar, Inc.). To the extent
necessary, AB&IS is required to satisfy certain liabilities of
Phoenixstar owed by Phoenixstar and its subsidiaries. These
charges were partially offset by a $70 gain related to the
settlement of pension obligations for former employees who
accepted AT&T's VRIP offer.
Restructuring and other charges, net, for the nine months ended
September 30, 1998, were $2,827 pretax. The charge is comprised of
a first quarter 1998 pretax charge of $601 which resulted from the
decision not to pursue Total Service Resale as a local-service
strategy, a second quarter $2,743 net pretax charge primarily
related to AT&T's VRIP offer, and the third quarter net pretax
benefit as noted above.
<PAGE>
AT&T Form 10-Q - Part I
(f) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Basic earnings per share (EPS) for AT&T Group for the three and
nine months ended September 30, 1999 and 1998, were computed by
dividing income attributable to AT&T Group common shareowners by
the weighted-average number of common shares outstanding of AT&T
Group during the period.
Diluted EPS for AT&T Group for the three and nine months ended
September 30, 1999 and 1998, was computed by dividing the income
attributable to AT&T Group common shareowners, adjusted for the
conversion of securities, by the weighted-average number of common
shares and dilutive potential common shares outstanding of AT&T
Group during the period, assuming conversion of the potential
common shares at the beginning of the periods presented. Shares
issuable upon conversion of preferred stock of subsidiaries,
convertible debt securities of subsidiary, quarterly income
preferred securities, stock options and other performance awards
have been included in the diluted calculation of weighted-average
shares to the extent that the assumed issuance of such shares
would have been dilutive, as illustrated below.
Income from continuing operations for the three and nine-month
periods ended September 30, 1999, of $1,416 and
$3,479, respectively, include income from continuing operations
attributable to AT&T Group of $1,633 and $4,297, respectively, as
well as losses from LMG of $217 and $818 respectively.
A reconciliation of the income and share components for the basic
and diluted EPS calculations with respect to AT&T Group continuing
operations is as follows:
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Income from continuing
operations attributable to AT&T
Group $1,633 $2,123 $4,297 $3,247
Income impact of assumed conversion:
Preferred stock of subsidiary 8 - 18 -
quarterly income preferred
securities 40 - 47 -
Income from continuing
operations attributable to AT&T
Group adjusted for conversion of
securities $1,681 $2,123 $4,362 $3,247
AT&T Group weighted-average common
shares (millions) 3,195 2,686 3,045 2,692
Stock options 32 20 37 23
Preferred stock of subsidiary 40 - 30 -
Convertible quarterly income
preferred securities 67 - 26 -
Convertible debt securities of
subsidiary - - 2 -
AT&T Group weighted-average common
shares and potential common
shares (millions) 3,334 2,706 3,140 2,715
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
Basic EPS for LMG for the third quarter of 1999 and date of
acquisition through September 30, 1999, was computed by dividing
the income attributable to LMG shareowners by the weighted-average
number of shares outstanding of LMG of 1.265 billion and 1.257
billion, respectively, for these periods. Since LMG had a loss for
both periods, the impact of any potential shares would have been
antidilutive, and therefore are not factored into the diluted
calculations. There were 52 million potentially dilutive
securities outstanding at September 30, 1999.
On September 27, 1999, LMG announced that the Board of Directors
of AT&T approved the repurchase from time to time of up to 135
million shares of Liberty Media Group Class A or Class B tracking
stock.
(g) FINANCIAL INSTRUMENTS
In the normal course of business we use various financial
instruments, including derivative financial instruments, for
purposes other than trading. We do not use derivative financial
instruments for speculative purposes. These instruments include
letters of credit, guarantees of debt, interest rate swap
agreements and foreign currency exchange contracts. Interest rate
swap agreements and foreign currency exchange contracts are used
to mitigate interest rate and foreign currency exposures.
Collateral is generally not required for these types of
instruments.
<PAGE>
AT&T Form 10-Q - Part I
For debt excluding capital leases, the carrying amounts and fair
values were $30.6 billion and $29.6 billion, respectively, at
September 30, 1999.
(h) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our
business: business services, consumer services, wireless services
and broadband & Internet services. Our existing segments reflect
certain managerial changes since the publication of our 1998
annual results. The business services segment was expanded to
include the results of TCG and the business portion of AT&T
WorldNet Service; the consumer services segment was expanded to
include the residential portion of AT&T WorldNet Service and the
costs associated with the development of fixed wireless
technology. All prior results have been restated to reflect these
changes. In addition, we established a new segment called
broadband & Internet services. Broadband & Internet services
includes the results associated with traditional analog video
service as well as new services such as Digital Cable and
AT&T@Home, a high-speed cable Internet service. Also included in
this segment are the operations associated with developing and
refining the infrastructure that will support broadband telephony.
Reflecting the dynamics of our business, we continuously review
our management model and structure, which may result in additional
changes to our operating segments in the future.
REVENUES
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Business services external revenues $ 5,849 $ 5,746 $17,663 $16,985
Business services internal revenues 427 229 1,110 656
Total business services revenues 6,276 5,975 18,773 17,641
Consumer services external revenues 5,614 5,889 16,604 17,264
Wireless services external revenues 2,050 1,420 5,490 3,897
Broadband & Internet services
external revenues 1,442 - 3,344 -
Total reportable segments 15,382 13,284 44,211 38,802
Other and corporate revenues (a) 888 369 1,846 893
Total revenues $16,270 $13,653 $46,057 $39,695
<FN>
(a) Included in other and corporate revenues are revenues from
AT&T Solutions, international operations and ventures, other
smaller units and the elimination of internal revenues.
</FN>
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
RECONCILIATION OF SEGMENT EARNINGS BEFORE INTEREST AND TAXES
(EBIT) TO INCOME BEFORE INCOME TAXES
<CAPTION>
Three Nine
Months Ended Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Business services $1,537 $1,359 $ 4,563 $ 3,602
Consumer services 2,176 1,764 5,893 4,609
Wireless services 69 47 93 261
Broadband & Internet services (530) - (1,763) -
Total reportable segments' EBIT 3,252 3,170 8,786 8,472
Other and corporate EBIT (272) 342 (702) (3,002)
Liberty Media Group equity losses (217) - (818) -
Interest expense 459 114 1,108 322
Total income before income
taxes $2,304 $3,398 $ 6,158 $ 5,148
ASSETS
<CAPTION>
At Sept. 30, At Dec. 31,
1999 1998
<S> <C> <C>
Business services $ 23,378 $21,415
Consumer services 6,907 6,561
Wireless services 21,938 19,115
Broadband & Internet services 55,941 -
Total reportable segments 108,164 47,091
All other segments 10,521 4,165
Corporate assets:
Investment in Liberty Media
Group and related
receivables, net 35,519 -
Prepaid pension costs 2,364 2,074
Deferred taxes 1,188 1,156
Other corporate assets 4,050 5,064
Total assets $161,806 $59,550
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
(i) SUBSEQUENT EVENTS
On October 6, 1999, AT&T and Dobson Communications Corporation
(Dobson) announced the signing of a definitive agreement to
acquire American Cellular Corporation through a newly created
joint venture for $2.32 billion. Dobson will be responsible for
day to day management of the joint venture, which will be equally
owned and jointly controlled by Dobson and AT&T. The acquisition
will be funded with non-recourse bank debt by the joint venture
and cash equity contributions of up to $370 from each of the two
partners. The Board of Directors of AT&T, Dobson and American
Cellular have approved the transaction. The acquisition, which is
expected to close in the first quarter of 2000, is subject to
approval by American Cellular's shareowners, as well as federal
regulatory and certain other conditions.
On October 21, 1999, shareowners of MediaOne Group, Inc.
(MediaOne) unanimously voted in favor of the proposed merger
between AT&T and MediaOne, pursuant to a definitive merger
agreement entered into on May 6, 1999. In accordance with the
agreement, AT&T will purchase each share of MediaOne common stock
for $85.00 per share consisting of 0.95 of a share of AT&T common
stock plus $30.85 in cash. In addition, the agreement provides for
an increase in the amount of cash received per share of MediaOne
common stock to the extent that AT&T's stock price was less than
$57.00 per share. The additional amount of cash which may be
received is limited to $5.42 per share. AT&T plans to issue
approximately 613 million shares in the transaction. Upon receipt
of regulatory and other approvals, the merger is expected to close
in the first quarter of 2000.
On November 1, 1999, AT&T announced its plans to form a new public
company, to be named AT&T Latin America, that will merge the
operations of Netstream, the competitive local exchange company
AT&T is acquiring in Brazil, and FirstCom, a publicly traded
company with competitive telecommunications operations in Chile,
Columbia and Peru. AT&T, together with Promon Tecnologia, its
Brazilian partner, will contribute Netstream and $70 in cash. AT&T
will own approximately 60% of the company, owning Class B shares,
with 10 votes per share. The transaction has been approved by both
AT&T's and FirstCom's Board of Directors. Upon approval by
FirstCom shareowners as well as regulatory and other approvals,
the transaction is expected to close in the first quarter of 2000.
AT&T Latin America intends to apply for listing on the NASDAQ
stock market.
On November 5, 1999, WORLDxCHANGE Communications announced the
acquisition of ACC in Europe (ACC) from AT&T. The agreement
includes ACC's principal operations in the United Kingdom, as well
as ACC's operating companies in France, Germany and Italy. AT&T
believes it will record a pretax loss in the range of $150 to $200
on the sale.
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The merger with Tele-Communications, Inc. (TCI, renamed AT&T broadband and
Internet services or "AB&IS") was completed on March 9, 1999, in an all stock
transaction valued at approximately $52 billion. AT&T issued approximately 664
million shares of AT&T common stock in the transaction, of which approximately
149 million shares were treasury shares. Also in connection with the merger and
the formation of Liberty Media Group (LMG) from TCI's former programming
business and technology investments business, AT&T issued a separate tracking
stock designed to reflect the separate economic performance of LMG. A total of
1,080 million shares of Class A Liberty Media Group Tracking Stock and 110
million shares of Class B Liberty Media Group Tracking Stock were issued by
AT&T. AT&T issued an additional 60 million shares in connection with the
conversion of certain convertible notes. AT&T does not have a controlling
financial interest for financial accounting purposes in LMG, therefore AT&T's
investment in LMG has been reflected as an equity method investment in the
accompanying consolidated financial statements. The amounts attributable to LMG
are reflected in separate line items "Equity losses from Liberty Media Group"
and "Investment in Liberty Media Group and related receivables, net" in the
accompanying consolidated financial statements. As a separate tracking stock,
all of the earnings or losses related to LMG are excluded from the earnings
available to the holders of AT&T common stock.
The merger was recorded as a purchase. Accordingly, the operating results of
AB&IS have been included in the accompanying consolidated financial statements
since the date of acquisition. For accounting purposes the deemed effective date
of the acquisition is March 1, 1999, since the impact of the results from March
1, 1999, through March 9, 1999, is deemed immaterial to our consolidated
results. AB&IS' cable and certain other operations, including its ownership
interest in At Home Corporation (Excite@Home), but excluding LMG, were combined
with the existing operations of AT&T to form the AT&T Common Stock Group (AT&T
Group).
We segment our results based on how we manage our business. The following
businesses comprise AT&T Group: business services, consumer services, broadband
& Internet services and wireless services. A fifth group, other and corporate,
includes the results of AT&T Solutions, international operations and ventures,
other corporate operations, overhead and eliminations. Results are discussed for
these five groups as well as for combined AT&T Group. The discussion for the
other and corporate group is further broken out to include information for AT&T
Solutions (which includes the results of the Solutions outsourcing unit, the
internal AT&T Information Technology Services unit, and the results of portions
of the IBM Global Network which were acquired in the second and third quarters
of 1999 and renamed AT&T Global Network Services (AGNS), and international
operations and ventures.
<PAGE>
AT&T Form 10-Q - Part I
Operating results are discussed separately for AT&T Group and LMG. All lines of
the accompanying consolidated statements of income except for "Equity losses
from Liberty Media Group", "Income from continuing operations" and "Net income"
reflect the results of AT&T Group only. All lines of the accompanying
consolidated balance sheet, except for the "Investment in Liberty Media Group
and related receivables, net" and the components of shareowners' equity labeled
as relating to LMG are attributable to AT&T Group only. The liquidity, financial
condition, risk management and year 2000 discussion pertain to consolidated
AT&T, including our investment in LMG.
<PAGE>
AT&T Form 10-Q - Part I
FORWARD-LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Any Form 10-K/A, Annual
Report to Shareowners, Form 10-Q or Form 8-K of AT&T may include forward-looking
statements, including statements concerning future operating performance, year
2000 compliance, AT&T's share of new and existing markets, AT&T's short- and
long-term revenue and earnings growth rates, general industry growth rates and
AT&T's performance relative thereto. These forward-looking statements rely on a
number of assumptions concerning future events, including the adoption and
implementation of balanced and effective rules and regulations by the Federal
Communications Commission (FCC) and the state public regulatory agencies, and
AT&T's ability to achieve a significant market penetration in new markets. These
forward-looking statements are subject to a number of uncertainties and other
factors, many of which are outside AT&T's control, that could cause actual
results to differ materially from such statements.
For a more complete discussion of the factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion
thereof contained under the heading "Forward-Looking Statements" in AT&T's Form
10-K/A for the year ended December 31, 1998. Readers should also consider the
factors discussed under the headings "Results of Operations" and "Financial
Condition" included in this Form 10-Q. AT&T disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
<PAGE> AT&T Form 10-Q - Part I
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Dollars in millions
(except per share amounts)
Income (loss) from continuing
operations attributable to common
shareowners:
AT&T Group......................... $1,633 $2,123 $4,297 $3,247
Liberty Media Group................ (217) - (818) -
Income (loss) attributable to common
shareowners:
AT&T Group......................... $1,633 $1,986 $4,297 $4,410
Liberty Media Group................ (217) - (818) -
Per AT&T common share - basic:
Income from continuing operations... $ 0.51 $ 0.79 $ 1.41 $ 1.21
Income from discontinued operations. - - - -
Gain on sale of discontinued
operations......................... - - - 0.48
Extraordinary loss.................. - 0.05 - 0.05
Total income........................ $ 0.51 $ 0.74 $ 1.41 $ 1.64
Per AT&T common share - diluted:
Income from continuing operations... $ 0.50 $ 0.78 $ 1.39 $ 1.20
Income from discontinued operations. - - - -
Gain on sale of discontinued
operations......................... - - - 0.47
Extraordinary loss.................. - 0.05 - 0.05
Total income........................ $ 0.50 $ 0.73 $ 1.39 $ 1.62
Liberty Media Group loss per share:
Basic and diluted................... $ 0.17 $ - $ 0.65 $ -
</TABLE>
Earnings per share (EPS) from continuing operations attributable to AT&T common
shareowners were $0.50 on a diluted basis for the third quarter of 1999, down
from $0.78 in the third quarter of 1998. Earnings per share from continuing
operations attributable to AT&T common shareowners were $1.39 on a diluted basis
in the first nine months of 1999, compared with $1.20 on a diluted basis in the
first nine months of 1998. For the quarterly period, the decrease was due
primarily to the impacts of AB&IS and AGNS, the 1998 benefit for restructuring
and other charges, net, and equity losses related to Excite@Home and Cablevision
Systems Corp. (Cablevision), partially offset by increased income from core
operations and a gain on the sale of a business in 1999. For the year to date
period, the increase was due to increased income from core operations and lower
restructuring and other charges, net, partially offset by the impacts of AB&IS
and AGNS, the equity losses for the nine months ended September 30, 1999,
related to Excite@Home and Cablevision and lower gains on the sales of
businesses in 1999.
<PAGE>
AT&T Form 10-Q - Part I
AT&T Group's operational earnings, which excluded certain nonoperational items,
were $0.54 per diluted share for the third quarter of 1999, a decrease of 20.6%,
or $0.14, over the prior year period. Nonoperational items for the third quarter
were:
..Restructuring and other charges, net benefit of $0.10 in 1998
..Gain on sale of a business of $0.02 in 1999
..A loss of $0.06 reflecting the earnings impact of our investments in
Excite@Home and Cablevision in 1999.
The decrease in operational earnings for the third quarter was due primarily to
the impact of AB&IS.
Excluding the impacts of both AB&IS and AGNS, operational EPS for the third
quarter of 1999 was $0.81, an increase of 19.1%, or $0.13, compared with the
third quarter of 1998. The increase was primarily due to higher revenues
combined with improving margins.
AT&T Group's operational earnings, which excluded certain nonoperational items,
were $1.63 per diluted share for the nine months ended September 30, 1999, a
decrease of 2.4%, or $0.04, over the prior year period. Nonoperational items for
the first nine months were:
..Restructuring and other charges, net, of $0.21 in 1999 and $0.64 in 1998
..Gains on sales of businesses of $0.07 in 1999 and $0.17 in 1998
..A $0.02 benefit in 1999 from changes in tax rules with respect to the
utilization of acquired net operating losses
..A loss of $0.12 in 1999 reflecting the earnings impact of our investment
in Excite@Home and Cablevision.
The decrease in operational earnings for the nine months ended September 30,
1999 was due primarily to the impact of AB&IS.
Excluding the impacts of both AB&IS and AGNS, operational EPS for the nine
months ended September 30, 1999, was $2.23, an increase of 33.5%, or $0.56,
compared with the prior year period primarily due to higher revenues combined
with improving margins.
LMG's loss per share was $0.17 for the quarter ended September 30, 1999, and
$0.65 for the period from the date of acquisition through September 30, 1999.
The results of AT&T Group and our investment in LMG are discussed in further
detail below.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
AT&T GROUP RESULTS OF OPERATIONS
REVENUES
<CAPTION>
For the Three Months
Ended September 30, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Dollars in millions
Business services.......................... $ 6,276 $ 5,975 $ 301 5.0%
Consumer services.......................... 5,614 5,889 (275) (4.7%)
Wireless services.......................... 2,050 1,420 630 44.2%
Broadband & Internet services.............. 1,442 - 1,442 -
Other and corporate........................ 888 369 519 141.9%
Total revenues............................. $16,270 $13,653 $2,617 19.2%
<CAPTION>
For the Nine Months
Ended September 30, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Dollars in millions
Business services.......................... $18,773 $17,641 $ 1,132 6.4%
Consumer services.......................... 16,604 17,264 (660) (3.8%)
Wireless services.......................... 5,490 3,897 1,593 40.9%
Broadband & Internet services.............. 3,344 - 3,344 -
Other and corporate........................ 1,846 893 953 107.2%
Total revenues............................. $46,057 $39,695 $ 6,362 16.0%
</TABLE>
Total revenues on a reported basis increased 19.2% to $16,270 million and
increased 16.0% to $46,057 million for the three and nine-month periods ended
September 30, 1999, respectively, compared with the corresponding prior year
periods. Excluding AB&IS and AGNS, revenues increased 5.3% to $14,372 million
for the third quarter of 1999 and increased 5.9% to $42,042 million for the nine
months ended September 30, 1999, compared with the comparable prior year
periods. The increases for both periods were due to growth in wireless services,
business services and AT&T Solution's outsourcing services, partially offset by
lower consumer services revenues. Revenues on a pro forma basis, which include
the results of AB&IS (adjusted to exclude all closed cable partnerships and
Excite@Home) and the impact of the closed portions of AGNS for a full period in
both 1999 and 1998, increased 5.6% for the third quarter of 1999 and increased
6.2% for the nine months ended September 30, 1999, compared with the
corresponding prior year periods.
OPERATING EXPENSES
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Access and other interconnection..... $3,654 $3,819 $11,054 $11,649
Access and other interconnection expenses decreased $165 million, or 4.3%, to
$3,654 million in the third quarter of 1999 compared with the third quarter of
1998. Access and other interconnection expenses decreased $595 million, or 5.1%,
to $11,054 million in the first nine months of 1999 compared with the first nine
months of 1998. The declines were primarily driven by mandated reductions in
per-minute access charges and lower negotiated international settlement rates.
These declines were partially offset by total long distance volume growth of
8.9% for the quarter and 8.5% on a year-to-date basis. For the quarterly period,
increased per-line charges (Primary Interexchange Carrier Charges or "PICC")
also partially offset the declines.
<PAGE>
AT&T Form 10-Q - Part I
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Network and other communications
services........................... $3,869 $2,648 $10,515 $7,746
Network and other communications services expenses increased $1,221 million, or
46.1%, to $3,869 million in the third quarter of 1999 compared with the same
period last year. Network and other communications services expenses increased
$2,769 million, or 35.7%, to $10,515 million in the first nine months of 1999
compared with the same period last year. Excluding the impacts of AB&IS and
AGNS, network and other communications services expenses increased 3.6% and 6.2%
for the three and nine-month periods ended September 30, 1999, respectively,
compared with the same periods last year. These increases were primarily driven
by the growing wireless subscriber base largely attributable to the success of
AT&T Digital One Rate service which resulted in higher off-network roaming
charges, higher costs and volume of handsets and an increased provision for
uncollectibles. A portion of the increase was also due to growth in AT&T
Solutions. These increases were partially offset by network cost control
initiatives, lower per call compensation expense due to a favorable FCC ruling
in the first quarter of 1999, and a lower provision for uncollectibles in
consumer services. For the year to date period, the increases were also
partially offset by lower nonincome taxes and a lower provision for
uncollectibles in business services.
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Amortization of goodwill, franchise
costs and other purchased
intangibles..........................$ 358 $ 62 $ 900 $ 188
Amortization of goodwill, franchise costs and other purchased intangibles
increased $296 million, or 471.4%, from the third quarter of 1998 and increased
$712 million, or 378.0%, for the nine months ended September 30, 1999, compared
with the same periods last year. Franchise costs represent the value
attributable to the agreement with local authorities that allow access to homes
in AB&IS' service areas. Other purchased intangibles arising from business
combinations primarily include customer lists and licenses. The increases were
primarily driven by AB&IS. AT&T also has amortization of goodwill associated
with nonconsolidated investments recorded as a component of other income
(expense) amounting to $164 million and $356 million for the three and
nine-month periods ended September 30, 1999, respectively, and $14 million and
$43 million for the three and nine-month periods ended September 30, 1998,
respectively.
<PAGE>
AT&T Form 10-Q - Part I
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Depreciation and other amortization.. $1,558 $1,139 $4,408 $3,213
Depreciation and other amortization expenses increased $419 million, or 36.9%,
in the third quarter of 1999 and increased $1,195 million, or 37.2%, in the
first nine months of 1999 compared with the corresponding prior year periods.
Excluding AB&IS and AGNS, depreciation and other amortization expenses increased
14.7% and 19.2% for the three and nine-month periods ended September 30, 1999,
respectively, compared with the corresponding prior year periods. The increases
were primarily due to growth in AT&T Group's depreciable asset base resulting
from the continued infrastructure investment throughout 1998 and 1999. Capital
expenditures, including AB&IS and AGNS, were $3.6 billion for the three months
ended September 30, 1999, and $7.9 billion for the nine months ended September
30, 1999. The capital expenditures for both periods focused on cable operations,
data services, wireless services and business local services.
Three Nine
Months Ended Months Ended
September, September,
Dollars in millions 1999 1998 1999 1998
Selling, general and administrative.. $3,442 $3,146 $10,060 $9,771
Selling, general and administrative (SG&A) expenses increased $296 million, or
9.4%, to $3,442 million in the third quarter of 1999 and increased $289 million,
or 3.0%, to $10,060 million for the nine months ended September 30, 1999,
compared with the corresponding prior year periods. Excluding AB&IS and AGNS,
SG&A expenses declined 2.4% for the third quarter of 1999 and declined 5.3% for
the nine months ended September 30, 1999, versus the corresponding prior year
periods. These reductions reflect reduced marketing and sales expenses resulting
primarily from reductions in consumer acquisition program spending and other
cost-control initiatives. These reductions were partially offset by increased
spending in the company's growth businesses, including wireless services due to
increased subscribers and customer care spending, and for the quarterly period,
the AT&T Solutions outsourcing unit. Including AB&IS and AGNS, SG&A expenses as
a percentage of revenues were 21.2% and 21.8% for the three and nine-month
periods ended September 30, 1999, respectively, compared with 23.0% and 24.6% in
the prior year periods. SG&A expenses excluding wireless services and the
consumer local business as a percentage of revenues were 18.8% and 19.7% for the
three and nine-month periods ended September 30, 1999.
<PAGE>
AT&T Form 10-Q - Part I
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Restructuring and other charges, net. $ - $(517) $ 702 $2,827
Restructuring and other charges, net for the three months ended September 30,
1998, were a net benefit of $517 million pretax. The benefit was primarily
related to a $602 million pretax gain related to the settlement of pension
obligations for former employees who accepted AT&T's voluntary retirement
incentive program (VRIP) offer, partially offset by $85 million of expenses
associated with the merger with Teleport Communications Group Inc. (TCG), which
closed in the third quarter of 1998.
Restructuring and other charges for the nine months ended September 30, 1999,
were $702 million pretax. Included in the $702 million was an in-process
research and development charge of $594 million related to AB&IS as well as a
$128 million net charge primarily related to the exit of certain joint ventures
that would have competed directly with Concert, the global venture that AT&T is
forming with British Telecommunications plc (BT). Additionally, a $50 million
charge was recorded in the second quarter related to a contribution agreement
AB&IS entered into with Phoenixstar, Inc. (formerly Primestar, Inc.). To the
extent necessary, AB&IS is required to satisfy certain liabilities of
Phoenixstar owed by Phoenixstar and its subsidiaries. These charges were
partially offset by a $70 million gain related to the settlement of pension
obligations for former employees who accepted AT&T's VRIP offer.
The in-process research and development projects related to AB&IS' efforts to
offer voice over Internet protocol, cost savings efforts for cable telephony
implementation and product integration efforts for advanced set-top devices that
would enable AB&IS to offer next-generation digital services. Although there are
significant technological issues to overcome in order to successfully complete
the acquired in-process research and development, AT&T expects successful
completion. AT&T currently anticipates that (i) it will deploy equipment to
offer voice over Internet protocol to two cities in the year 2001, (ii) field
deployable devices will be available by the end of the year with respect to
AT&T's cost savings efforts for cable telephony implementation, and (iii) field
trials will begin in mid-year 2000 for next-generation digital services. If,
however, AT&T is unable to establish technological feasibility and produce a
commercially viable product/service, then anticipated incremental future cash
flows attributable to expected profits from such new product/service may not be
realized.
Restructuring and other charges, net for the nine months ended September 30,
1998, were $2,827 million pretax. The charge is comprised of a first quarter
1998 pretax charge of $601 million which resulted from the decision not to
pursue Total Service Resale as a local-service strategy, the second quarter
$2,743 million net pretax charge primarily related to AT&T's VRIP offer, and the
third quarter net pretax benefit as noted above.
<PAGE>
AT&T Form 10-Q - Part I
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Other income (expense)............... $ (409) $ 156 $ (334) $1,169
For the three months ended September 30, 1999, other income (expense) decreased
$565 million, or 360.7%, to an expense of $409 million compared with $156
million of income in the third quarter of 1998. The decrease primarily resulted
from higher equity losses and goodwill amortization associated with our
nonconsolidated investments, largely due to Excite@Home and Cablevision. Also
contributing to the decrease were distributions on trust preferred securities,
as well as higher interest income in 1998 on the proceeds received from the sale
of Universal Card Services (UCS). Partially offsetting these decreases was a
1999 third quarter pretax gain of $110 million on the sale of a portion of
AT&T's ownership interest in AT&T Canada.
Other income (expense) decreased $1,503 million, or 128.6%, to an expense of
$334 million for the nine months ended September 30, 1999, compared with $1,169
million of income in the first nine months of 1998. The decrease primarily
resulted from higher equity losses and goodwill amortization associated with our
nonconsolidated investments, largely due to Excite@Home and Cablevision. Also
contributing to the decrease were first quarter 1998 pretax gains on the sales
of AT&T Solutions Customer Care (ASCC) of $350 million, LIN Television Corp.
(LIN-TV) of $317 million, and a second quarter 1998 gain on the sale of SmarTone
Telecommunications Holdings Limited (SmarTone) of $103 million. In addition, the
decline reflects higher interest income in 1998 on the proceeds received from
the sale of UCS. Partially offsetting these decreases was a first quarter 1999
pretax gain on the sale of the AT&T Language Line Services business (Language
Line) of $153 million, a second quarter 1999 pretax gain on the sale of WOOD-TV
of $88 million, and a third quarter 1999 pretax gain on the sale of a portion of
our ownership interest in AT&T Canada of $110 million.
<PAGE>
AT&T Form 10-Q - Part I
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Earnings Before Interest and Taxes
(EBIT)...............................$2,980 $3,512 $8,084 $5,470
EBIT decreased $532 million, or 15.2%, to $2,980 million, for the third quarter
of 1999 compared with the third quarter of 1998 and increased $2,614 million, or
47.8%, to $8,084 million for the nine months ended September 30, 1999, compared
with the nine months ended September 30, 1998. Excluding AB&IS and AGNS, as well
as restructuring and other charges, net, and certain gains on the sales of
businesses, EBIT increased $464 million, or 15.5%, to $3,459 million, for the
third quarter of 1999 compared with the third quarter of 1998 and increased
$2,124 million, or 28.2%, to $9,651 million for the nine months ended September
30, 1999, compared with the nine months ended September 30, 1998. These
increases were due primarily to revenue increases combined with an improving
cost structure, partially offset by lower interest income and distributions on
trust preferred securities issued in 1999. AT&T remains committed to reducing
the cost of doing business by cutting $2 billion in costs by the end of 2000.
However, as we continue to invest in growth businesses, total operating expenses
are expected to increase.
AT&T calculates EBIT as operating income plus other income and is a measure used
by our chief operating decision-makers to measure AT&T's consolidated operating
results and to measure segment profitability. Interest and taxes are generally
not allocated to our segments because debt is managed and serviced and taxes are
managed and calculated on a centralized basis. Trends in interest and taxes are
discussed separately on a consolidated basis. Management believes EBIT is a
meaningful measure to disclose to investors because it provides investors with
an analysis of operating results using the same measures used by the chief
operating decision-makers of AT&T, provides a return on total capitalization
measure, and allows investors a means to evaluate the financial results of each
segment in relation to consolidated AT&T. Our calculation of EBIT may or may not
be consistent with the calculation of EBIT by other public companies, and EBIT
should not be viewed by investors as an alternative to generally accepted
accounting principles (GAAP) measures of income as a measure of performance or
to cash flows from operating, investing and financing activities as a measure of
liquidity.
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Interest expense..................... $ 459 $ 114 $1,108 $ 322
Interest expense increased $345 million, or 301.4%, in the third quarter of 1999
compared with the third quarter of 1998. For the nine months ended September 30,
1999, interest expense increased $786 million, or 244.1%, compared with the nine
months ended September 30, 1998. These increases were primarily driven by a
higher level of average debt outstanding associated with our acquisitions. For
the quarterly period, the increase was partially offset by a lower average
interest rate.
<PAGE>
AT&T Form 10-Q - Part I
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Provision for income taxes............ $ 888 $1,275 $2,679 $1,901
The provision for income taxes decreased $387 million, or 30.4%, to $888 million
in the third quarter of 1999 compared with the third quarter of 1998 due to
lower earnings before income taxes and a lower effective tax rate. Effective tax
rates for the third quarter of 1999 and 1998 were 35.2% and 37.5%, respectively.
The decrease in the effective tax rate was due primarily to the pooling of TCG's
historical operating results which did not include tax benefits on
pre-acquisition losses in 1998 and certain foreign legal entity restructurings
in 1999.
The provision for income taxes increased $778 million, or 40.9%, to $2,679
million for the nine months ended September 30, 1999, compared with the nine
months ended September 30, 1998, due primarily to higher income before income
taxes. Effective tax rates for the nine months ended September 30, 1999 and 1998
were 38.4% and 36.9%, respectively. In the first quarter of 1999, AT&T Group
recorded a non-tax deductible in-process research and development charge, and
accordingly, no tax benefit was recorded. During the second quarter of 1999, a
change in the net operating loss utilization tax rules resulted in a $75 million
reduction in the second quarter income tax provision. Excluding the impacts of
the in-process research and development charge and the change in the net
operating loss utilization tax rules in 1999, the effective tax rate for the
nine months ended September 30, 1999, was 36.4%. The change in the effective tax
rate was impacted by the pooling of TCG's historical operating results which did
not include tax benefits on pre-acquisition losses in 1998, the impacts of
certain 1998 investment dispositions and certain foreign legal entity
restructurings in both periods.
Other Items
In April 1998 AT&T sold UCS for $3,500 million, resulting in an after-tax gain
of $1,290 million, or $0.47 per diluted share, reflected as "Gain on Sale of
Discontinued Operations" in the accompanying consolidated statements of income.
In August 1998, AT&T extinguished $1,046 million of TCG's debt. The $217 million
early extinguishment of debt was recorded as an extraordinary loss. The
after-tax impact was $137 million, or $0.05 per diluted share.
<PAGE>
AT&T Form 10-Q - Part I
Three Nine
Months Ended Months Ended
September 30, September 30,
Dollars in millions 1999 1998 1999 1998
Income available to AT&T shareowners. $1,633 $1,986 $4,297 $4,410
Income available to AT&T shareowners decreased $353 million, or 17.7%, to $1,633
million in the third quarter of 1999, driven primarily by the impacts of AB&IS
and AGNS, the 1998 benefit in restructuring and other charges, net, and equity
losses for the third quarter of 1999 related to Excite@Home and Cablevision,
partially offset by increased income from core operations, an extraordinary loss
on the extinguishment of debt recognized in the third quarter of 1998 and the
gain on the sale of a business in 1999. Income available to AT&T shareowners
decreased $113 million, or 2.6%, to $4,297 million for the first nine months of
1999 driven primarily by the 1998 gain on the sale of discontinued operations,
the impacts of AB&IS and AGNS, the equity losses for the nine months ended
September 30, 1999, related to Excite@Home and Cablevision and lower gains on
the sales of businesses in 1999. These declines were partially offset by
increased income from core operations, lower restructuring and other charges and
an extraordinary loss on the extinguishment of debt recognized in the third
quarter of 1998.
<PAGE>
AT&T Form 10-Q - Part I
AT&T GROUP SEGMENT RESULTS
Business Services
The business services segment results reflect sales of long distance and local
voice and data services to business customers, including: domestic and
international; inbound and outbound; intra-LATA toll; calling card and
operator-handled services, and other network enabled services. This segment also
includes electronic commerce and Internet-protocol (IP) for business customers
such as Web site hosting and AT&T WorldNet business Internet access.
Consumer Services
The consumer services segment includes the results of providing
telecommunications services to residential customers including domestic and
international long distance services, intra-LATA toll services, calling-card and
operator-handled calling services, and prepaid calling cards. In addition, this
segment includes AT&T WorldNet residential Internet access service, noncable
local services provided to residential customers and the costs associated with
the development of fixed wireless technology.
Wireless Services
The results of this segment are comprised primarily of sales of wireless
services and products to customers in AT&T Group's 850 MHz (cellular) and 1900
MHz (PCS) markets. The results of AT&T's former messaging business are included
in 1998 results through October 2, when the unit was sold.
Broadband & Internet Services
AB&IS includes the results associated with traditional analog video service, as
well as new services, such as Digital Cable and AT&T@Home, a high-speed cable
Internet access service. AT&T@Home, along with several other large cable
operators, has a contract with Excite@Home, the operator of an Internet
"backbone", over which we can provide high-speed cable Internet service. Also
included in this segment are the operations associated with developing and
refining the infrastructure that will support broadband telephony.
Other and Corporate
This group includes the results of AT&T Solutions (including AGNS),
international operations and ventures, other corporate operations, overhead and
eliminations.
The above segments reflect certain changes since the publication of our annual
results due to changes in the way we manage our business. The business services
segment was expanded to include the results of TCG and the business portion of
AT&T WorldNet Service; the consumer services segment was expanded to include the
residential portion of AT&T WorldNet Service and the costs associated with the
development of fixed wireless technology. All prior results have been restated
to reflect these changes.
<PAGE>
AT&T Form 10-Q - Part I
The discussion of segment results for AT&T Group generally includes revenues;
earnings before interest and taxes, including other income (EBIT); earnings
before interest, taxes, depreciation and amortization, including other income
(EBITDA); capital additions and total assets. The discussion of EBITDA for AT&T
Group's wireless services and broadband & Internet services segments is modified
to exclude other income.
AT&T calculates EBIT as operating income plus other income and is a measure used
by our chief operating decision-makers to measure AT&T's consolidated operating
results and to measure segment profitability. Interest and taxes are generally
not allocated to our segments because debt is managed and serviced and taxes are
managed and calculated on a centralized basis. Trends in interest and taxes are
discussed separately on a consolidated basis. Management believes EBIT is a
meaningful measure to disclose to investors because it provides investors with
an analysis of operating results using the same measures used by the chief
operating decision-makers of AT&T, provides a return on total capitalization
measure, and allows investors a means to evaluate the financial results of each
segment in relation to consolidated AT&T. Our calculation of EBIT may or may not
be consistent with the calculation of EBIT by other public companies, and EBIT
should not be viewed by investors as an alternative to generally accepted
accounting principles (GAAP) measures of income as a measure of performance or
to cash flows from operating, investing and financing activities as a measure of
liquidity.
EBITDA is also used by management as a measure of segment performance and is
defined as EBIT plus depreciation and amortization. We believe it is meaningful
to investors as a measure of each segment's liquidity and allows investors to
evaluate a segment's liquidity using the same measure that is used by the chief
operating decision-makers of AT&T. Consolidated EBITDA is also provided for
comparison purposes. Our calculation of EBITDA may or may not be consistent with
the calculation of EBITDA by other public companies and should not be viewed by
investors as an alternative to GAAP measures of income as a measure of
performance or to cash flows from operating, investing and financing activities
as a measure of liquidity. In addition, EBITDA does not take into effect changes
in certain assets and liabilities which can affect cash flow.
Total assets for each segment include all assets, except inter-entity
receivables. Deferred taxes, prepaid pension assets, and corporate-owned or
leased real estate are generally held at the corporate level and therefore are
primarily included in the other and corporate group. Shared network assets are
allocated to the segments and reallocated each January, based on the prior two
years' volumes of minutes used.
Capital additions for each segment include additions to property, plant and
equipment and other long-lived assets including licenses, investments, franchise
costs and capitalized software.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
BUSINESS SERVICES
<CAPTION>
Three months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
External revenues................... $ 5,849 $ 5,746 $ 103 1.8%
Internal revenues................... 427 229 198 86.7%
Total revenues...................... 6,276 5,975 301 5.0%
EBIT................................ 1,537 1,359 178 13.0%
EBITDA.............................. 2,257 1,983 274 13.8%
OTHER ITEMS
Capital additions................... $ 1,821 $ 1,509 $ 312 20.7%
<CAPTION>
Nine months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
External revenues................... $17,663 $16,985 $ 678 4.0%
Internal revenues................... 1,110 656 454 69.1%
Total revenues...................... 18,773 17,641 1,132 6.4%
EBIT................................ 4,563 3,602 961 26.7%
EBITDA.............................. 6,715 5,346 1,369 25.6%
OTHER ITEMS
Capital additions................... $ 4,316 $ 3,685 $ 631 17.1%
At Sept. 30, At Dec. 31, Change
1999 1998 $ %
Total assets........................ $23,378 $21,415 $1,963 9.2%
</TABLE>
REVENUES
Business services revenues increased 5.0% in the third quarter of 1999, and
increased 6.4% for the nine months ended September 30, 1999, compared with the
prior year. The increase for the quarter was primarily driven by continued
strength in data services which includes Internet Protocol (IP) services, as
well as increases in local voice services. The increase for the year-to-date
period was primarily driven by data services, domestic long distance voice
services and local voice services. Total calling volumes for both periods,
including local services, increased about 25% over the prior year; excluding
local services, volumes increased at a mid-teens growth rate for the quarter and
year-to-date periods.
Data services revenues grew at a mid-teens rate for the third quarter of 1999.
The increase was led by continued growth in frame relay as well as growth in
international and high-speed private line services. Data services for the 1999
year-to-date period grew in the high-teens, due primarily to continued growth in
frame relay and high-speed private line services. The data revenues growth rates
were negatively impacted by 1998 billing adjustments. The data services growth
was augmented by significant growth in IP services, such as AT&T WorldNet, for
both periods. Packet services (frame relay, ATM and IP) grew over 50% on a
combined basis for the quarter and approximately 65% for the year-to-date
period.
<PAGE>
AT&T Form 10-Q - Part I
Long distance voice revenues grew at a low-single-digit rate for the third
quarter and for the nine months ended September 30, 1999, compared with the
prior year periods. Strong volume increases were partially offset by a declining
average price per minute. The average price per minute has been negatively
impacted by the competitive forces within the industry which we expect to
continue. In addition, the price per minute has been negatively impacted by
changes in product mix, largely attributable to an increase in wholesale, which
has a lower rate per minute.
Local voice service revenues, which included domestic ACC revenues since its
acquisition in April 1998, grew nearly 70% in the third quarter and first nine
months of 1999, compared with the corresponding prior year periods. AT&T's
integrated business local operations, including AT&T Digital Link, added
approximately 164 thousand access lines in the third quarter and total access
lines in service as of September 30, 1999, reached approximately 1.1 million on
a restated basis. The number of access lines was restated and now represents a
more comprehensive view of our bundled strategy as it now includes all channels
capable of providing local traffic. Prior period amounts have also been
restated. AT&T serves 32,809 buildings in 87 metropolitan statistical areas
(MSAs), with over 17% of the buildings on-network.
Internal revenues increased 86.7% and 69.1% for the three and nine months ended
September 30, 1999, respectively. The increases were due to higher sales of
business long distance services to other AT&T units, primarily AT&T Solutions
(including the impact of AGNS) and wireless services, for resale to AT&T
Solutions and wireless services customers.
EBIT/EBITDA
EBIT and EBITDA for business services increased 13.0% to $1,537 million and
13.8% to $2,257 million, respectively, in the third quarter of 1999 compared
with the prior year quarter. EBIT and EBITDA for business services increased
26.7% to $4,563 million and 25.6% to $6,715 million, respectively, for the nine
months ended September 30, 1999, compared with the prior year. The improvements
were driven by the growth in revenues and margin improvement. EBIT and EBITDA
margins were positively impacted by an improved cost structure as a result of
cost control initiatives in 1999. The EBIT and EBITDA growth rates have declined
from the prior quarter due to increased costs associated with volume increases,
price declines and strong third quarter 1998 results due to the reduced cost
structure due to headcount reductions associated with VRIP.
OTHER ITEMS
Capital additions for business services were $1,821 million for the third
quarter of 1999 and were $4,316 million for the nine months ended September 30,
1999. Capital additions were $1,509 million for the third quarter of 1998 and
were $3,685 million for the nine months ended September 30, 1998. Spending in
both 1999 and 1998 was primarily directed towards the long distance network,
including SONET, as well as spending on the local network. In 1998 spending was
also directed towards circuit switch equipment.
Total assets increased $1,963 million, or 9.2%, to $23,378 million at September
30, 1999, compared with December 31, 1998, primarily due to an increase in
property, plant and equipment as a result of capital additions.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
CONSUMER SERVICES
<CAPTION>
Three months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................. $ 5,614 $ 5,889 $ (275) (4.7)%
EBIT................................. 2,176 1,764 412 23.3%
EBITDA............................... 2,393 1,948 445 22.9%
OTHER ITEMS
Capital additions.................... $ 191 $ 130 $ 61 45.8%
<CAPTION>
Nine months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................. $16,604 $17,264 $ (660) (3.8)%
EBIT................................. 5,893 4,609 1,284 27.9%
EBITDA............................... 6,535 5,144 1,391 27.0%
OTHER ITEMS
Capital additions.................... $ 449 $ 329 $ 120 36.3%
<CAPTION>
At Sept. 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets......................... $ 6,907 $ 6,561 $ 346 5.3%
</TABLE>
REVENUES
Consumer services revenues decreased 4.7% and 3.8% for the three and nine-month
periods ended September 30, 1999, respectively, compared with the same periods
last year. Excluding AT&T WorldNet Service, revenues were down 5.1% and 4.3% for
the three and nine-month periods ended September 30, 1999, respectively. Long
distance calling volumes declined at a mid-single-digit rate for both periods.
These results reflect the competitive nature of the consumer long distance
industry. Lower revenues reflect the company's strategy to migrate higher-usage
customers to optional calling plans in order to optimize the customer base for
future growth.
In August 1999, AT&T introduced One Rate 7sm, a simple, convenient calling plan
that allows consumers to make long distance calls 24 hours a day, seven days a
week for seven-cents a minute. The plan requires a monthly fee of $5.95 that is
reduced to $4.95 for customers who select AT&T as their intra-LATA provider.
Initial customer response to One Rate 7 has exceeded expectations. In the first
five weeks, nearly 2 million customers subscribed to the plan with over 60%
choosing AT&T for intra-LATA service. New and existing Personal Network
subscribers also receive the seven-cent rate on long distance calling as part of
the bundled package.
Consumer WorldNet Service revenues increased 44.3% in the third quarter of 1999
over the prior year quarter to $79 million. Revenues increased 46.7% for the
nine months ended September 30, 1999, to $220 million compared with the nine
months ended September 30, 1998. AT&T WorldNet Service now serves 1.5 million
residential subscribers, an increase of 44.8% from a year ago.
<PAGE>
AT&T Form 10-Q - Part I
EBIT/EBITDA
EBIT and EBITDA for consumer services increased 23.3% and 22.9%, respectively,
in the third quarter of 1999 compared with the third quarter of the prior year
and increased 27.9% and 27.0%, respectively, for the nine months ended September
30, 1999, compared with the nine months ended September 30, 1998. EBIT and
EBITDA for consumer services excluding the first quarter 1999 gain on the sale
of Language Line increased 24.5% and 24.1%, respectively, for the nine months
ended September 30, 1999, over the same period last year. The increase for the
quarter was driven primarily by lower negotiated settlement rates and cost
reduction efforts, primarily in marketing spending. The increase for the
year-to-date period, excluding the gain on the sale of Language Line, was driven
primarily by cost reduction efforts, primarily in marketing spending and lower
negotiated settlement rates.
OTHER ITEMS
Capital additions for consumer services were $191 million for the third quarter
of 1999 and were $449 million for the nine months ended September 30, 1999.
Capital additions were $130 million for the third quarter of 1998 and were $329
million for the nine months ended September 30, 1998. Spending in both years was
primarily directed towards the long distance network.
Total assets increased $346 million, or 5.3%, to $6,907 million primarily
associated with the purchase of SmarTalk in the first quarter of 1999. Also
contributing to the increase was capital additions, partially offset by
increased accumulated depreciation.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
WIRELESS SERVICES
<CAPTION>
Three months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 2,050 $ 1,420 $ 630 44.2%
EBIT................................ 69 47 22 48.1%
EBITDA excluding other income....... 404 264 140 53.3%
OTHER ITEMS
Capital additions................... $ 676 $ 208 $ 468 226.2%
<CAPTION>
Nine months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 5,490 $ 3,897 $1,593 40.9%
EBIT................................ 93 261 (168) (64.3)%
EBITDA excluding other income....... 935 750 185 24.7%
OTHER ITEMS
Capital additions................... $ 1,493 $ 603 $ 890 147.7%
<CAPTION>
At Sept. 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $21,938 $19,115 $2,823 14.8%
</TABLE>
REVENUES
Wireless services' revenues increased $630 million, or 44.2%, in the third
quarter of 1999, and increased $1,593 million, or 40.9%, for the nine months
ended September 30, 1999, compared with same periods last year. Wireless
services' 1999 results include Vanguard Cellular Systems (Vanguard) since its
acquisition on May 3, 1999, and 1998 results include our messaging business
until the sale date of October 2, 1998. Adjusted to exclude both Vanguard and
our messaging business, revenues grew 40.9% and 41.1% for the three and
nine-month periods ended September 30, 1999, respectively, compared with the
prior year periods. The growth for both periods was driven by the continued
successful execution of AT&T's wireless strategy of targeting and retaining
high-value subscribers, expanding the national wireless footprint, focusing on
digital service, and offering simple rate plans, which has resulted in increased
subscribers and rising average revenue per subscriber.
<PAGE>
AT&T Form 10-Q - Part I
AT&T continues to experience growth in wireless subscribers. Consolidated
subscribers grew 34.8% from a year ago to approximately 9.2 million at September
30, 1999, including approximately 700 thousand subscribers from our acquisition
of Vanguard and approximately 125 thousand subscribers from our acquisition of
Honolulu Cellular Telephone Company (Honolulu) in August 1999. Net subscriber
additions totaled 269 thousand during the third quarter, down 17.4% from the
prior year quarter. Net subscriber additions declined as a result of a reduction
in acquisition marketing efforts in some markets due to network capacity
challenges and a supply shortage of digital multi-network phones in the quarter.
Total subscribers, including partnership markets in which AT&T does not own a
controlling interest, were nearly 12 million at the end of the third quarter of
1999.
AT&T's focus on high-value subscribers has helped generate rising usage by
customers and increased quarterly average revenue per user (ARPU). ARPU across
all of AT&T's wireless markets was $67.9 in the third quarter, an increase of
14.9% from the third quarter of 1998 and a 2.6% increase from the second quarter
of 1999. This represents the fourth consecutive quarter ARPU has increased over
the prior year.
The company continues to rapidly migrate customers to digital service,
generating more efficient use of the network while also reducing customer churn
compared to analog service. At the end of the third quarter of 1999, 73.2% of
AT&T's nearly 9.2 million consolidated subscribers were on digital service, up
from 52.7% one year ago and up from 69.0% one quarter ago.
EBIT/EBITDA EXCLUDING OTHER INCOME
EBIT was $69 million for the quarter, an increase of $22 million over the prior
year period. The increase is primarily due to higher revenues, partially offset
by increased costs from higher off-network roaming expenses, increased customer
care and customer acquisition costs and lower equity earnings. EBIT was $93
million for the nine months ended September 30, 1999, a decrease of 64.3% over
the prior year period. Excluding the second quarter 1998 gain on the sale of
SmarTone, EBIT decreased 41.1% for the nine months ended September 30, 1999,
compared with the prior year period. The EBIT decline for the period was
primarily due to increased costs from higher off-network roaming expenses, and
increased customer care and customer acquisition costs associated with the high
growth of subscriber additions. In addition, EBIT was also impacted by higher
depreciation and amortization as a result of a larger asset base and lower
equity earnings in the current period. EBITDA excluding other income was $404
million and $935 million, for the three and nine months ended September 30,
1999, respectively, representing increases of 53.3% and 24.7% over the prior
year periods. The improvement for both periods was the result of revenue growth
and an improving cost structure. These improvements occurred despite increased
costs from higher off-network roaming and increased customer care spending.
<PAGE>
AT&T Form 10-Q - Part I
Off-network roaming expenses continued to negatively impact results, but at a
declining rate compared to earlier quarters, as initiatives have been introduced
to aggressively capture more minutes on the AT&T network as well as reduce
intercarrier roaming rates. AT&T continues to address off-network usage through
capital expansion, acquisitions and affiliate launches. Capital expansion is
underway within existing and new markets, including Columbus, Ohio; Omaha,
Nebraska; San Diego, California; and certain Connecticut cities. In April 1999,
we acquired Bakersfield Cellular. In May 1999, AT&T completed its merger with
Vanguard, adding more than 700 thousand subscribers and increasing AT&T's
wireless coverage in suburban and rural markets in the Ohio Valley and
Northeastern U.S. In August 1999, AT&T completed its acquisition of Honolulu,
adding approximately 125 thousand customers and providing its mainland customers
with wireless services in Honolulu and Maui. Partnership affiliations with
Cincinnati Bell Wireless, Triton PCS Holdings, Inc., Telecorp PCS, Inc. and
Tritel Inc. further expand AT&T's Time Division Multiple Access (TDMA)
footprint. Intercarrier roaming rates have also declined significantly as a
result of renegotiated roaming agreements and the deployment of Intelligent
Roaming Database (IRDB) technology, which assists in identifying favorable
roaming partners in areas not included in our wireless network. All of these
efforts have resulted in a 20% and 10% reduction in average incollect rate per
minute for the third quarter of 1999 and for nine months ended September 30,
1999, respectively, compared with the same periods last year.
OTHER ITEMS
Capital additions increased $468 million, or 226.2%, in the third quarter of
1999, compared with the third quarter of 1998. Capital additions increased $890
million, or 147.7%, for the nine months ended September 30, 1999, compared with
the nine months ended September 30, 1998. These increases were the result of
additional spending to upgrade and increase capacity in existing markets, as
well as to expand our national footprint.
Total assets increased $2,823 million, or 14.8%, to $21,938 million at September
30, 1999, from December 31, 1998, primarily due to increases in goodwill,
licensing costs and property, plant and equipment associated with our
acquisitions of Vanguard, Honolulu and Bakersfield Cellular. In addition, higher
net property, plant and equipment as a result of capital expenditures and
increased accounts receivable associated with higher revenues also contributed
to the increase in assets.
<PAGE>
AT&T Form 10-Q - Part I
BROADBAND & INTERNET SERVICES
Date of
Three months acquisition
ended through
September 30, September 30,
Dollars in millions 1999 1999
Revenues............................ $1,442 $ 3,344
EBIT................................ (530) (1,763)
EBITDA excluding other income....... 389 263
OTHER ITEMS
Capital additions................... $1,007 $ 2,155
At September 30,
1999
Total assets........................ $55,941
REVENUES
Revenues were $1,442 million for the third quarter of 1999 and were $3,344
million from the date of acquisition through September 30, 1999.
Broadband & Internet services ended the third quarter of 1999 with 11.4 million
basic cable customers passing 19.4 million homes. AT&T had approximately 1.7
million Digital Cable customers. The high-speed cable Internet service,
AT&T@Home, had approximately 113,600 customers at the end of the third quarter
compared with approximately 82,800 at the end of the second quarter.
AT&T holds equity interests in Excite@Home and Cablevision. At September 30,
1999, AT&T owned 94.5 million shares of Excite@Home, representing an approximate
26% economic interest, and 48.9 million shares of Cablevision, representing an
approximate 32% economic interest. In the fourth quarter of 1999, Excite@Home
agreed to acquire an online greeting card company. Upon completion of the
merger, it is expected that AT&T's economic interest in Excite@Home will be
further diluted.
EBIT/EBITDA EXCLUDING OTHER INCOME
EBIT was a deficit of $530 million for the third quarter of 1999 and a deficit
of $1,763 million since acquisition in early March of 1999. EBITDA excluding
other income was $389 million for the third quarter of 1999 and $263 million
since acquisition. Included in AB&IS year-to-date results was a $594 million
first quarter 1999 charge for in-process research and development and a second
quarter 1999 charge of $50 million related to a contribution agreement entered
into by AB&IS to satisfy certain liabilities of Phoenixstar.
OTHER ITEMS
Total assets were $55,941 million at September 30, 1999.
Capital additions of $1,007 million for the third quarter of 1999 and $2,155
million since the date of acquisition through September 30, 1999, comprised
primarily of spending on cable distribution systems which focused primarily on
upgrading the plant bandwidth.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
OTHER AND CORPORATE
<CAPTION>
Three months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 888 $ 369 $ 519 141.9%
EBIT................................ (272) 342 (614) (179.2)%
EBITDA.............................. (81) 462 (543) (117.5)%
OTHER ITEMS
Capital additions................... $ 944 $ 167 $ 777 471.2%
<CAPTION>
Nine months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 1,846 $ 893 $ 953 107.2%
EBIT................................ (702) (3,002) 2,300 76.6%
EBITDA.............................. (221) (2,646) 2,425 91.7%
OTHER ITEMS
Capital additions................... $ 1,489 $ 425 $1,064 250.6%
<CAPTION>
At Sept. 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $18,209 $12,459 $5,750 46.1%
</TABLE>
REVENUES
Revenues increased $519 million, or 141.9%, in the third quarter of 1999
compared with the same quarter last year. Excluding the impacts of AGNS,
revenues for the third quarter of 1999 were $432 million, an increase of 17.8%
from the same quarter a year ago. Revenue growth was primarily driven by AT&T
Solutions as a result of the continued strength of the outsourcing business.
These increases were partially offset by an increase in the elimination of
intercompany revenues. Revenues increased $953 million, or 107.2%, for the nine
months ended September 30, 1999, compared with the same period last year.
Excluding the impacts of AGNS, revenues increased $282 million, or 31.9%, for
the nine months ended September 30, 1999, compared with the same period in the
prior year. The increase was primarily driven by the growth in AT&T Solutions
and international operations and ventures. These increases were partially offset
by an increase in the elimination of intercompany revenues and the sale of ASCC
in 1998.
<PAGE>
AT&T Form 10-Q - Part I
The elimination of revenues and profit generated by the sale of services between
segments is primarily a result of the sale of business long distance services to
other AT&T units. Revenues eliminated in the quarter were $427 million, an
increase of 93.6% from the third quarter of 1998. Revenues eliminated through
September 30, 1999, year-to-date were $1,124 million, an increase of 57.0% from
the prior year. The increase in eliminated revenues is primarily due to an
increase in business services sales to AT&T Solutions, including the impact of
AGNS, and wireless services.
EBIT/EBITDA
EBIT and EBITDA decreased $614 million, or 179.2%, and $543 million, or 117.5%,
in the third quarter of 1999 compared with the prior year quarter. Excluding the
third quarter 1999 gain on the sale of a portion of AT&T's equity interest in
AT&T Canada and the third quarter 1998 restructuring and other charge benefit,
EBIT and EBITDA decreased $207 million and $136 million, or 118.7% and 248.6%,
respectively, from the third quarter of 1998. The decline was primarily driven
by higher interest income in 1998 and distributions on trust preferred
securities in 1999. In addition, EBIT was negatively impacted and EBITDA
positively impacted by AGNS.
EBIT and EBITDA improved $2,300 million, or 76.6% and $2,425 million, or 91.7%,
respectively, for the nine months ended September 30, 1999, compared with the
same period last year. Excluding the restructuring and other charges, the 1999
gains on the sales of a portion of AT&T's ownership in AT&T Canada and WOOD-TV
and the first quarter 1998 gains on the sales of ASCC and LIN-TV, EBIT was flat
for the nine months ended September 30, 1999, compared with the nine months
ended September 30, 1998, and EBITDA improved $125 million, or 26.0%, for the
same period. Savings from cost control initiatives and lower equity losses for
international operations and ventures were offset by lower interest income and
distributions on trust preferred securities. In addition, EBIT was negatively
impacted and EBITDA was positively impacted by AGNS.
<PAGE>
AT&T Form 10-Q - Part I
OTHER ITEMS
Capital additions increased $777 million, or 471.2%, in the third quarter of
1999 compared with the third quarter of last year. Capital additions increased
$1,064 million, or 250.6% for the nine months ended September 30, 1999, compared
with the nine months ended September 30, 1998, primarily due to increased
investment in international operations and ventures' nonconsolidated
subsidiaries.
Total assets at September 30, 1999, were $18,209 million compared with $12,459
million at December 31, 1998, which represents a 46.1% increase. The increase
was primarily due to goodwill associated with AGNS.
AT&T SOLUTIONS
AT&T Solutions is our outsourcing, network-management and professional-services
business. AT&T Solutions is comprised of the Solutions outsourcing unit, the
internal AT&T Information Technology Services unit, and the recently acquired
AGNS. During the third quarter of 1999, AT&T completed additional portions of
the acquisition in Canada, New Zealand, Korea, Hong Kong, South Africa and
Isreal. The results of AT&T Solutions are included in the other and corporate
group.
<TABLE>
<CAPTION>
Three months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 983 $ 285 $ 698 245.1%
EBIT................................ (23) 18 (41) (222.7)%
EBITDA.............................. 117 88 29 32.3%
OTHER ITEMS
Capital additions................... $ 152 $ 51 $ 101 199.8%
<CAPTION>
Nine months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $1,989 $ 765 $1,224 159.9%
EBIT................................ (30) 14 (44) (312.4)%
EBITDA.............................. 296 219 77 35.1%
OTHER ITEMS
Capital additions................... $ 228 $ 108 $ 120 112.5%
<CAPTION>
At Sept. 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $6,774 $1,023 $5,751 562.1%
</TABLE>
REVENUES
AT&T Solutions grew revenues 245.1% for the third quarter of 1999 and 159.9% for
the nine months ended September 30, 1999, to $983 million and $1,989 million,
respectively, compared with the corresponding prior year periods. Excluding the
impact of AGNS, revenues grew 47.8% for the quarter and 49.5%, for the nine
months ended September 30, 1999, to $421 million and $1,144 million,
respectively. The growth for both periods was the result of new contracts
signings and growth from existing clients. In addition, AT&T Solutions manages
AT&T's internal network infrastructure and generated approximately $421 million
in internal billings in the third quarter and $1,273 million for the nine months
ended September 30, 1999, which were recorded as a reduction to AT&T Solutions'
expenses (cost recovery).
<PAGE>
AT&T Form 10-Q - Part I
AT&T Solutions, with more than 30,000 clients, including IBM, CitiGroup,
McGraw-Hill, Bank One, United Health Group, Textron, J.P. Morgan, Merrill Lynch,
and MasterCard International, has the potential for more than $11 billion in
outsourcing revenues over the life of the signed contracts.
EBIT/EBITDA
EBIT and EBITDA were a deficit of $23 million and income of $117 million for the
third quarter of 1999, respectively, including AGNS. For the nine months ended
September 30, 1999, EBIT and EBITDA were a deficit of $30 million and income of
$296 million, respectively. Excluding the impact of AGNS, EBIT and EBITDA were a
positive $24 million and $94 million for the third quarter of 1999,
respectively, an improvement over $18 million and $88 million, respectively,
reported in the corresponding prior year quarter. EBIT and EBITDA were $45
million and $260 million on this basis for the nine months ended September 30,
1999, an improvement over $14 million and $219 million for the nine months ended
September 30, 1998. Excluding AGNS, the improvement for both periods was
primarily due to revenue growth in AT&T Solutions' outsourcing unit combined
with improving margins. On a year-to-date basis, the improvement was partially
offset by a lower EBIT margin on internal services billed.
OTHER ITEMS
Capital additions for the third quarter of 1999 were $152 million, an increase
of 199.8% over the third quarter of 1998. Capital additions for the nine months
ended September 30, 1999, were $228 million, an increase of 112.5% over the
corresponding prior year period. The increases were primarily due to the
addition of client support equipment.
Total assets increased $5,751 million, or 562.1%, from December 31, 1998, due
primarily to goodwill and other intangible assets associated with AGNS as well
as higher accounts receivable.
INTERNATIONAL OPERATIONS AND VENTURES
International operations and ventures include consolidated foreign operations
such as frame relay services in the UK, ACC, the company's international carrier
services businesses and international online services. The equity earnings or
losses of AT&T's nonconsolidated international joint ventures and alliances,
such as Alestra in Mexico, AT&T Canada Corp., Rogers Cantel and Japan Telecom
are also included. The results of international operations and ventures are
included in the other and corporate group.
<TABLE>
<CAPTION>
Three months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 316 $ 288 $ 28 9.8%
EBIT................................ 84 (48) 132 273.7%
EBITDA.............................. 99 (31) 130 423.7%
OTHER ITEMS
Capital additions................... $ 690 $ 39 $651 NMF
<PAGE>
AT&T Form 10-Q - Part I
<CAPTION>
Nine months
ended
September 30, Change
Dollars in millions 1999 1998 $ %
<S> <C> <C> <C> <C>
Revenues............................ $ 941 $ 739 $202 27.4%
EBIT................................ (105) (174) 69 39.7%
EBITDA.............................. (52) (119) 67 56.5%
OTHER ITEMS
Capital additions................... $1,047 $ 104 $943 NMF
<CAPTION>
At Sept. 30, At Dec. 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Total assets........................ $2,538 $1,915 $623 32.6%
</TABLE>
REVENUES
Revenues grew 9.8% in the third quarter of 1999 to $316 million and grew 27.4%
to $941 million for the nine months ended September 30, 1999, compared with the
corresponding periods in 1998. Revenue growth for both periods was led by
international carrier services and frame relay services due to increased
volumes. A decline in ACC revenues due to the merger of ACC Canada with AT&T
Canada Corp., which is now accounted for as an equity investment, partially
offset the increase in revenues for the quarter. Revenue growth rates have also
been impacted by the divestment of certain nonstrategic businesses.
EBIT/EBITDA
EBIT and EBITDA improved in the third quarter of 1999 by $132 million and $130
million, respectively, compared with the same period in 1998 due primarily to a
gain on the sale of a portion of AT&T's ownership interest of AT&T Canada to BT.
Excluding this gain, EBIT and EBITDA improved in the third quarter of 1999 by
$22 million and $20 million, respectively, due primarily to an improving
financial performance in ventures and alliances. The divestment of certain
nonstrategic businesses and improved performance in international carrier
services and frame relay services also contributed to the improvement. These
increases were partially offset by costs related to the preparation of Concert.
<PAGE>
AT&T Form 10-Q - Part I
EBIT and EBITDA improved for the nine months ended September 30, 1999, by $69
million to a deficit of $105 million and by $67 million to a deficit of $52
million, respectively, compared with the same period in 1998. Excluding the
third quarter gain on the sale of a portion of AT&T's ownership interest in AT&T
Canada and the year-to-date net charge related to the exit of joint ventures
that would have competed directly with Concert, EBIT and EBITDA improved during
the period by $87 million and $85 million, respectively, primarily driven by an
improving financial performance in ventures and alliances. The divestment of
certain nonstrategic businesses and improved performance in frame relay and
international carrier services also contributed to the improvement. These
increases were partially offset by costs related to the preparation of Concert.
OTHER ITEMS
Capital additions increased $651 million to $690 million in the third quarter of
1999 and increased $943 million to $1,047 million for the nine months ended
September 30, 1999, compared with the same periods last year. The increases were
primarily due to increased investments in nonconsolidated subsidiaries.
Total assets were $2,538 million at September 30, 1999, compared with $1,915
million at December 31, 1998. The increase was primarily driven by additional
investments in nonconsolidated subsidiaries partially offset by the divestment
of certain nonstrategic businesses.
<PAGE>
AT&T Form 10-Q - Part I
LIBERTY MEDIA GROUP RESULTS
LMG produces, acquires and distributes entertainment, educational and
informational programming services through all available formats and media. LMG
is also engaged in electronic retailing services, direct marketing services,
advertising sales relating to programming services, infomercials and transaction
processing. Although LMG is wholly owned by AT&T, it is accounted for as an
equity investment in the accompanying consolidated financial statements since
AT&T does not have a controlling financial interest for financial reporting
purposes in LMG. Equity losses from LMG were $217 million for the third quarter
of 1999 and $818 million for the period from the date of acquisition through
September 30, 1999.
On July 7, 1999, Liberty Media Corporation (a company in the Liberty Media
Group) and The Associated Group, Inc. (Associated) signed a definitive merger
agreement pursuant to which LMG will acquire Associated in an all-stock,
tax-free transaction valued at approximately $3 billion. Under the agreement,
Associated shareowners would receive an aggregate of approximately 51,778,920
shares of Class A Liberty Media Group tracking stock, subject to adjustment, and
an aggregate of approximately 19,719,274 shares of AT&T common stock. The AT&T
common stock issued is equal to the number of AT&T shares held by Associated
that will be dividended to AT&T and will be retired. In addition, Associated
also owns 23.4 million shares of LMG Class A tracking stock and 5.3 million
shares of Class B tracking stock that will become treasury stock. A proxy
statement/prospectus was filed with the SEC on October 29, 1999. Upon approval
of the stockholders of Associated, as well as the FCC and other authorities, the
transaction is expected to be completed during the first quarter of 2000.
On September 28, 1999, LMG announced that the Board of Directors of AT&T
approved the repurchase from time to time of up to 135 million shares of Liberty
Media Group Class A or Class B tracking stock.
<PAGE>
AT&T Form 10-Q - Part I
<TABLE>
LIQUIDITY
<CAPTION>
Nine months
ended
September 30,
Dollars in millions 1999 1998
<S> <C> <C>
CASH FLOW OF CONTINUING OPERATIONS:
Provided by operating activities.............. $ 7,237 $ 6,998
(Used in) provided by investing activities.... (21,353) 6,808
Provided by (used in) financing activities.... 10,956 (10,026)
EBITDA* ........................................ $ 13,748 $ 8,914
<FN>
* Earnings before interest, taxes, depreciation and amortization
(EBITDA) for the nine months ended September 30, 1999, includes
restructuring and other charges, net, of $702 million, a $153 million
pretax gain on the sale of Language Line, a $110 million pretax gain on
the sale of a portion of AT&T's equity interest in AT&T Canada, an $88
million pretax gain on the sale of WOOD-TV and the equity losses
associated with our nonconsolidated investments in Excite@Home and
Cablevision. EBITDA for the nine months ended September 30, 1998,
includes restructuring and other charges, net, of $2,827 million,
pretax gains from the sales of ASCC of $350 million, LIN-TV of $317
million and SmarTone of $103 million. EBITDA excludes the results of
LMG.
</FN>
</TABLE>
Net cash provided by operating activities of continuing operations for the nine
months ended September 30, 1999, was $7,237 million. This represents an increase
of $239 million compared with the nine months ended September 30, 1998. The
increase was driven primarily by an increase in operating net income excluding
depreciation and amortization, offset by an increase in the 1999 tax payment of
approximately $1.4 billion primarily related to the gain on the sale of UCS and
an increase in accounts receivable.
AT&T's investing activities resulted in a net use of cash of $21,353 million for
the nine months ended September 30, 1999, compared with a net source of cash of
$6,808 million for the nine months ended September 30, 1998. During the nine
months ended September 30, 1999, AT&T used $8.8 billion for capital
expenditures, transferred $5.5 billion of cash to LMG, purchased portions of
AGNS for $4.9 billion and loaned $1.5 billion to MediaOne Group, Inc. (MediaOne)
to pay termination fees to Comcast Corporation (Comcast). During the nine months
ended September 30, 1998, we received $5.7 billion as a settlement of a
receivable in conjunction with the sale of UCS as well as $3.5 billion in
proceeds from the sale. Also in 1998, we received a total of $1.6 billion in
proceeds from the sales of LIN-TV, ASCC and SmarTone. Our capital spending of
$5.1 billion was the primary use of cash during the nine months ended September
30, 1998.
<PAGE>
AT&T Form 10-Q - Part I
During the nine months ended September 30, 1999, the net cash provided by
financing activities was $10,956 million compared with cash used in financing
activities of $10,026 million for the nine months ended September 30, 1998.
During the first nine months of 1999, AT&T received $8.4 billion of cash from
1999 bond issuances, $6.3 billion from the issuance of commercial paper and
short-term debt, and $5.0 billion from the issuance of convertible securities
and warrants to Microsoft Corporation (Microsoft). Significant uses of cash were
$3.9 billion to fund the share repurchase program, $2.1 billion to retire
commercial paper and other short-term debt, and $2.0 billion to pay dividends on
common stock. In the first nine months of 1998, cash used in financing
activities was largely attributable to the pay down of commercial paper and
debt, and the repurchase of approximately $3 billion of AT&T common stock.
EBITDA is a measure of our ability to generate cash flow and should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with generally accepted accounting
principles. EBITDA increased $333 million, or 7.0%, to $5,060 million for the
third quarter of 1999 compared with the same period last year. EBITDA increased
$4,834 million, or 54.2%, to $13,748 million for the nine months ended September
30, 1999, compared with the same period in 1998. Excluding AB&IS, AGNS, the
restructuring and other charges, and gains on sales of businesses in 1999 and
1998, EBITDA increased 25.1% to $13,723 million in the first nine months of 1999
from $10,971 million for the first nine months of 1998. The increase was
primarily due to increased revenues and improved margins in business services
and cost reductions in consumer services.
EURO CONVERSION
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
currency (Euro). The transition period is anticipated to extend through July 1,
2002. We have assessed the impact of the conversion on information-technology
systems, currency exchange rate risk, derivatives and other financial
instruments, continuity of material contracts as well as income tax and
accounting issues. To date, the conversion has not had nor do we expect the
conversion during the transition period to have a material effect on our
consolidated financial statements.
<PAGE>
AT&T Form 10-Q - Part I
FINANCIAL CONDITION Total assets increased $102,256 million, or 171.7%, to
$161,806 million at September 30, 1999, compared with December 31, 1998. The
increase in total assets was due primarily to the impact of AB&IS, which
resulted in franchise costs, an investment in LMG, increased other investments
including Cablevision, Excite@Home and Lenfest Communications, Inc., and the
addition of over $6 billion to property, plant and equipment. In addition, we
recognized goodwill related to AGNS. Other assets increased $1.5 billion
representing the Comcast break-up fee loaned to MediaOne by AT&T. These
increases were partially offset by a net decrease in cash, which was used to
partially fund capital expenditures during the period and the first quarter
share repurchase, as well as AGNS.
Total liabilities increased $44,377 million, or 130.8%, to $78,296 million at
September 30, 1999, compared with December 31, 1998. The increase was due
primarily to AB&IS, particularly deferred income taxes and debt, the $8.5
billion in bond offerings and the issuance of $6.3 billion of short-term debt.
These increases were partially offset by the retirement of $2.1 billion of
long-term debt.
Included within "Minority Interest in Equity of Consolidated Subsidiaries" is
Class A Senior Cumulative Exchangeable Preferred Stock of TCI Pacific
Communications, Inc. (Pacific) and TCI Class B Preferred Stock. At September 30,
1999, the amount of preferred stock and accumulated dividends of Pacific and
Class B preferred, respectively, were an aggregate $2.1 billion and $149
million.
In addition, AT&T issued $5.0 million of quarterly convertible income preferred
securities (recorded net of a $0.3 million discount) to Microsoft.
Total shareowners' equity increased $49,241 million, or 192.9%, to $74,763
million at September 30, 1999, compared with December 31, 1998. The increase was
due primarily to the issuance of shares related to AB&IS, partially offset by
shares repurchased.
<PAGE>
AT&T Form 10-Q - Part I
AT&T Group's ratio of total debt to total capital at September 30, 1999, was
42.6% compared with 20.9% at December 31, 1998. Equity includes the $5 billion
convertible securities issued to Microsoft and debt includes $1.6 billion of
non-convertible securities issued by TCI's subsidiary trusts. The increase was
primarily driven by an increase in debt associated with AB&IS and $8.5 billion
of bond issuances in 1999, partially offset by a higher equity base. AT&T
Group's net debt-to-operational EBITDA was 1.69X at September 30, 1999, compared
with 0.24X at December 31, 1998.
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign exchange
rates. On a limited basis we use certain derivative financial instruments,
including interest rate swaps, options, forwards and other derivative contracts
to manage these risks. We do not use financial instruments for trading or
speculative purposes. All financial instruments are used in accordance with
board-approved policies.
Assuming a 10% downward shift in interest rates at September 30, 1999, the
potential loss for changes in fair value of unhedged debt would have been $1.0
billion.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, it requires that entities recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T this means that the standard must be adopted no later than January 1, 2001.
Management does not expect the adoption of this standard to have a material
impact on AT&T's results of operations, financial position or cash flows.
<PAGE>
AT&T Form 10-Q - Part I
YEAR 2000
AT&T is preparing its systems and applications for the year 2000 (Y2K). The
issue our Y2K program addresses is the use of a two-digit year field instead of
a four-digit year field in computer systems. If computer systems cannot
distinguish between the year 1900 and the year 2000, system failures or other
computer errors could result. The potential for failures and errors spans all
aspects of our business, including computer systems, voice and data networks,
and building infrastructures. We are also faced with addressing
interdependencies with our suppliers, connecting carriers and major customers,
all of whom face the same issue.
AT&T's company-wide Y2K program is focused on four interrelated categories which
are critical to maintaining uninterrupted service to our customers:
AT&T-developed applications and their external interfaces, AT&T networks,
information-technology (IT) platforms that support the applications, and non-IT
infrastructure.
AT&T's progress in our Y2K program is measured by certain key milestones or
phases common to each category of systems. These milestones are: assessment,
repair/remediation, testing and certification. AT&T monitors and tracks the
progress of our Y2K program through a series of scorecards that capture the
activities related to the Y2K process phases.
As of September 30, 1999, AT&T's network services and AT&T-developed
applications and their external interfaces are year 2000 compliant. This means
they have been assessed for year 2000 impacts, repaired if necessary, tested and
fully deployed. Within the IT-infrastructure category, some non-critical
desktops remain to be certified and a small number of sites remain to be
certified in the non-IT infrastructure category. The certification of the
remaining desktops and sites is expected to be completed in November 1999. The
status of AB&IS' Y2K program is discussed separately from the existing AT&T
program. All targets cited herein also exclude information regarding pending
acquisitions, whose programs continue to be evaluated and planned for
integration into the overall AT&T Y2K program.
Program Status
AT&T now has over 3,500 applications that (1) directly support AT&T's voice and
data telecommunications services (including wired and wireless); (2) are
critical to the provisioning, administration, maintenance and customer
service/support related to our telecommunications services; and (3) support our
sales and marketing organizations, other AT&T services and internal
administrative functions. These applications represent over 385 million lines of
code. As of September 30, 1999, these applications are 100% complaint.
With respect to external (third-party) interface assessment, formal letters were
sent to about 2,000 domestic telecommunications companies and international
telecommunications authorities to request information on their Y2K plans and
targets for compliance. We have identified over 1,000 different types of
third-party interfaces and about 10,000 total instances of those types. As of
September 30, 1999, AT&T is 100% complete with Y2K certification of external
interfaces.
<PAGE>
AT&T Form 10-Q - Part I
The AT&T network is critical to providing top-quality, reliable service to AT&T
customers. As of September 30, 1999, the assessment, repair and certification
phases of the operation-support systems (OS) were 100% complete and these
systems are now fully deployed. In addition to the AT&T-developed applications
supporting the network, AT&T has inventoried about 2,000 unique types
(manufactured/model combinations) of externally purchased network elements (NE)
including switches, routers, network-control points and signal-transfer points.
Additional Y2K testing is conducted to independently verify supplier claims of
compliance. All of the NEs are now certified. After OS/NE certification is
complete, AT&T performs integration testing to verify Y2K certification of NEs
in conjunction with the associated OS applications. Such integration testing is
100% completed, and all of the NEs are fully deployed.
The IT infrastructure category addresses not only the computing platforms that
are critical to the AT&T-developed applications, but also the common modules,
communications protocols, the internal AT&T wide-area and local-area networks,
desktop hardware/software and the internal voice network. As of September 30,
1999, AT&T was 100% compliant in computing platforms, about 95% compliant in
desktops, 100% compliant in voice systems and adjuncts, and 100% compliant in
data networks. The desktops that still remain to be validated as Y2K compliant
are not in customer-affecting areas. Based on the experience with the desktops
already verified as compliant, it is likely that many of the remaining desktops
may only require software "patches" or minimal upgrades to be made compliant. We
anticipate that we will complete the validation process by the end of November
1999.
The non-IT infrastructure focuses on the energy- and environment-management
systems that are critical to various computer systems, as well as safety,
security and operations. This aspect of the Y2K program encompasses more than
18,000 sites, including thousands of repeater huts, radio towers and wireless
cell sites. As of September 30, 1999, 100% of all sites completed inventory and
assessment and about 97% are compliant (or not impacted). The small number of
sites that still remain to be certified as compliant are anticipated to be
completed by mid-November 1999.
In addition, AT&T has virtually completed network interoperability tests with a
variety of domestic and international testing partners, with the remaining two
tests scheduled to be completed in November. These tests are designed to
exercise the network across a range of our vendors, and across a range of AT&T
voice, private line, and data services. We have also completed testing with key
customer and industry segments, including the financial community, insurance,
power utilities, the federal government and others. All test results to date
have been positive.
Similar to AT&T's Y2K program, the AB&IS program has a four-phased approach to
determining the readiness of systems for Y2K, namely: assessment, remediation,
testing and implementation. As of September 30, 1999, critical cable delivery
systems and customer services are Y2K compliant. We anticipate completion of all
remaining phases of AB&IS' program by mid-November. AB&IS is also continuing its
efforts to verify the year 2000 readiness of its significant suppliers and
vendors and continue to communicate with significant business partners and
affiliates to assess such partners' and affiliates' Y2K status.
<PAGE>
AT&T Form 10-Q - Part I
Costs
We have expended approximately $675 million since inception in 1997 on all
phases of the Y2K project. This figure included approximately $76 million of
costs incurred during the third quarter of 1999, of which approximately $11
million represented capital spending for upgrading and replacing non-compliant
computer systems and network components. Less than half of the 1999 costs
incurred to date represent internal IT resources that have been redeployed from
other projects and are expected to return to these projects upon completion of
the Y2K project. We anticipate remaining Y2K costs for 1999, inclusive of
approximately $25 million projected expenditures associated with completing the
AB&IS program, will be approximately $64 million. This projection includes
approximately $21 million of capitalized costs. The remaining projected
expenditures will consist primarily of continued independent verification and
validation; contingency planning testing; completion of document retention
requirements and continued communications expansion and enhancement.
Risk Assessment
We have assessed our business exposure that would result from a failure of our
Y2K program, as well as those of our suppliers, connecting carriers and major
customers. Such failures would result in business consequences that could
include failure to be able to serve customers, loss of network functionality,
inability to render accurate bills, lost revenues, harm to the AT&T brand, legal
and regulatory exposure, and failure of management controls. Although we believe
that internal Y2K compliance will be achieved by December 31, 1999, there can be
no assurance that the Y2K problem will not have a material adverse effect on our
business, financial condition or results of operations.
<PAGE>
AT&T Form 10-Q - Part I
Contingency Plans
AT&T's contingency planning program focuses on 38 critical business processes
and many more that are designated as "important" or "support". The plans address
all facets of business continuity, including key suppliers,
systems/applications, IT infrastructure and work centers. Specific examples of
AT&T's contingency plan initiatives include the following:
Plans are under way to engineer additional network capacity and to position AT&T
personnel on site at critical locations to monitor operations and manage
increases in work and call volumes.
Agreements are being negotiated with contractors and vendors to ensure the
availability of on-site technical support. This coverage includes, but is not
limited to, network centers and sites, customer-care centers and data centers.
We are planning to proactively stage supplemental power, fuel, water, heating,
air-conditioning and ventilation sources to support critical business operations
and personnel requirements.
Alternate procedures and processes are being developed to support critical
customer functions, including alternative procedures for rapid repair, recovery
and restoration of critical technology components by business resumption teams.
Procedures to perform database backups, hardcopy printouts, data retention and
recovery are being established for business critical data.
Risk Management
In addition to the contingency planning program, AT&T has implemented an
Independent Verification and Validation program for applications to validate the
quality of application remediation and testing, as well as the continuing
compliance of systems put back into production. We also continue to conduct
independent audits across critical areas of the Y2K program.
AT&T continues to monitor the progress of over 50 countries who represent a
significant revenue source. Based on assessments aggregated by the Network
Reliability and Interoperability Council, the outlook for Y2K readiness for
these countries and their carriers continues to improve. Network
interoperability testing results also support this view.
To maintain a state of readiness and further protect against potential
Y2K-related service disruptions, AT&T is instituting a special "quiet period"
from December 1, 1999 through January 15, 2000. During this period, no new
software or hardware will be introduced into the network or support systems.
Provisioning and scheduled maintenance will also be limited.
<PAGE>
AT&T Form 10-Q - Part I
OTHER MATTERS On April 30, 1999, AT&T completed its acquisition of the IBM
Global Network business (renamed AT&T Global Network Services or "AGNS") and its
assets in the United States. The acquisition is occurring in phases throughout
1999 as legal and regulatory requirements are met in each of the 59 countries in
which the business operates. As of the end of the third quarter, we had
completed acquisitions representing approximately 95% of the revenues generated
by businesses which comprise AGNS. The acquisition has been accounted for as a
purchase. Accordingly, the operating results of AGNS have been included in the
accompanying consolidated financial statements since the date of acquisition.
Intangible assets of approximately $4.1 billion including customer lists and the
excess of the purchase price over the fair value of net assets acquired are
being amortized on a straight-line basis over periods ranging from five to 30
years. The pro forma impact of AGNS on historical AT&T results are not material.
On May 28, 1999, At Home Corporation consummated a merger agreement with Excite,
Inc. (Excite), a global Internet media company that offers consumers and
advertisers comprehensive Internet navigation services with extensive
personalization capabilities. Under the terms of the merger agreement, At Home
Corporation issued approximately 116 million shares of its common stock for all
of the outstanding common stock of Excite. As a result, AT&T's economic interest
in At Home Corporation (Excite@Home) decreased from 38% to 26% following the
merger. Due to the resulting increase in Excite@Home's equity after the merger,
net of the dilution of AT&T's ownership interest in Excite@Home, AT&T recorded
an increase to additional paid-in capital of $488 million at September 30, 1999.
In the fourth quarter of 1999, Excite@Home agreed to acquire an online greeting
card company. Upon completion of that merger, AT&T will record additional
amounts to its additional paid-in capital as the share of its ownership of
Excite@Home is diluted. At September 30, 1999, AT&T owned 94.5 million shares of
Excite@Home common stock and has an approximate 58% voting interest on certain
matters.
On August 2, 1999, AT&T completed its acquisition of Honolulu Cellular Telephone
Company from BellSouth.
In August 1999, AT&T and British Telecommunications plc (BT) jointly acquired a
33.3% stake in Rogers Cantel Mobile Communications Inc. (Rogers Cantel) in
Canada for approximately $934 million in cash. The investment is owned equally
by AT&T and BT. Rogers Cantel is Canada's largest mobile company serving two
million customers from coast to coast. Rogers Cantel provides a complete range
of wireless solutions including cellular, paging and interactive messaging,
digital PCS and wireless data services marketed under the co-brand Cantel AT&T.
Also in August 1999, AT&T sold 30% of its 31% ownership interest in AT&T Canada
to BT for approximately $402 million resulting in a $110 million pretax gain and
a 22% beneficial ownership by AT&T. AT&T and BT both contributed their ownership
interest of AT&T Canada to a joint venture that is 70% owned by AT&T and 30%
owned by BT.
On September 2, 1999, AT&T and BT acquired a 30% stake in Japan Telecom for
$1.83 billion.
The previously announced global venture between AT&T and BT has received
approval from the Federal Communication Commission (FCC), the U.S. Justice
Department and the European Commission. The venture, which will be called
Concert, will combine transborder assets and operations of each company and will
be equally owned by both companies when operations begin. The venture is
expected to be completed in the fourth quarter of 1999 and to begin operations
on January 1, 2000.
<PAGE>
AT&T Form 10-Q - Part I
SUBSEQUENT EVENTS
On October 6, 1999, AT&T and Dobson Communications Corporation (Dobson)
announced the signing of a definitive agreement to acquire American Cellular
Corporation through a newly created joint venture for $2.32 billion. Dobson will
be responsible for day to day management of the joint venture, which will be
equally owned and jointly controlled by Dobson and AT&T. The acquisition will be
funded with non-recourse bank debt by the joint venture and cash equity
contributions of up to $370 million from each of the two partners. The Board of
Directors of AT&T, Dobson and American Cellular have approved the transaction.
The acquisition, which is expected to close in the first quarter of 2000, is
subject to approval by American Cellular's shareowners, as well as federal
regulatory and certain other conditions.
On October 21, 1999, shareowners of MediaOne Group, Inc. (MediaOne) unanimously
voted in favor of the proposed merger between AT&T and MediaOne, pursuant to a
definitive merger agreement entered into on May 6, 1999. In accordance with the
agreement, AT&T will purchase each share of MediaOne common stock for $85.00 per
share consisting of 0.95 of a share of AT&T common stock plus $30.85 in cash. In
addition, the agreement provides for an increase in the amount of cash received
per share of MediaOne common stock to the extent that AT&T's stock price was
less than $57.00 per share. The additional amount of cash which may be received
is limited to $5.42 per share. AT&T plans to issue approximately 613 million
shares in the transaction. Upon receipt of regulatory and other approvals, the
merger is expected to close in the first quarter of 2000.
On November 1, 1999, AT&T announced its plans to form a new public company, to
be named AT&T Latin America, that will merge the operations of Netstream, the
competitive local exchange company AT&T is acquiring in Brazil, and FirstCom, a
publicly traded company with competitive telecommunications operations in Chile,
Columbia and Peru. AT&T, together with Promon Tecnologia, its Brazilian partner,
will contribute Netstream and $70 million in cash. AT&T will own approximately
60% of the company, owning Class B shares, with 10 votes per share. The
transaction has been approved by both AT&T's and FirstCom's Board of Directors.
Upon approval by FirstCom shareowners as well as regulatory and other approvals,
the transaction is expected to close in the first quarter of 2000. AT&T Latin
America intends to apply for listing on the NASDAQ stock market.
On November 5, 1999, WORLDxCHANGE Communications announced the acquisition of
ACC in Europe (ACC) from AT&T. The agreement includes ACC's principal operations
in the United Kingdom, as well as ACC's operating companies in France, Germany
and Italy. AT&T believes it will record a pretax loss in the range of $150
million to $200 million on the sale.
LEGISLATIVE AND REGULATORY DEVELOPMENTS On October 8, 1999, the Federal
Communications Commission (FCC) adopted amendments to its cable attribution
rules which eased restrictions on its horizontal ownership limitations. In 1993
the FCC had adopted rules which limited the number of households passed by a
single cable operator to 30% of households passed by all cable operators. The
amendments affirmed the 30% limit but changed the applicable measurement from
households passed to subscribers. In addition, the FCC expanded the base of
total subscribers to include those served by alternative multichannel video
programming distributors, such as direct broadcast satellite. The FCC stated
that the 30% limit on total subscribers equated to 36.7% of cable subscribers.
In addition, the FCC also exempted from a cable operator's attributable
subscribers those served by systems that the cable operator overbuilds in an
incumbent cable franchise territory after October 20, 1999. The FCC retained the
5% voting equity threshold for attribution, and adopted a rule which would treat
as attributable any interest that exceeds 33% of the total asset value (equity
plus debt) of the entity. The FCC stayed enforcement of the new rules until the
D.C. Circuit Court of Appeals decides upon the pending challenge to the cable
attribution rules.
<PAGE>
AT&T Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99.1 Liberty Media Group Financial Results for the
Quarter and Year-to-Date Periods Ended September
30, 1999
99.2 Tele-Communications, Inc. Financial Results for
the Quarter and Year-to-Date Periods Ended
September 30, 1999
(b) Reports on Form 8-K
Form 8-K dated September 2, 1999, was filed pursuant to Item 5
(Other Events) and Item 7 (Financial Statements and Exhibits).
<PAGE>
AT&T Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T Corp.
/s/ N. S. Cyprus
------------------------------
By: N. S. Cyprus
Vice President and Controller
(Principal Accounting Officer)
Date: November 12, 1999
<PAGE>
AT&T Form 10-Q
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99.1 Liberty Media Group Financial Results for the
Quarter and Year-to-Date Periods Ended September
30, 1999
99.2 Tele-Communications, Inc. Financial Results for
the Quarter and Year-to-Date Periods Ended
September 30, 1999
Form 10-Q
For the nine
Months Ended
September 30, 1999
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
Income from Continuing Operations
Before Income Taxes ................................. $6,158
Less Interest Capitalized during
the Period........................................... 104
Add Equity Investment Losses, net of distributions
of Less than 50% Owned Affiliates.................... 594
Add Fixed Charges...................................... 1,608
Total Earnings from Continuing
Operations Before Income Taxes
and Fixed Charges.................................... $8,256
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $1,212
Interest Portion of Rental Expense..................... 197
Dividend Requirements on Subsidiary Preferred Stock and
Interest on Trust Preferred Securities................ 199
Total Fixed Charges.................................. $1,608
Ratio of Earnings to Fixed Charges..................... 5.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet of AT&T Corp. at September 30, 1999, and
the unaudited consolidated statement of income for the nine-month period ended
September 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,117
<ALLOWANCES> 1,488
<INVENTORY> 0
<CURRENT-ASSETS> 13,040
<PP&E> 65,361
<DEPRECIATION> 28,886
<TOTAL-ASSETS> 161,806
<CURRENT-LIABILITIES> 23,515
<BONDS> 22,073
6,346
0
<COMMON> 4,461
<OTHER-SE> 70,302
<TOTAL-LIABILITY-AND-EQUITY> 161,806
<SALES> 0
<TOTAL-REVENUES> 46,057
<CGS> 0
<TOTAL-COSTS> 37,639
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,077
<INTEREST-EXPENSE> 1,108
<INCOME-PRETAX> 6,158
<INCOME-TAX> 2,679
<INCOME-CONTINUING> 3,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,479
<EPS-BASIC> 1.41
<EPS-DILUTED> 1.39
</TABLE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1)
September 30, December 31,
1999 1998
------------- ------------
Assets amounts in millions
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 499 407
Marketable securities 2,949 124
Trade and other receivables, net 143 185
Prepaid expenses and committed program rights 407 263
Deferred income tax assets 380 216
Other current assets 5 21
----------- -----------
Total current assets 4,383 1,216
----------- -----------
Investments in affiliates, accounted for under the equity method, and
related receivables (note 5) 15,939 3,079
Investment in Time Warner, Inc. ("Time Warner") (note 6)
6,968 7,083
Investment in AT&T Corp. ("AT&T") (note 2) -- 3,556
Investment in Sprint Corporation ("Sprint") (notes 2 and 5)
7,616 2,446
Other investments and related receivables 5,156 1,298
Property and equipment, at cost 123 935
Less accumulated depreciation 7 350
----------- -----------
116 585
----------- -----------
Intangible assets 10,148 1,139
Less accumulated amortization 319 164
----------- -----------
9,829 975
----------- -----------
Other assets, at cost, net of accumulated amortization
846 326
----------- -----------
Total assets $ 50,853 20,564
=========== ===========
</TABLE>
(continued)
<PAGE>
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1)
September 30, December 31,
1999 1998
------------- ------------
Liabilities and Combined Equity amounts in millions
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 192 416
Accrued stock compensation 1,119 126
Program rights payable 170 156
Current portion of debt 474 578
------------- -------------
Total current liabilities 1,955 1,276
------------- -------------
Long-term debt (note 8) 1,720 2,318
Deferred income taxes (note 9) 11,635 4,674
Other liabilities 23 423
------------- -------------
Total liabilities 15,333 8,691
------------- -------------
Minority interests in equity of attributed subsidiaries
1 545
Obligation to redeem common stock -- 17
Combined equity (note 10):
Combined equity 33,025 6,896
Accumulated other comprehensive earnings, net of taxes
2,408 3,718
------------- -------------
35,433 10,614
Due to related parties 86 697
------------- -------------
Total combined equity 35,519 11,311
------------- -------------
Commitments and contingencies (note 11)
Total liabilities and combined equity $ 50,853 20,564
============= =============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
Combined Statements of Operations and Comprehensive Earnings
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1)
Three months ended
September 30,
1999 1998
amounts in millions,
<S> <C> <C>
Revenue $ 214 412
Operating costs and expenses:
Operating, selling, general and administrative 168 339
Stock compensation (23) (2)
Depreciation and amortization 164 62
------------- --------------
309 399
------------- --------------
Operating income (loss) (95) 13
Other income (expense):
Interest expense (41) (37)
Dividend and interest income 66 32
Share of losses of affiliates, net (note 5) (238) (307)
Minority interests in losses of attributed subsidiaries
3 20
Gain on dispositions (note 7) 12 2,305
Gains on issuance of equity by affiliates and
subsidiaries (notes 5 and 7)
-- 75
Other, net (4) (2)
------------- --------------
(202) 2,086
------------- --------------
Earnings (loss) before income taxes (297) 2,099
Income tax benefit (expense) 80 (814)
------------- --------------
Net earnings (loss) $ (217) 1,285
============= ==============
Other comprehensive earnings, net of taxes:
Foreign currency translation adjustments 131 11
Unrealized holding gains arising during the period, net of
reclassification adjustments 308 32
------------- --------------
Other comprehensive earnings 439 43
------------- --------------
Comprehensive earnings $ 222 1,328
============= ==============
</TABLE>
(continued)
<PAGE>
Combined Statements of Operations and Comprehensive Earnings
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
Seven months Two months Nine months
ended ended ended
September 30, February 28, September 30,
1999 1999 1998
amounts in millions
<S> <C> <C> <C>
Revenue $ 506 282 1,137
Operating costs and expenses:
Operating, selling, general and administrative
408 227 975
Stock compensation 432 183 263
Depreciation and amortization 394 47 173
------------ ------------ ------------
1,234 457 1,411
------------ ------------ ------------
Operating loss (728) (175) (274)
Other income (expense):
Interest expense (87) (28) (81)
Dividend and interest income 172 12 66
Share of losses of affiliates, net (note 5) (597) (66) (861)
Minority interests in losses of attributed subsidiaries 15 4 42
Gain on dispositions, net (notes 6 and 7) 10 14 2,862
Gains on issuance of equity by affiliates and
subsidiaries (notes 5 and 7) -- 389 314
Other, net (8) -- (2)
------------ ------------ ------------
(495) 325 2,340
------------ ------------ ------------
Earnings (loss) before income taxes (1,223) 150 2,066
Income tax benefit (expense) 405 (209) (828)
------------ ------------ ------------
Net earnings (loss) $ (818) (59) 1,238
============ ============ ============
Other comprehensive earnings, net of taxes:
Foreign currency translation adjustments 88 (15) 7
Unrealized holding gains arising during the period, net
of reclassification adjustments 2,320 971 887
------------ ------------ ------------
Other comprehensive earnings 2,408 956 894
------------ ------------ ------------
Comprehensive earnings $ 1,590 897 2,132
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Combined Statement of Equity
Nine months ended September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other Due to
comprehensive (from) Total
Combined earnings, related combined
equity net of taxes parties equity
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1999 6,896 3,718 697 11,311
Net loss (59) -- -- (59)
Foreign currency translation adjustments -- (15) -- (15)
Unrealized gains on available-for-sale securities -- 971 -- 971
Reversal of reclassification of redemption amount of
common stock subject to put obligation 8 -- -- 8
Transfer of net liabilities to related party, net of taxes 99 -- -- 99
Excess paid on settlement of preferred stock conversion (18) -- -- (18)
Other transfers to related parties, net -- -- (24) (24)
------- ------- ------- -------
Balance at February 28, 1999 $ 6,926 4,674 673 12,273
======= ======= ======= =======
Balance at March 1, 1999 33,515 -- 213 33,728
Net loss (818) -- -- (818)
Foreign currency translation adjustments -- 88 -- 88
Unrealized gains on available-for-sale securities -- 2,320 -- 2,320
AT&T Liberty Media Group Tracking Stock issued for
conversion of debentures 354 -- -- 354
Reversal of reclassification of redemption amount of
common stock subject to put obligation 9 -- -- 9
Gain in connection with the issuance of common stock of
attributed subsidiary 50 -- -- 50
Utilization of net operating losses of Liberty Media Group
by AT&T (note 9) (85) -- -- (85)
Other transfers to related parties, net -- -- (127) (127)
------- ------- ------- -------
Balance at September 30, 1999 $33,025 2,408 86 35,519
======= ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
Seven months Two months Nine months
ended ended ended
September 30, February 28, September 30,
1999 1999 1998
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (818) (59) 1,238
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 394 47 173
Stock compensation 432 183 263
Payments of stock compensation (42) (126) (76)
Share of losses of affiliates, net 597 66 861
Deferred income tax (benefit) expense (356) 205 804
Intergroup tax allocation (49) -- 1
Cash payment from AT&T pursuant to tax sharing
agreement, net 19 -- --
Minority interests in losses of attributed subsidiaries (15) (4) (42)
Gains on issuance of equity by affiliates and
subsidiaries -- (389) (314)
Gain on dispositions, net (10) (14) (2,862)
Other noncash charges 6 9 4
Changes in current assets and liabilities,
net of the effect of acquisitions and dispositions:
Change in receivables (3) (19) (32)
Change in prepaid expenses and committed
program rights (120) (10) (14)
Change in payables and accruals 70 4 (1)
--------- --------- ---------
Net cash provided (used) by operating
activities 105 (107) 3
--------- --------- ---------
Cash flows from investing activities:
Capital expended for property and equipment (28) (21) (105)
Investments in and loans to affiliates and others (1,952) (45) (1,243)
Purchases of marketable securities (6,894) (132) --
Sales and maturities of marketable securities 3,923 34 --
Cash paid for acquisitions (3) -- (83)
Cash proceeds from dispositions 90 43 343
Cash balances of deconsolidated subsidiaries -- (53) --
Other, net 1 (9) (9)
--------- --------- ---------
Net cash used in investing activities (4,863) (183) (1,097)
--------- --------- ---------
</TABLE>
(continued)
<PAGE>
Combined Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
Seven months Two months Nine months
ended ended ended
September 30, February 28, September 30,
1999 1999 1998
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings of debt 2,216 156 2,061
Repayments of debt (2,166) (148) (488)
Cash transfers (to) from related parties (156) 132 (191)
Net proceeds from issuance of stock by subsidiaries 27 -- 92
Repurchase of stock of subsidiary -- (45) (15)
Repurchase of common stock -- -- (30)
Payments for call agreements -- -- (140)
Other, net 17 (1) (16)
-------- -------- --------
Net cash (used) provided by financing
activities (62) 94 1,273
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents (4,820) (196) 179
Cash and cash equivalents at beginning
of period 5,319 407 224
-------- --------- --------
Cash and cash equivalents at end of
period $ 499 211 403
======== ========= ========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Notes to Combined Financial Statements
September 30, 1999
(unaudited)
(1) Basis of Presentation
The accompanying combined financial statements include the accounts of
the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that
are attributed to Liberty Media Group, as defined below. On March 9,
1999, AT&T acquired TCI in a merger transaction (the "AT&T Merger").
See note 2. The AT&T Merger has been accounted for using the purchase
method. Accordingly, Liberty Media Group's assets and liabilities have
been recorded at their respective fair market values therefore creating
a new cost basis. For financial reporting purposes the AT&T Merger and
related restructuring transactions described in note 2 are deemed to
have occurred on March 1, 1999. Accordingly, for periods prior to March
1, 1999 the assets and liabilities attributed to Liberty Media Group
and the related combined financial statements are sometimes referred to
herein as "Old Liberty", and for periods subsequent to February 28,
1999 the assets and liabilities attributed to Liberty Media Group and
the related combined financial statements are sometimes referred to
herein as "New Liberty". The "Company" and "Liberty Media Group" refer
to both New Liberty and Old Liberty.
The following table represents the summary balance sheet of Old Liberty
at February 28, 1999 prior to the restructuring transactions and the
consummation of the AT&T Merger and the opening summary balance sheet
of New Liberty subsequent to the restructuring transactions and the
consummation of the AT&T Merger. Certain pre-merger transactions
occurring between March 1, 1999 and March 9, 1999 that affected Old
Liberty's equity, gains on issuance of equity by subsidiaries and stock
compensation have been reflected in the two-month period ended February
28, 1999.
<PAGE>
<TABLE>
<CAPTION>
Old Liberty New Liberty
(amounts in millions)
<S> <C> <C>
Assets
Cash and cash equivalents $ 211 5,319
Other current assets 648 447
Investments in affiliates 3,971 17,116
Investment in Time Warner 7,361 7,832
Investment in Sprint 3,381 3,681
Investment in AT&T 3,856 --
Other investments 1,257 1,586
Property and equipment, net 532 125
Intangibles and other assets 817 11,228
--------- ---------
$ 22,034 47,334
========= =========
Liabilities and Equity
Current liabilities $ 1,446 1,741
Debt 2,319 1,845
Deferred income taxes 5,369 9,953
Other liabilities 168 19
--------- ---------
Total liabilities 9,302 13,558
--------- ---------
Minority interests in equity
of attributed subsidiaries 450 39
Obligation to redeem common stock 9 9
Equity 12,273 33,728
--------- ---------
$ 22,034 47,334
========= =========
</TABLE>
(continued)
<PAGE>
The following table reflects the recapitalization resulting from the
AT&T Merger (amounts in millions):
Total combined equity
of Old Liberty $ 12,273
Net contribution resulting
from the restructuring transactions 2,334
Purchase accounting adjustments 19,121
Initial total combined equity of
New Liberty subsequent to the AT&T Merger $ 33,728
===============
The following unaudited condensed results of operations for the nine
months ended September 30, 1999 and 1998 were prepared assuming the
AT&T Merger occurred on January 1, 1998. These pro forma amounts are
not necessarily indicative of operating results that would have
occurred if the AT&T Merger had occurred on January 1, 1998.
Nine months ended
September 30,
1999 1998
(amounts in millions)
Revenue $ 742 1,022
Net loss $(1,041) (955)
At September 30, 1999, Liberty Media Group consisted principally of the
following: (i) AT&T's assets and businesses which provide programming
services including production, acquisition and distribution through all
available formats and media of branded entertainment, educational and
informational programming and software, including multimedia products,
(ii) AT&T's assets and businesses engaged in electronic retailing,
direct marketing, advertising sales relating to programming services,
infomercials and transaction processing, (iii) certain of AT&T's assets
and businesses engaged in international cable, telephony and
programming businesses and (iv) AT&T's holdings in a new class of
tracking stock of Sprint (the "Sprint PCS Group Stock").
All significant intercompany accounts and transactions have been
eliminated. The combined financial statements of Liberty Media Group
are presented for purposes of additional analysis of the consolidated
financial statements of AT&T and should be read in conjunction with
such consolidated financial statements.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the combined financial statements and notes thereto contained in AT&T's
Current Report on Form 8-K filed on March 22, 1999.
(continued)
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Effective June 11, 1999, AT&T issued stock dividends to holders of AT&T
Liberty Media Group Tracking Stock (the "1999 Liberty Stock Dividend").
The 1999 Liberty Stock Dividend consisted of one share of AT&T Liberty
Media Group Tracking Stock for every one share of AT&T Liberty Media
Group Tracking Stock owned. The 1999 Liberty Stock Dividend has been
treated as a stock split, and accordingly, all share and per share
amounts have been restated to reflect the 1999 Liberty Stock Dividend.
Certain prior period amounts have been reclassified for comparability
with the 1999 presentation.
(2) Merger with AT&T
As a result of the AT&T Merger, holders of shares of TCI's then
outstanding Liberty Media Group Tracking Stock and TCI Ventures Group
Tracking Stock were issued separate shares of new targeted stock of
AT&T. Each share of TCI's then outstanding Liberty Media Group Series A
Tracking Stock was converted into 2 shares of a newly created class of
AT&T common stock, the AT&T Liberty Media Group Class A Tracking Stock,
each share of TCI's then outstanding Liberty Media Group Series B
Tracking Stock was converted into 2 shares of a newly created class of
AT&T common stock, the AT&T Liberty Media Group Class B Tracking Stock,
each share of TCI's then outstanding TCI Ventures Group Series A
Tracking Stock was converted into 1.04 shares of AT&T Liberty Media
Group Class A Tracking Stock and each share of TCI's then outstanding
TCI Ventures Group Series B Tracking Stock was converted into 1.04
shares of AT&T Liberty Media Group Class B Tracking Stock.
Effective with the AT&T Merger, each share of TCI's Convertible
Preferred Stock Series C-Liberty Media Group was converted into 112.5
shares of AT&T Liberty Media Group Class A Tracking Stock and each
share of TCI's Redeemable Convertible Liberty Media Group Preferred
Stock, Series H was converted into 1.18125 shares of AT&T Liberty Media
Group Class A Tracking Stock. In general, the holders of shares of AT&T
Liberty Media Group Class A Tracking Stock and the holders of shares of
AT&T Liberty Media Group Class B Tracking Stock will vote together as a
single class with the holders of shares of AT&T Common Stock on all
matters presented to such stockholders, with the holders being entitled
to three-fortieths (3/40th) of a vote for each share of AT&T Liberty
Media Group Class A Tracking Stock held, three-fourths (3/4th) vote per
share of AT&T Liberty Media Group Class B Tracking Stock held and 1
vote per share of AT&T Common Stock held.
(continued)
<PAGE>
The shares of AT&T Liberty Media Group Tracking Stock issued in the
AT&T Merger are intended to reflect the separate performance of the
businesses and assets attributed to Liberty Media Group. Immediately
prior to the AT&T Merger, certain assets previously attributed to Old
Liberty (including, among others, the shares of AT&T Common Stock
received in the merger of AT&T and Teleport Communications Group, Inc.
("Teleport") (see note 7), Old Liberty's interests in At Home
Corporation ("@Home"), the National Digital Television Center, Inc.
("NDTC") and Western Tele-Communications, Inc.) were attributed to "TCI
Group" (a group of TCI's assets, which, prior to the AT&T Merger, was
comprised primarily of TCI's domestic cable and communications
business) in exchange for approximately $5.5 billion in cash (the
"Asset Transfers"). Also, upon consummation of the AT&T Merger, through
a new tax sharing agreement between the Company and AT&T, the Company
is entitled to the benefit of approximately $2 billion in net operating
loss carryforwards available to the entities included in TCI's
consolidated income tax return as of the date of the AT&T Merger. Such
net operating loss carryforwards are subject to adjustment by the
Internal Revenue Service ("IRS") and are subject to limitations on
usage which may affect the ultimate amount utilized. Additionally,
certain warrants to purchase shares of General Instruments Corporation
("GI Warrants") previously attributed to TCI Group were attributed to
the Company in exchange for approximately $176 million in cash. Certain
agreements entered into at the time of the AT&T Merger provide, among
other things, for preferred vendor status to the Company for digital
basic distribution on AT&T's systems of new programming services
created by the Company and for a renewal of existing affiliation
agreements. Pursuant to amended corporate governance documents for the
entities included in Liberty Media Group and certain agreements among
AT&T and TCI, the business of Liberty Media Group will continue to be
managed by certain persons who were members of TCI's management prior
to the AT&T Merger.
Pursuant to a proposed final judgment (the "Final Judgment") agreed to
by TCI, AT&T and the United States Department of Justice (the "DOJ") on
December 31, 1998, Liberty Media Group transferred all of its
beneficially owned securities (the "Sprint Securities") of Sprint to a
trustee (the "Trustee") prior to the AT&T Merger. The Final Judgment,
if entered by the United States District Court for the District of
Columbia, would require the Trustee, on or before May 23, 2002, to
dispose of a portion of the Sprint Securities sufficient to cause
Liberty Media Group to beneficially own no more than 10% of the
outstanding Series 1 PCS Stock of Sprint on a fully diluted basis on
such date. On or before May 23, 2004, the Trustee must divest the
remainder of the Sprint Securities beneficially owned by Liberty Media
Group.
The Final Judgment would provide that the Trustee vote the Sprint
Securities beneficially owned by Liberty Media Group in the same
proportion as other holders of Sprint's PCS Stock so long as such
securities are held by the trust. The Final Judgment would also
prohibit the acquisition by Liberty Media Group of additional Sprint
Securities, with certain exceptions, without the prior written consent
of the DOJ.
(continued)
<PAGE>
(3) Loss Per Common Share
Basic earnings or loss per share ("EPS") is measured as the income or
loss attributable to common stockholders divided by the weighted
average outstanding common shares for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share
basis of potential common shares as if they had been converted at the
beginning of the periods presented. Potential common shares that have
an anti-dilutive effect are excluded from diluted EPS.
The basic and diluted loss attributable to Liberty Media Group common
stockholders per common share for the three and seven months ended
September 30, 1999 was computed by dividing the net loss attributable
to Liberty Media Group common stockholders by the weighted average
number of common shares outstanding of AT&T Liberty Media Group
Tracking Stock during each period. Potential common shares were not
included in the computations of weighted average shares outstanding
because their inclusion would be anti-dilutive.
At September 30, 1999, there were 52 million potential common shares
consisting of fixed and nonvested performance awards, stock options and
convertible securities that could potentially dilute future EPS
calculations in periods of net earnings. No material changes in the
weighted average outstanding shares or potential common shares occurred
after September 30, 1999.
Three months Seven months
ended ended
September 30, September 30,
1999 1999
amounts in millions,
except per share amounts
Basic and diluted EPS:
Loss attributable to
common stockholders $ (217) (818)
========== ==========
Weighted average
common shares 1,265 1,257
========== ==========
Basic and diluted loss
per share attributable
to common stockholders $ (0.17) (0.65)
========== ==========
(continued)
<PAGE>
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $75 million for the seven month period ended
September 30, 1999, $32 million for the two month period ended February
28, 1999 and $79 million for the nine months ended September 30, 1998.
Cash paid for income taxes for the seven month period ended September
30, 1999 and the two month period ended February 28, 1999 was not
material. Cash paid for income taxes for the nine months ended
September 30, 1998 was $19 million.
<TABLE>
<CAPTION>
New Liberty Old Liberty
Seven months Two months Nine months
ended ended ended
September 30, February 28, September 30,
1999 1999 1998
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 5 -- 136
Net liabilities assumed (2) -- (25)
Debt issued -- -- (65)
Minority interest in equity of acquired
subsidiary -- -- 39
Gain in connection with the issuance of
shares by subsidiary -- -- (2)
------- ------- --------
Cash paid for acquisitions $ 3 -- 83
======= ======= ========
</TABLE>
During July 1999, attributed subsidiaries of Liberty Media Group were
exchanged for a limited partnership interest having a fair value at the
time of the transaction of $150 million.
Liberty ceased to include TV Guide, Inc. ("TV Guide") in its combined
financial results and began to account for TV Guide using the equity
method of accounting, effective March 1, 1999 (see note 7). The effects
of changing the method of accounting for Liberty Media Group's
ownership interests in TV Guide from the consolidation method to the
equity method are summarized below (amounts in millions):
Assets (other than cash and cash equivalents)
reclassified to investments in affiliates $ (572)
Liabilities reclassified to investments in
affiliates 190
Minority interests in equity of subsidiaries
reclassified to investments in affiliates 63
Gain on issuance of equity by subsidiary 372
Decrease in cash and cash equivalents $ 53
===========
(continued)
<PAGE>
The following table reflects the change in cash and cash equivalents
resulting from the AT&T Merger and related restructuring transactions
(amounts in millions):
Cash and cash equivalents prior to the AT&T Merger $ 211
Cash received in the Asset Transfers, net of
cash balances transferred 5,284
Cash paid to TCI Group for GI Warrants (176)
Cash and cash equivalents subsequent to the AT&T
Merger $ 5,319
(5) Investments in Affiliates Accounted for Under the Equity Method
Liberty Media Group has various investments accounted for under the
equity method. The following table includes Liberty Media Group's
carrying amount of the more significant investments at September 30,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
New Liberty Old Liberty
September 30, December 31,
1999 1998
amounts in millions
<S> <C> <C>
USA Networks, Inc. ("USAI") and related investments $ 2,710 1,042
Telewest Communications plc ("Telewest") 1,961 515
Discovery Communications, Inc. ("Discovery") 3,546 49
TV Guide 1,756 --
QVC, Inc. ("QVC") 2,505 197
Flextech plc ("Flextech") 757 320
Other foreign investments (other than Telewest and
Flextech) 1,504 346
Other 1,200 610
------- -------
15,939 3,079
======= =======
</TABLE>
(continued)
<PAGE>
The following table reflects Liberty Media Group's share of earnings
(losses) of affiliates:
<TABLE>
<CAPTION>
New Liberty Old Liberty
Seven months Two months Nine months
ended ended ended
September 30, February 28, September 30,
1999 1999 1998
amounts in millions
<S> <C> <C> <C>
USAI and related investments
$ (13) 10 11
Telewest (154) (38) (90)
Discovery (154) (8) (41)
Fox/Liberty Networks LLC ("Fox
Sports") (48) (1) (76)
TV Guide (24) -- --
QVC (17) 13 38
Flextech (27) (5) (13)
Other foreign investments
(96) (22) (80)
PCS Ventures -- -- (510)
Teleport (note 7) -- -- (32)
Other (64) (15) (68)
----- ----- -----
$(597) (66) (861)
===== ===== =====
</TABLE>
Summarized unaudited combined financial information for affiliates is
as follows:
<TABLE>
<CAPTION>
New Liberty Old Liberty
Seven months Two months Nine months
ended ended ended
September 30, February 28, September 30,
1999 1999 1998
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Combined Operations
Revenue $ 6,947 2,341 10,103
Operating expenses (5,901) (1,894) (9,548)
Depreciation and amortization (929) (353) (1,891)
------- ------- -------
Operating income (loss) 117 94 (1,336)
Interest expense (558) (281) (1,278)
Other, net (322) (127) (83)
------- ------- -------
Net loss $ (763) (314) (2,697)
======= ======= =======
</TABLE>
(continued)
<PAGE>
USAI owns and operates businesses in network and television production,
television broadcasting, electronic retailing, ticketing operations,
and internet services. At September 30, 1999, Liberty Media Group
directly and indirectly held 33.3 million shares of USAI's common
stock. Liberty Media Group also held shares directly in certain
subsidiaries of USAI which are exchangeable into 39.5 million shares of
USAI common stock. Liberty Media Group's direct ownership of USAI is
currently restricted by FCC regulations. The exchange of these shares
can be accomplished only if there is a change to existing regulations
or if Liberty Media Group obtains permission from the FCC. If the
exchange of Liberty Media Group's shares of such subsidiary stock, as
well as certain securities owned by Universal Studios, Inc. and certain
of its affiliates, into USAI common stock were completed at September
30, 1999, Liberty Media Group would own 72.8 million shares or
approximately 21% of the then outstanding USAI common stock. USAI's
common stock had a closing market price of $38-3/4 per share on
September 30, 1999. Liberty Media Group accounts for its investments in
USAI and related subsidiaries on a combined basis under the equity
method.
In February 1998, USAI paid cash and issued shares and one of its
subsidiaries issued shares in connection with the acquisition of
certain assets from Universal Studios, Inc. (the "Universal
Transaction"). Liberty Media Group recorded an increase to its
investment in USAI of $54 million and an increase to combined equity of
$33 million (after deducting a deferred income taxes of $21 million) as
a result of this share issuance. No gain was recognized in the combined
statement of operations and comprehensive earnings for the Universal
Transaction due primarily to Liberty Media Group's intention at such
time to purchase additional equity interests in USAI. In connection
with the Universal Transaction, Liberty Media Group was granted an
antidilutive right with respect to any future issuance of USAI common
stock, subject to certain limitations, that enables it to maintain its
percentage ownership interests in USAI.
Effective September 1, 1998, Telewest and General Cable PLC consummated
a merger. In connection with the merger, Liberty Media Group's
ownership interest in Telewest decreased to 22%. In connection with the
increase in Telewest's equity, net of the dilution of Liberty Media
Group's interest in Telewest, that resulted from the merger, Liberty
Media Group recorded a non-cash gain of $58 million (before deducting
deferred income tax expense of $20 million) during the third quarter of
1998.
Telewest currently operates and constructs cable television and
telephone systems in the UK. At September 30, 1999 Liberty Media Group
indirectly owned 463 million of the issued and outstanding Telewest
ordinary shares. The reported closing price on the London Stock
Exchange of Telewest ordinary shares was (pound)2.23 ($3.67) per share
at September 30, 1999.
(continued)
<PAGE>
Liberty Media Group and The News Corporation Limited ("News Corp.")
each held 50% of Fox Sports which operates national and regional sports
networks. Prior to the first quarter of 1998, Liberty Media Group had
no obligation, nor intention, to fund Fox Sports. During 1998, Liberty
Media Group made the determination to provide funding to Fox Sports
based on specific transactions consummated by Fox Sports. Consequently,
Liberty Media Group's share of losses of Fox Sports for the nine months
ended September 30, 1998 included previously unrecognized losses of Fox
Sports of approximately $64 million. Losses for Fox Sports were not
recognized in prior periods due to the fact that Liberty Media Group's
investment in Fox Sports was less than zero.
On July 15, 1999 News Corp. acquired Liberty Media Group's 50% interest
in Fox Sports in exchange for 51.8 million News Corp. American
Depository Receipts ("ADRs") representing preferred limited voting
ordinary shares of News Corp. Of the 51.8 million ADRs received, 3.6
million were placed in an escrow (the "Escrow Shares") pending an
independent third party valuation, as of the third anniversary of the
transaction. The remainder of the 51.8 million ADRs received (the
"Restricted Shares") are subject to a two-year lockup which restricts
any transfer of the securities for a period of two years from the date
of the transaction. Liberty Media Group recorded the ADRs at fair
value, which included a discount from market value for the Restricted
Shares due to the two-year restriction on transfer, resulting in a $13
million gain on the transaction. In a related transaction, Liberty
Media Group acquired from News Corp. 28.1 million additional ADRs
representing preferred limited voting ordinary shares of News Corp. for
approximately $695 million. Liberty Media Group accounts for its
investment in News Corp. as an available-for-sale security, with the
exception of the Restricted Shares and the Escrow Shares.
The class A common stock of TV Guide is publicly traded. At September
30, 1999, Liberty Media Group held 29 million shares of TV Guide Class
A common stock and 37 million shares of TV Guide Class B common stock.
See note 7. The TV Guide Class B common stock is convertible,
one-for-one, into TV Guide Class A common stock. The closing price for
TV Guide Class A common stock was $39-1/8 per share on September 30,
1999.
Flextech develops and sells a variety of television programming in the
UK. At September 30, 1999, Liberty Media Group indirectly owned 58
million Flextech ordinary shares. The reported closing price on the
London Stock Exchange of the Flextech ordinary shares was (pound)9.45
($15.56) per share at September 30, 1999.
The PCS Ventures included Sprint Spectrum Holding Company, L. P. and
MinorCo, L.P. (collectively, "Sprint PCS") and PhillieCo Partnership I,
L.P. ("PhillieCo"). The partners of each of the Sprint PCS partnerships
were subsidiaries of Sprint, Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and Liberty Media Group. The partners of
PhillieCo were subsidiaries of Sprint, Cox and Liberty Media Group.
Liberty Media Group had a 30% partnership interest in each of the
Sprint PCS partnerships and a 35% partnership interest in PhillieCo.
(continued)
<PAGE>
On November 23, 1998, Liberty Media Group, Comcast, and Cox exchanged
their respective interests in Sprint PCS and PhillieCo (the "PCS
Exchange") for shares of Sprint PCS Group Stock which tracks the
performance of Sprint's newly created PCS Group (consisting initially
of the PCS Ventures and certain PCS licenses which were separately
owned by Sprint). The Sprint PCS Group Stock collectively represents an
approximate 17% voting interest in Sprint. As a result of the PCS
Exchange, Liberty Media Group holds the Sprint Securities which
consists of shares of Sprint PCS Group Stock, as well as certain
additional securities of Sprint exercisable for or convertible into
such securities, representing approximately 24% of the equity value of
Sprint attributable to its PCS Group and less than 1% of the voting
interest in Sprint. Through November 23, 1998, Liberty Media Group
accounted for its interest in the PCS Ventures using the equity method
of accounting, however, as a result of the PCS Exchange and Liberty
Media Group's less than 1% voting interest in Sprint, Liberty Media
Group no longer exercises significant influence with respect to its
investment in the PCS Ventures. Accordingly, Liberty Media Group
accounts for its investment in the Sprint PCS Group Stock as an
available-for-sale security.
In September 1999, Liberty entered into a four and one-half year
"cashless collar" with a financial institution with respect to 17.5
million shares of Sprint PCS Group common stock, secured by 17.5
million shares of such stock. This cashless collar provides Liberty
Media Group with a put option that gives it the right to require its
counterparty to buy 17.5 million Sprint PCS Group shares from Liberty
Media Group in approximately four and one-half years for a weighted
average price of $55.24 per share. Liberty Media Group simultaneously
sold a call option giving the counterparty the right to buy the same
number of Sprint PCS Group shares from Liberty Media Group in
approximately four and one-half years for a weighted average price of
$114.84 per share.
The $14 billion aggregate excess of Liberty Media Group's aggregate
carrying amount in its affiliates over Liberty Media Group's
proportionate share of its affiliates' net assets is being amortized
over an estimated useful life of 20 years.
Certain of Liberty Media Group's affiliates are general partnerships
and subsidiaries of Liberty Media Group that are general partners in
such partnerships, are liable as a matter of partnership law for all
debts (other than non-recourse debts) of that partnership in the event
liabilities of that partnership were to exceed its assets.
(6) Investment in Time Warner
Liberty Media Group holds shares of a series of Time Warner's series
common stock with limited voting rights (the "TW Exchange Stock") that
are convertible into an aggregate of 114 million shares of Time Warner
common stock.
(continued)
<PAGE>
On June 24, 1997 Liberty Media Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern
Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
(together with Southern, the "Southern Business") through a purchase of
assets (the "Southern Option"). Liberty Media Group received shares of
TW Exchange Stock which are convertible into 12.8 million shares of
Time Warner common stock valued at $306 million in consideration for
the grant. In September 1997, Time Warner exercised the Southern
Option. Pursuant to the Southern Option, Time Warner acquired the
Southern Business, effective January 1, 1998, for $213 million in cash.
Liberty Media Group recognized a $515 million pre-tax gain in
connection with such transactions in the first quarter of 1998.
In March 1999, Liberty Media Group entered into a seven-year "cashless
collar" with a financial institution with respect to 15 million shares
of Time Warner common stock, secured by 15 million shares of its TW
Exchange Stock. This cashless collar provides Liberty Media Group with
a put option that gives it the right to require its counterparty to buy
15 million Time Warner shares from Liberty Media Group in approximately
seven years for $67.45 per share. Liberty Media Group simultaneously
sold a call option giving the counterparty the right to buy the same
number of Time Warner shares from Liberty Media Group in approximately
seven years for $158.33 per share.
As these cashless collars are designated to 15 million shares of TW
Exchange Stock and 17.5 million shares of Sprint PCS Group common stock
(together the "Underlying Securities") held by Liberty Media Group and
the changes in the fair value of the cashless collars are correlated
with changes in the fair value of the Underlying Securities, the
cashless collars function as hedges. Accordingly, changes in the fair
value of the cashless collars are reported as a component of
comprehensive earnings (in unrealized gains) along with the changes in
the fair value of the Underlying Securities.
(7) Acquisitions and Dispositions
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("SNG") in exchange
for an approximate 20% interest in SNG. As a result of such
transaction, Liberty Media Group's direct and indirect (through United
Video Satellite Group, Inc. ("UVSG")) ownership interest in SNG,
decreased to approximately 80%. In connection with the increase in
SNG's equity, net of the dilution of Liberty Media Group's ownership
interest in SNG, that resulted from such transaction, Liberty Media
Group recognized a gain of $38 million (before deducting deferred
income tax expense of $15 million). Turner Vision's contribution to SNG
was accounted for as a purchase and the $61 million excess of the
purchase price over the fair value of the net assets acquired was
recorded as excess cost and is being amortized over five years.
On April 22, 1998, Teleport completed a merger transaction with ACC
Corp. As a result, Liberty Media Group's interest in Teleport was
reduced to approximately 26%. In connection with the increase in
Teleport's equity, net of the dilution of Liberty Media Group's
interest in Teleport, that resulted from the merger, Liberty Media
Group recorded a non-cash gain of $201 million (before deducting
deferred income tax expense of $71 million).
(continued)
<PAGE>
On July 24, 1998, Teleport was acquired by AT&T and Liberty Media Group
received in exchange for all of its interest in Teleport, approximately
70.4 million shares of AT&T common stock. Liberty Media Group
recognized a $2.3 billion gain (excluding related tax expense of $883
million) on such transaction during the third quarter of 1998 based on
the difference between the carrying value of Liberty Media Group's
interest in Teleport and the fair value of the AT&T common stock
received.
During the third quarter of 1998, At Home Corporation ("@Home")
completed a public offering in which Liberty Media Group purchased
additional shares of @Home common stock and Liberty Media Group's
economic interest in @Home decreased to approximately 39%. In
connection with the increase in @Home's equity, net of the dilution of
Liberty Media Group's interest in @Home that resulted from @Home's
public offering, Liberty Media Group recorded a gain of $17 million
during the third quarter of 1998.
On March 1, 1999, UVSG and News Corp. completed a transaction whereby
UVSG acquired News Corp.'s TV Guide properties creating a broader
platform for offering television guide services to consumers and
advertisers and UVSG was renamed TV Guide. News Corp. received total
consideration of $1.9 billion including $800 million in cash, 22.5
million shares of UVSG's Class A common stock and 37.5 million shares
of UVSG's Class B common stock valued at an average of $18.65 per
share. In addition, News Corp. purchased approximately 6.5 million
additional shares of UVSG Class A common stock for $129 million in
order to equalize its ownership with that of Liberty Media Group. As a
result of these transactions, and another transaction completed on the
same date, News Corp., Liberty Media Group and TV Guide's public
stockholders own on an economic basis approximately 44%, 44% and 12%,
respectively, of TV Guide. Following such transactions, News Corp. and
Liberty Media Group each have approximately 49% of the voting power of
TV Guide's outstanding stock. In connection with the increase in TV
Guide's equity, net of the dilution of Liberty Media Group's ownership
interest in TV Guide, Liberty Media Group recognized a gain of $372
million (before deducting deferred income tax expense of $147 million).
Upon consummation, Liberty Media Group began accounting for its
interest in TV Guide under the equity method of accounting.
(continued)
<PAGE>
(8) Long-Term Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
New Liberty Old Liberty
September 30, December 31,
1999 1998
amounts in millions
<S> <C> <C>
Bank credit facilities $ 926 2,029
Senior Notes, net of unamortized
discount of $9 million 741 --
Senior Debentures, net of unamortized
discount of $6 million 494 --
Convertible Subordinated Debentures -- 229
4-1/2% Convertible Subordinated
Debentures -- 345
Other 33 293
------ ------
2,194 2,896
Less current maturities 474 578
------ ------
Total long-term debt $1,720 2,318
====== ======
</TABLE>
On April 8, 1999, Liberty Media Group redeemed all of its outstanding
4-1/2% Convertible Subordinated Debentures due February 15, 2005. See
note 10.
On July 7, 1999, Liberty Media Group received net cash proceeds of
approximately $741 million and $494 million from the issuance of 7-7/8%
Senior Notes due 2009 (the "Senior Notes") and 8-1/2% Senior Debentures
due 2029 (the "Senior Debentures"), respectively. The Senior Notes have
an aggregate principal amount of $750 million and the Senior Debentures
have an aggregate principal amount of $500 million. Interest on the
Senior Notes and the Senior Debentures is payable on January 15 and
July 15 of each year. The proceeds were used to repay outstanding
borrowings under certain of Liberty Media Group's credit facilities,
which were subsequently canceled.
At September 30, 1999, Liberty Media Group had approximately $133
million in unused lines of credit under its bank credit facilities.
The bank credit facilities of Liberty Media Group generally contain
restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and include limitations on
indebtedness, liens and encumbrances, acquisitions, dispositions,
guarantees and dividends. Additionally, Liberty Media Group pays fees
ranging from .15% to .375% per annum on the average unborrowed portions
of the total amounts available for borrowings under its bank credit
facilities.
With the exception of the Senior Notes and the Senior Debentures which
had fair values of $754 million and $504 million, respectively, at
September 30, 1999, Liberty Media Group believes that the carrying
value of Liberty Media Group's debt approximated its fair value at
September 30, 1999.
(continued)
<PAGE>
(9) Income Taxes
Subsequent to the AT&T Merger, Liberty Media Group is included in the
consolidated federal income tax return of AT&T and party to a tax
sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). Liberty
Media Group calculates its respective tax liability on a separate
return basis. The income tax provision for Liberty Media Group is
calculated based on the increase or decrease in the tax liability of
the AT&T consolidated group resulting from the inclusion of those items
in the consolidated tax return of AT&T which are attributable to
Liberty Media Group.
Under the AT&T Tax Sharing Agreement, Liberty Media Group will receive
a cash payment from AT&T in periods when it generates taxable losses
and such taxable losses are utilized by AT&T to reduce the consolidated
income tax liability. This utilization of taxable losses will be
accounted for by Liberty Media Group as a current federal intercompany
income tax benefit. To the extent such losses are not utilized by AT&T,
such amounts will be available to reduce federal taxable income
generated by Liberty Media Group in future periods, similar to a net
operating loss carryforward and will be accounted for as a deferred
federal income tax benefit.
In periods when Liberty Media Group generates federal taxable income,
AT&T has agreed to satisfy such tax liability on Liberty Media Group's
behalf up to a certain amount. The reduction of such computed tax
liabilities will be accounted for by Liberty Media Group as a credit to
combined equity. The total amount of future federal tax liabilities of
Liberty Media Group which AT&T will satisfy under the AT&T Tax Sharing
Agreement is approximately $512 million, which represents the tax
effect of the net operating loss carryforward reflected in TCI's final
federal income tax return, subject to IRS adjustments. Thereafter,
Liberty Media Group is required to make cash payments to AT&T for
federal tax liabilities of Liberty Media Group.
To the extent AT&T utilizes existing net operating losses of entities
attributed to Liberty Media Group, such amounts will be accounted for
by Liberty Media Group as a reduction of combined equity. During the
seven month period ending September 30, 1999, AT&T utilized net
operating losses of Liberty Media Group with a tax effected carrying
value of $85 million.
Liberty Media Group will generally make cash payments to AT&T related
to states where it generates taxable income and receive cash payments
from AT&T in states where it generates taxable losses.
Liberty Media Group's obligation under the 1995 TCI Tax Sharing
Agreement of approximately $139 million (subject to adjustment), which
is included in "due to related parties," shall be paid at the time, if
ever, that Liberty Media Group deconsolidates from the AT&T income tax
return. Liberty Media Group's receivable under the 1997 TCI Tax Sharing
Agreement of approximately $220 million was forgiven in the AT&T Tax
Sharing Agreement and recorded as an adjustment to combined equity by
Liberty Media Group in connection with the AT&T Merger.
(continued)
<PAGE>
(10) Combined Equity
Stock Repurchase and Issuances
On April 8, 1999, Liberty Media Group redeemed all of its outstanding
4-1/2% Convertible Subordinated Debentures due February 15, 2005. The
debentures were convertible into shares of AT&T Liberty Media Group
Class A Tracking Stock at a conversion price of $23.54, or 42.48 shares
per $1,000 principal amount. Certain holders of the debentures had
exercised their rights to convert their debentures and 14.6 million
shares of AT&T Liberty Media Group Tracking Stock were issued to such
holders. In connection with such issuance of AT&T Liberty Media Group
Tracking Stock, Liberty Media Group recorded a $354 million increase to
combined equity.
During the nine months ended September 30, 1998, pursuant to a stock
repurchase program, Liberty Media Group repurchased 239,450 shares of
TCI's then outstanding TCI Ventures Group Stock and 766,783 shares of
TCI's then outstanding Liberty Media Group Stock at an aggregate cost
of approximately $30 million. Such amount is reflected as a decrease to
combined equity in the accompanying combined financial statements.
In conjunction with a stock repurchase program or similar transaction,
the issuer may elect to sell put options on its own common stock.
Proceeds from any sales of puts with respect to TCI's then outstanding
TCI Ventures Group Tracking Stock and TCI's then outstanding Liberty
Media Group Tracking Stock have been reflected as an increase to
combined equity, and an amount equal to the maximum redemption amount
under unexpired put options with respect to such tracking stocks was
reflected as an "obligation to redeem common stock" in the accompanying
combined balance sheets. At September 30, 1999 no amounts were
outstanding under such arrangements.
Stock Issuances by Subsidiary
On September 9, 1999, Liberty Media Group and TCI Music, renamed
Liberty Digital, Inc. ("Liberty Digital"), completed a transaction (the
"Liberty Digital Transaction") pursuant to which Liberty Media Group
contributed to Liberty Digital substantially all of its directly held
internet content and interactive television assets, its rights to
provide interactive video services on AT&T's cable television systems
and a combination of cash and notes receivable equal to $150 million.
Liberty Digital issued common stock and convertible preferred stock to
Liberty Media Group.
As a result of the transaction and assuming conversion of the preferred
stock, Liberty Media Group holds approximately 12 million shares of
Liberty Digital Series A common stock and approximately 197.7 million
shares of Series B common stock resulting in approximately 94.5% equity
interest and 99% voting interest in Liberty Digital.
(continued)
<PAGE>
Prior to the Liberty Digital Transaction, Liberty Digital issued
approximately 4.8 million shares of common stock in connection with the
conversion of its preferred stock and approximately 0.5 million shares
of common stock in connection with the exercise of certain employee
stock options. As a result, Liberty Media Group's interest in Liberty
Digital was reduced to 86%. Following the Liberty Digital Transaction,
Liberty Media Group's interest in Liberty Digital was increased to
94.5%. During the month of September, 1999, Liberty Digital issued
approximately 0.5 million shares of common stock in connection with the
exercise of certain employee stock options. As a result, Liberty Media
Group's interest in Liberty Digital was reduced to 94.3%. In connection
with the increase in Liberty Digital's equity, net of the dilution of
Liberty Media Group's interest in Liberty Digital, that resulted from
such stock issuances, Liberty Media Group recorded a $50 million
increase to combined equity. No gain was recognized in the combined
statement of operations and comprehensive earnings due to Liberty Media
Group's continuing involvement in capital transactions of Liberty
Digital.
Transactions with AT&T (formerly TCI) and Other Related Parties
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming and other services to cable
distribution operators (including AT&T) and others. Charges to AT&T are
based upon customary rates charged to others. Amounts included in
revenue for services provided to AT&T were $125 million, $43 million
and $199 million for the seven month period ending September 30, 1999,
the two month period ending February 28, 1999 and the nine months ended
September 30, 1998, respectively.
Certain AT&T corporate general and administrative costs are charged to
Liberty Media Group and included in operating expenses in the
accompanying combined statements of operations and comprehensive
earnings. During the seven month period ended September 30, 1999, the
two month period ended February 28, 1999 and the nine months ended
September 30, 1998, Liberty Media Group was allocated less than $1
million, $2 million and $12 million, respectively, in corporate general
and administrative costs by AT&T.
Entities included in Liberty Media Group lease satellite transponder
facilities from NDTC. In connection with the AT&T Merger, NDTC is no
longer included in the combined financial results of Liberty Media
Group. Charges by NDTC for such arrangements and other related
operating expenses for the seven months ended September 30, 1999
aggregated $14 million and are included in operating expenses in the
accompanying combined statements of operations and comprehensive
earnings.
(continued)
<PAGE>
In connection with the AT&T Merger, warrants to buy 3 million shares of
common stock of CSG Systems International, Inc. ("CSG") and related
registration rights were transferred to Liberty Media Group. On April
13, 1999, AT&T purchased these warrants from Liberty Media Group for an
aggregate purchase price of $75 million along with the related
registration rights. The vesting of the CSG warrants is contingent on
AT&T meeting certain subscriber commitments to CSG. If any warrants do
not vest, Liberty Media Group must repurchase the unvested warrants
from AT&T, with interest at 6% from April 12, 1999. Accordingly,
Liberty Media Group has recorded the unvested CSG warrants as deferred
income until such time as the CSG warrants vest.
A subsidiary of Liberty Media Group issued preferred stock in
connection with a previous acquisition which was convertible at the
option of the holders into 1,084,056 of TCI's then outstanding TCI
Group Series A Common Stock. In July 1998, Liberty Media Group entered
into an equity swap transaction with a commercial bank, which provided
Liberty Media Group with the right but not the obligation to acquire
1,084,056 shares of TCI's then outstanding TCI Group Series A Stock for
approximately $45 million on or before April 19, 1999. Liberty Media
Group exercised its right under this equity swap transaction and used
the TCI Group Series A Stock to satisfy the exchange requirements of
the aforementioned preferred stock during the two months ended February
28, 1999. In connection with such transaction, Liberty Media Group
recorded an $18 million decrease to combined equity for the difference
between the exercise price of the right and the carrying amount of the
preferred stock.
Prior to the AT&T Merger, a limited liability company owned by Dr. John
C. Malone (Liberty Media Group's Chairman) acquired, from certain
subsidiaries of Liberty Media Group, for $17 million, working cattle
ranches located in Wyoming. No gain or loss was recognized on such
acquisition. The purchase price was paid by such limited liability
company in the form of a 12-month note in the amount of $17 million
having an interest rate of 7%. Such note is payable at any time without
penalty and is personally guaranteed by Dr. Malone.
In connection with the AT&T Merger, Liberty Media Group paid two
directors of Liberty Media Corporation and one other individual, all
three of whom are directors of TCI, an aggregate of $12 million for
services rendered in connection with the AT&T Merger. Such amount is
included in operating, selling, general and administrative expenses for
the two months ended February 28, 1999 in the accompanying combined
statements of operations and comprehensive earnings.
(continued)
<PAGE>
On February 9, 1998, in connection with the settlement of certain legal
proceedings relative to the Estate of Bob Magness (the "Magness
Estate"), the late founder and former Chairman of the Board of TCI, TCI
entered into a call agreement with Dr. Malone and Dr. Malone's wife
(together with Dr. Malone, the "Malones"), and a call agreement with
the Estate of Bob Magness, the Estate of Betsy Magness, Gary Magness
(individually and in certain representative capacities) and Kim Magness
(individually and in certain representative capacities) (collectively,
the "Magness Group"). Under these call agreements, each of the Magness
Group and the Malones granted to TCI the right to acquire all of the
shares of TCI's common stock owned by them ("High Voting Shares") that
entitle the holder to cast more than one vote per share (the
"High-Voting Stock") upon Dr. Malone's death or upon a contemplated
sale of the High-Voting Shares (other than a minimal amount) to third
parties. In either such event, TCI had the right to acquire such shares
at a price equal to the then market price of shares of TCI's common
stock of the corresponding series that entitled the holder to cast no
more than one vote per share (the "Low-Voting Stock"), plus a 10%
premium, or in the case of a sale, the lesser of such price and the
price offered by the third party. In addition, each call agreement
provides that if TCI were ever to be sold to a third party, then the
maximum premium that the Magness Group or the Malones would receive for
their High-Voting Shares would be the price paid for shares of the
relevant series of Low-Voting Stock by the third party, plus a 10%
premium. Each call agreement also prohibits any member of the Magness
Group or the Malones from disposing of their High-Voting Shares, except
for certain exempt transfers (such as transfers to related parties or
to the other group or public sales of up to an aggregate of 5% of their
High-Voting Shares after conversion to the respective series of
Low-Voting Stock) and except for a transfer made in compliance with
TCI's purchase right described above. TCI paid $150 million to the
Malones and $124 million to the Magness Group in consideration of their
entering into the call agreements, of which an aggregate of $140
million was allocated to and paid by Liberty Media Group.
Also in February 1998, TCI, the Magness Group and the Malones entered
into a shareholders' agreement which provides for, among other things,
certain participation rights by the Magness Group with respect to
transactions by Dr. Malone, and certain "tag-along" rights in favor of
the Magness Group and certain "drag-along" rights in favor of the
Malones, with respect to transactions in the High-Voting Stock. Such
agreement also provides that a representative of Dr. Malone and a
representative of the Magness Group will consult with each other on all
matters to be brought to a vote of TCI's shareholders, but if a mutual
agreement on how to vote cannot be reached, Dr. Malone will vote the
High-Voting Stock owned by the Magness Group pursuant to an irrevocable
proxy granted by the Magness Group.
In connection with the AT&T merger, Liberty Media Group became entitled
to exercise TCI's rights and became subject to its obligations under
the call agreement and the shareholders' agreement with respect to the
Liberty Media Group Class B tracking stock acquired by the Malones and
the Magness Group as a result of the AT&T merger. If Liberty Media
Group were to exercise its call right under the call agreement with the
Malones or the Magness Group, it may also be required to purchase
High-Voting Shares of the other group if such group exercises its
"tag-along" rights under the shareholders' agreement.
(continued)
<PAGE>
Due to Related Parties
The components of "Due to related parties" are as follows:
<TABLE>
<CAPTION>
New Liberty Old Liberty
September 30, December 31,
1999 1998
amounts in millions
<S> <C> <C>
Note payable to TCI, including
accrued interest $ -- 141
Intercompany account 86 556
----- -----
$ 86 697
===== =====
</TABLE>
The non-interest bearing intercompany account includes certain stock
compensation allocations (in Old Liberty) and income tax allocations
that are to be settled at some future date. Stock compensation
liabilities of New Liberty are classified as a separate component in
current liabilities. All other amounts included in the intercompany
account are to be settled within thirty days following notification.
(11) Commitments and Contingencies
Encore Media Group, a wholly owned subsidiary of Liberty Media Group,
is obligated to pay fees for the rights to exhibit certain films that
are released by various producers through 2017 (the "Film Licensing
Obligations"). Based on customer levels at September 30, 1999, these
agreements require minimum payments aggregating approximately $887
million. The aggregate amount of the Film Licensing Obligations under
these license agreements is not currently estimable because such amount
is dependent upon the number of qualifying films released theatrically
by certain motion picture studios as well as the domestic theatrical
exhibition receipts upon the release of such qualifying films.
Nevertheless, required aggregate payments under the Film Licensing
Obligations could prove to be significant.
Flextech has undertaken to finance the working capital requirements of
a joint venture, (the "Principal Joint Venture") formed with BBC
Worldwide and is obligated to provide the Principal Joint Venture with
a primary credit facility of (pound)88 million ($145 million) and
subject to certain restrictions, a standby credit facility of (pound)30
million ($49 million). As of September 30, 1999, the Principal Joint
Venture had borrowed (pound)45 million ($74 million) under the primary
credit facility. If Flextech defaults on its funding obligation to the
Principal Joint Venture and fails to cure within 42 days after receipt
of notice from BBC Worldwide, BBC Worldwide is entitled, within the
following 90 days, to require that Liberty Media Group assume all of
Flextech's funding obligations to the Principal Joint Venture.
Liberty Media Group has guaranteed various loans, notes payable,
letters of credit and other obligations (the "Guaranteed Obligations")
of certain affiliates. At September 30, 1999, the Guaranteed
Obligations aggregated approximately $496 million. Currently, Liberty
Media Group is not certain of the likelihood of being required to
perform under such guarantees.
(continued)
<PAGE>
Liberty Media Group leases business offices, has entered into pole
rental and transponder lease agreements and uses certain equipment
under lease arrangements.
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including Liberty
Media Group's Puerto Rico subsidiary's cable television systems (the
"Puerto Rico Subsidiary"). The Puerto Rico Subsidiary's cable
television systems represent $31 million of Liberty Media Group's
revenue for the nine months ended September 30, 1999.
As of September 30, 1999, approximately 99% of the Puerto Rico
Subsidiary's pre-hurricane basic customers were receiving cable
television services. The loss of revenue from September 21, 1998
through September 30, 1999 was $13 million. The Puerto Rico
Subsidiary's business interruption insurance covered the first $3
million in lost revenue.
The Puerto Rico Subsidiary has also claimed coverage for business
interruption under a secondary insurance carrier. Such policy, which
covers the Puerto Rico Subsidiary's parent company's subsidiaries,
carries a deductible of $2.5 million. This insurance claim is subject
to approval by such insurance carrier and accordingly, no assurance can
be given that amounts claimed will be paid in their entirety. However,
in the event such claims are collected the overall impact in lost
revenues for the Puerto Rico Subsidiary as a result of Hurricane
Georges will not exceed $2.5 million.
Liberty Media Group has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. Although it is reasonably possible Liberty Media Group may
incur losses upon conclusion of such matters, an estimate of any loss
or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the accompanying
combined financial statements.
During the nine months ended September 30, 1999, Liberty Media Group,
in conjunction with AT&T, continued its enterprise-wide, comprehensive
efforts to assess and remediate its computer systems and related
software and equipment to ensure such systems, software and equipment
recognize, process and store information in the year 2000 and
thereafter. AT&T's year 2000 remediation efforts include an assessment
of Liberty Media Group's most critical systems, equipment, and
facilities. AT&T also continued its efforts to verify the year 2000
readiness of Liberty Media Group's significant suppliers and vendors
and continued to communicate with significant business partners and
affiliates to assess such partners and affiliates' year 2000 status.
Failure to achieve year 2000 compliance by Liberty Media Group, its
significant business partners and affiliates with which it has a
relationship could negatively affect Liberty Media Group's ability to
conduct business for an extended period. There can be no assurance that
all of Liberty Media Group's computer systems and related software will
be fully year 2000 compliant; in addition, other companies on which
Liberty Media Group's computer systems and related software and
operations rely may or may not be fully compliant on a timely basis,
and any such failure could have a material adverse effect on Liberty
Media Group's financial position, results of operation or liquidity.
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- ------------
September 30, December 31,
1999 1998
------------- ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash and cash equivalents $ -- 419
Restricted cash (note 4) 19 185
Trade and other receivables, net 478 653
Prepaid and committed program rights -- 263
Investment in Liberty Media Group and related
receivables (note 5) 35,519 --
Investments in affiliates other than Liberty Media
Group (the "Other Affiliates"), accounted for under
the equity method (notes 6 and 12) 14,393 4,709
Investment in Time Warner, Inc. ("Time Warner")
(note 2) 34 7,118
Investment in AT&T Corp. ("AT&T") (notes 2 and 11) -- 3,556
Investment in Sprint Corporation (note 2) -- 2,446
Property and equipment, at cost:
Land 119 63
Distribution systems 6,243 10,107
Support equipment and buildings 999 1,769
---------- ----------
7,361 11,939
Less accumulated depreciation 492 4,786
---------- ----------
6,869 7,153
---------- ----------
Franchise costs and other intangible assets 32,895 15,782
Less accumulated amortization 508 2,723
---------- ----------
32,387 13,059
---------- ----------
Other assets, net of accumulated amortization 1,462 2,290
---------- ----------
$ 91,161 41,851
========== ==========
</TABLE>
(continued)
I-1
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------- ------------
September 30, December 31,
1999 1998
------------- ------------
Liabilities and Stockholders' Equity amounts in millions
<S> <C> <C>
Accounts payable $ 276 229
Accrued interest 136 253
Accrued programming expense 327 471
Other accrued expenses 743 1,128
Debt (notes 2 and 8):
Due to unaffiliated parties 9,449 14,052
Notes payable to AT&T 8,559 --
Deferred income taxes 18,277 9,749
Other liabilities 1,032 1,819
---------- ----------
Total liabilities 38,799 27,701
---------- ----------
Minority interests in equity of consolidated subsidiaries 2,175 1,460
Redeemable securities (note 2) -- 322
Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts ("Trust Preferred Securities") holding
solely subordinated debt securities (note 9) 1,649 1,500
Stockholders' equity (notes 2 and 10):
Class A Series Preferred Stock, $.01 par value. Authorized
700,000 shares -- --
Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, $.01 par value. Authorized 1,675,096
shares; issued 1,552,490 shares -- --
Common stock, $.01 par value. Authorized 3,550,000,000
shares; issued 1,327,985,000 shares in 1999 13 --
Common stock, $1 par value:
Series A TCI Group. Authorized 1,750,000,000 shares;
issued 610,748,188 shares in 1998 -- 611
Series B TCI Group. Authorized 150,000,000 shares;
issued 73,929,229 shares in 1998 -- 74
Series A Liberty Media Group. Authorized 750,000,000
shares; issued 367,890,546 shares in 1998 -- 368
Series B Liberty Media Group. Authorized 75,000,000
shares; issued 35,198,156 shares in 1998 -- 35
Series A TCI Ventures Group. Authorized 750,000,000
shares; issued 377,253,230 shares in 1998 -- 377
Series B TCI Ventures Group. Authorized 75,000,000
shares; issued 45,750,534 shares in 1998 -- 46
Additional paid-in capital 52,531 5,987
Accumulated other comprehensive earnings, net of taxes 2,445 3,749
Retained earnings (accumulated deficit) (2,406) 1,124
---------- ----------
52,583 12,371
Investment in AT&T (notes 2 and 11) (4,045) --
Treasury stock and common stock held by subsidiaries, at
cost -- (1,503)
---------- ----------
Total stockholders' equity 48,538 10,868
---------- ----------
Commitments and contingencies (notes 13 and 14)
$ 91,161 41,851
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------------ ------------------
Three months Three months
ended ended
September 30, 1999 September 30, 1998
------------------ ------------------
amounts in millions,
except per share amounts
<S> <C> <C>
Revenue (note 11) $ 1,442 1,843
Operating costs and expenses:
Operating (note 11) 599 754
Selling, general and administrative (note 11) 324 412
Year 2000 costs 16 5
AT&T merger and integration costs 4 1
Stock compensation (2) 11
Depreciation and amortization 461 421
---------- ----------
1,402 1,604
---------- ----------
Operating income 40 239
Other income (expense):
Interest expense:
Unaffiliated parties (142) (272)
AT&T (notes 2 and 8) (106) --
Interest and dividend income 1 33
Share of losses of Liberty Media Group (note 5) (217) --
Share of losses of the Other Affiliates, net (note 6) (412) (397)
Minority interests in earnings of consolidated
subsidiaries, net (note 9) (45) (30)
Gain on issuance of stock by equity investee
(note 7) -- 58
Gain on issuance of equity interests by subsidiary
(note 6) -- 17
Gains on disposition of assets, net (notes 7 and 11) -- 2,605
Other, net 2 (7)
---------- ----------
(919) 2,007
---------- ----------
Earnings (loss) before income taxes and
extraordinary items (879) 2,246
Income tax benefit (expense) 239 (902)
---------- ----------
Earnings (loss) before extraordinary items (640) 1,344
Extraordinary gain (loss) (net of income taxes of $2
million and $9 million in 1999 and 1998,
respectively) (note 8) 4 (4)
---------- ----------
Net earnings (loss) (636) 1,340
Dividend requirements on preferred stocks (2) (5)
---------- ----------
Net earnings (loss) attributable to common
stockholders $ (638) 1,335
========== ==========
</TABLE>
(continued)
I-3
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------------ ------------------
Three months Three months
ended ended
September 30, 1999 September 30, 1998
------------------ ------------------
amounts in millions,
except per share amounts
<S> <C> <C>
Net earnings (loss) attributable to common
stockholders:
TCI Group Series A and Series B common stock $ -- 47
Liberty Media Group Series A and Series B common
stock -- (11)
TCI Ventures Group Series A and Series B common
stock -- 1,299
---------- ----------
$ -- 1,335
========== ==========
Basic earnings (loss) attributable to common
stockholders per common share (note 3):
TCI Group Series A and Series B common stock $ -- .09
========== ==========
Liberty Media Group Series A and Series B
common stock $ -- (.03)
========== ==========
TCI Ventures Group Series A and Series B common
stock $ -- 3.07
========== ==========
Diluted earnings (loss) attributable to common
stockholders per common and potential common
share (note 3):
TCI Group Series A and Series B common stock $ -- .08
========== ==========
Liberty Media Group Series A and Series B
common stock $ -- (.03)
========== ==========
TCI Ventures Group Series A and Series B common
stock $ -- 2.88
========== ==========
Comprehensive earnings (loss) $ (202) 1,425
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
I-4
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------------ ---------------------------------------
Seven months Two months Nine months
ended ended ended
September 30, 1999 February 28, 1999 September 30, 1998
------------------ ----------------- ------------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue (note 11) $ 3,344 1,145 5,563
Operating costs and expenses:
Operating (note 11) 1,345 467 2,202
Selling, general and administrative (note 11) 807 322 1,316
Year 2000 costs 47 11 6
AT&T merger and integration costs 31 65 11
Stock compensation 72 366 423
Reserve for loss arising from contingent
obligation (note 13) 50 -- --
Write-off of in-process research and
development costs (note 2) 594 -- --
Depreciation and amortization 1,143 277 1,289
---------- ---------- ----------
4,089 1,508 5,247
---------- ---------- ----------
Operating income (loss) (745) (363) 316
Other income (expense):
Interest expense:
Unaffiliated parties (346) (161) (807)
AT&T (notes 2 and 8) (212) -- --
Interest and dividend income 7 13 72
Share of losses of Liberty Media Group
(note 5) (818) -- --
Share of losses of the Other Affiliates, net
(note 6) (789) (161) (986)
Minority interests in earnings of consolidated
subsidiaries, net (note 9) (103) (26) (95)
Gain on issuance of stock by equity
investee (note 7) -- -- 259
Gains on issuance of equity interests by
subsidiaries (notes 6 and 7) -- 389 55
Gains on disposition of assets, net (notes
6, 7 and 11) -- 144 3,704
Other, net 7 8 (25)
---------- ---------- ----------
(2,254) 206 2,177
---------- ---------- ----------
Earnings (loss) before income taxes and
extraordinary items (2,999) (157) 2,493
Income tax benefit (expense) 589 (119) (1,079)
---------- ---------- ----------
Earnings (loss) before extraordinary items (2,410) (276) 1,414
Extraordinary gain (loss) (net of income taxes of
$2 million and $3 million for the seven and
two month periods in 1999, respectively, and
$17 million in 1998) (note 8) 4 (5) (27)
---------- ---------- ----------
Net earnings (loss) (2,406) (281) 1,387
Dividend requirements on preferred stocks (5) (4) (18)
---------- ---------- ----------
Net earnings (loss) attributable to common
stockholders $ (2,411) (285) 1,369
========== ========== ==========
</TABLE>
(continued)
I-5
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Operations, continued
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------------ ---------------------------------------
Seven months Two months Nine months
ended ended ended
September 30, 1999 February 28, 1999 September 30, 1998
------------------ ----------------- ------------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Net earnings (loss) attributable to common
stockholders:
TCI Group Series A and Series B common
stock $ -- (226) 130
Liberty Media Group Series A and Series B
common stock -- (49) 227
TCI Ventures Group Series A and Series B
common stock -- (10) 1,012
---------- ---------- ----------
$ -- (285) 1,369
========== ========== ==========
Basic earnings (loss) attributable to common
stockholders per common share (note 3):
TCI Group Series A and Series B common
stock $ -- (.42) .25
========== ========== ==========
Liberty Media Group Series A and Series
B common stock $ -- (.13) .64
========== ========== ==========
TCI Ventures Group Series A and Series B
common stock $ -- (.02) 2.40
========== ========== ==========
Diluted earnings (loss) attributable to
common stockholders per common and
potential common share (note 3):
TCI Group Series A and Series B common
stock $ -- (.43) .22
========== ========== ==========
Liberty Media Group Series A and Series
B common stock $ -- (.13) .58
========== ========== ==========
TCI Ventures Group Series A and Series B
common stock $ -- (.09) 2.24
========== ========== ==========
Comprehensive earnings $ 39 691 2,330
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
I-6
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statement of Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------------------------
Class B TCI Group Liberty Media Group TCI Ventures Group
Preferred -------------------- -------------------- --------------------
Stock Series A Series B Series A Series B Series A Series B
--------- -------- -------- -------- -------- -------- --------
amounts in millions
Old TCI
- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ -- 611 74 368 35 377 46
Net loss -- -- -- -- -- -- --
Reclassification of redeemable common stock
to equity upon expiration of put
obligations -- -- -- -- -- -- --
Proceeds received upon termination of equity
swap facilities (note 10) -- -- -- -- -- -- --
Settlement of equity swap transaction in
connection with preferred stock exchange
(note 10) -- -- -- -- -- -- --
Gain from contribution of cable television
systems to joint venture, net of taxes
(note 7) -- -- -- -- -- -- --
Issuance of common stock upon exercise of
stock options -- -- -- -- -- -- --
Recognition of stock compensation related to
restricted stock awards -- -- -- -- -- -- --
Issuance of restricted stock granted
pursuant to stock incentive plan -- 3 -- -- -- -- --
Conversion of Series B common stock to
Series A common stock -- -- -- -- -- 1 (1)
Accreted dividends on all classes of
preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements -- -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities, net of taxes -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance at February 28, 1999 $ -- 614 74 368 35 378 45
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Treasury
stock and
Accumulated common
other stock
Additional comprehensive held by Total
paid-in earnings, Retained subsidiaries, stockholders'
capital net of taxes earnings at cost equity
---------- ------------- -------- ------------- -------------
amounts in millions
Old TCI
- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 5,987 3,749 1,124 (1,503) 10,868
Net loss -- -- (281) -- (281)
Reclassification of redeemable common stock
to equity upon expiration of put
obligations 10 -- -- -- 10
Proceeds received upon termination of equity
swap facilities (note 10) 677 -- -- -- 677
Settlement of equity swap transaction in
connection with preferred stock exchange
(note 10) (29) -- -- -- (29)
Gain from contribution of cable television
systems to joint venture, net of taxes
(note 7) 9 -- -- -- 9
Issuance of common stock upon exercise of
stock options 3 -- -- -- 3
Recognition of stock compensation related to
restricted stock awards 12 -- -- -- 12
Issuance of restricted stock granted
pursuant to stock incentive plan (3) -- -- -- --
Conversion of Series B common stock to
Series A common stock -- -- -- -- --
Accreted dividends on all classes of
preferred stock -- -- (4) -- (4)
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements 2 -- -- -- 2
Foreign currency translation adjustment -- (15) -- -- (15)
Change in unrealized holding gains for
available-for-sale securities, net of taxes -- 987 -- -- 987
-------- -------- -------- -------- --------
Balance at February 28, 1999 6,668 4,721 839 (1,503) 12,239
======== ======== ======== ======== ========
</TABLE>
(continued)
I-7
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statement of Stockholders' Equity, continued
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Class B Additional comprehensive
Preferred Common paid-in earnings, Accumulated
Stock Stock capital net of taxes deficit
---------- ---------- ---------- ------------- -----------
amounts in millions
New TCI
- -------
<S> <C> <C> <C> <C> <C>
Balance at March 1, 1999 (note 2) $ -- 13 52,142 -- --
Net loss -- -- -- -- (2,406)
Payment of preferred stock dividends -- -- (10) -- --
Issuance of AT&T Common Stock upon
conversion of TCI notes payable (note 8) -- -- 40 -- --
Issuance of AT&T Liberty Tracking Stock upon
conversion of Liberty Media Group debt
(note 5) -- -- 354 -- --
Gain from issuance of common stock by
subsidiary and affiliate, net of
taxes (note 6) -- -- 484 -- --
Gain from issuance of common stock by
attributed subsidiary of Liberty Media
Group, net of taxes -- -- 50 -- --
Utilization of net operating loss
carryforwards by AT&T (notes 5 and 11) -- -- (580) -- --
Reclassification of liability for stock
options upon exercise and cancellation
of such options -- -- 42 -- --
Reclassification by Liberty Media Group of
redeemable common stock to equity upon
expiration of put obligation -- -- 9 -- --
Change in non-interest bearing intercompany
account with AT&T -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities, net of
taxes (note 5) -- -- -- 2,357 --
Foreign currency translation adjustments,
net of taxes (note 5) -- -- -- 88 --
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1999 $ -- 13 52,531 2,445 (2,406)
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Total
Investment stockholders'
in AT&T equity
------------- -------------
amounts in millions
New TCI
- -------
<S> <C> <C>
Balance at March 1, 1999 (note 2) (4,018) 48,137
Net loss -- (2,406)
Payment of preferred stock dividends -- (10)
Issuance of AT&T Common Stock upon
conversion of TCI notes payable (note 8) -- 40
Issuance of AT&T Liberty Tracking Stock upon
conversion of Liberty Media Group debt
(note 5) -- 354
Gain from issuance of common stock by
subsidiary and affiliate, net of
taxes (note 6) -- 484
Gain from issuance of common stock by
attributed subsidiary of Liberty Media
Group, net of taxes -- 50
Utilization of net operating loss
carryforwards by AT&T (notes 5 and 11) -- (580)
Reclassification of liability for stock
options upon exercise and cancellation
of such options -- 42
Reclassification by Liberty Media Group of
redeemable common stock to equity upon
expiration of put obligation -- 9
Change in non-interest bearing intercompany
account with AT&T (27) (27)
Change in unrealized holding gains for
available-for-sale securities, net of
taxes (note 5) -- 2,357
Foreign currency translation adjustments,
net of taxes (note 5) -- 88
---------- ----------
Balance at September 30, 1999 (4,045) 48,538
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
I-8
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
New TCI Old TCI
------------------- -------------------------------------
Seven months Two months Nine months
ended ended ended
September 30, 1999 February 28, 1999 September 30, 1998
------------------- ----------------- ------------------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before extraordinary items $ (2,410) (276) 1,414
Adjustments to reconcile net earnings (loss) before
extraordinary items to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,143 277 1,289
Stock compensation 72 366 423
Payments of obligation relating to stock
compensation (47) (294) (161)
Reserve for loss arising from contingent obligation 50 -- --
Payment of amounts relating to contingent obligation (116) -- --
Share of losses of Liberty Media Group 818 -- --
Share of losses of the Other Affiliates, net 789 161 986
Minority interests in earnings of consolidated
subsidiaries, net 103 26 95
Gains on issuance of equity interests by subsidiaries -- (389) (55)
Gain on issuance of stock by equity investee -- -- (259)
Gains on disposition of assets, net -- (144) (3,704)
Deferred income tax expense (benefit) (377) 116 1,026
Write-off of in-process research and development
costs 594 -- --
Other noncash charges (credits) (53) 1 (3)
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions:
Change in receivables and prepaids 11 (84) (191)
Change in non-interest bearing intercompany
account with AT&T (27) -- --
Change in other accruals and payables (23) 44 (112)
---------- ---------- ----------
Net cash provided by (used in) operating activities
527 (196) 748
---------- ---------- ----------
Cash flows from investing activities:
Cash paid for acquisitions and exchanges, net (75) (353) (166)
Capital expended for property and equipment (1,910) (297) (1,123)
Effect on cash and cash equivalents of deconsolidation of
subsidiaries (401) (53) --
Investments in and loans to affiliates (101) (52) (1,346)
Collections of loans to affiliates, net 127 709 1,675
Proceeds from disposition of assets 38 344 712
Change in restricted cash 36 112 (335)
Other investing activities (28) 65 (73)
---------- ---------- ----------
Net cash provided by (used in) investing
activities (2,314) 475 (656)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings of debt 3,584 583 4,645
Repayments of debt (2,228) (1,468) (4,213)
Payment of dividends on subsidiary preferred stock and
Trust Preferred Securities (124) (12) (141)
Payment of preferred stock dividends (10) (4) (27)
Proceeds received upon termination of equity swap
facilities -- 677 --
Prepayment penalties -- (4) (39)
Repurchase of common stock -- -- (31)
Repurchase of subsidiary common and preferred stock -- (45) (15)
Payments for call agreements -- -- (274)
Proceeds from issuance of subsidiary stock -- -- 91
Other financing activities (10) 8 (12)
---------- ---------- ----------
Net cash provided by (used in) financing
activities 1,212 (265) (16)
---------- ---------- ----------
Net change in cash and cash equivalents (575) 14 76
Cash and cash equivalents at beginning of
period 575 419 244
---------- ---------- ----------
Cash and cash equivalents at end of period $ -- 433 320
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
I-9
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Tele-Communications, Inc. and those of all of its subsidiaries
("TCI" or the "Company"). On March 9, 1999, AT&T acquired TCI in a
merger transaction (the "AT&T Merger"). For financial reporting
purposes the AT&T Merger and related restructuring transactions
described in note 2 are deemed to have occurred on March 1, 1999. The
consolidated financial statements for periods prior to March 1, 1999
are referred to herein as "Old TCI", and the consolidated financial
statements for periods subsequent to February 28, 1999 are referred to
herein as "New TCI." Due to the March 1, 1999 application of purchase
accounting in connection with the AT&T Merger, the predecessor
consolidated financial statements of Old TCI are not comparable to the
successor consolidated financial statements of New TCI. In the
following text, "TCI" and "the Company" refer to both Old TCI and New
TCI. See note 2.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of results for
the full year. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto contained in TCI's Annual Report on Form 10-K for the year
ended December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Prior to the AT&T Merger, TCI generally recognized changes in its
proportionate share of the underlying equity of a subsidiary or equity
method investee, which resulted from the issuance of additional equity
securities by such subsidiary or equity investee, in the consolidated
statement of operations. Upon consummation of the AT&T Merger, TCI
began to account for such changes in the underlying equity of its
subsidiaries and affiliates as equity transactions in order to conform
with AT&T's accounting policy.
Certain prior period amounts have been reclassified for comparability
with the current period presentation.
(continued)
I-10
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Targeted Stock
Prior to the AT&T Merger, the Company's assets and operations were
included in three separate groups, each of which was tracked separately
by public equity securities. These groups were formerly known as the
"Liberty Media Group" (referred to herein as the "Old Liberty Group"),
the "TCI Ventures Group" and the "TCI Group."
Old Liberty Group was intended to reflect the separate performance of
TCI's assets which produce and distribute programming services.
The TCI Ventures Group was intended to reflect the separate performance
of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets.
The TCI Group was intended to reflect the separate performance of TCI
and its subsidiaries and assets not attributed to Old Liberty Group or
TCI Ventures Group. Such subsidiaries and assets are comprised
primarily of TCI's domestic cable and communications business.
TCI Group, Old Liberty Group and TCI Ventures Group individually may be
referred to herein as a "Group."
The TCI Group was tracked separately through the Tele-Communications,
Inc. Series A TCI Group Common Stock (the "TCI Group Series A Stock")
and Series B TCI Group Common Stock (the "TCI Group Series B Stock,"
and together with the TCI Group Series A Stock, the "TCI Group Stock").
The Old Liberty Group was tracked through the Tele-Communications, Inc.
Series A Liberty Media Group Common Stock ("Liberty Group Series A
Stock") and Series B Liberty Media Group Common Stock ("Liberty Group
Series B Stock" and together with the Liberty Group Series A Stock, the
"Liberty Group Stock"). The TCI Ventures Group was tracked separately
through the Tele-Communications, Inc. Series A TCI Ventures Group
Common Stock ("TCI Ventures Group Series A Stock") and Series B TCI
Ventures Group Common Stock ("TCI Ventures Group Series B Stock" and
together with the TCI Ventures Group Series A Stock, the "TCI Ventures
Group Stock").
Upon consummation of the AT&T Merger, each of the separate series of
Tele-Communications, Inc. common stock was converted either into shares
of AT&T common stock, par value $1.00 per share, ("AT&T Common Stock")
or shares of one of two classes of a new AT&T tracking stock designated
to track the combined Old Liberty Group and TCI Ventures Group after
giving effect to certain asset transfers. See note 2.
(continued)
I-11
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Merger with AT&T and Related Accounting
On March 9, 1999, AT&T acquired TCI in the AT&T Merger, in which Italy
Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into
TCI, and TCI thereby became a subsidiary of AT&T. As a result of the
AT&T Merger, (i) each share of TCI Group Series A Stock was converted
into 1.16355 shares of AT&T Common Stock, (ii) each share of TCI Group
Series B Stock was converted into 1.27995 shares of AT&T Common Stock,
(iii) each share of Liberty Group Series A Stock was converted into 2
shares of a newly created class of AT&T common stock designated as the
Class A Liberty Media Group Common Stock, par value $1.00 per share
(the "AT&T Liberty Class A Tracking Stock"), (iv) each share of Liberty
Group Series B Stock was converted into 2 shares of a newly created
class of AT&T common stock designated as the Class B Liberty Media
Group Common Stock, par value $1.00 per share (the "AT&T Liberty Class
B Tracking Stock" and together with the AT&T Liberty Class A Tracking
Stock, the "AT&T Liberty Tracking Stock"), (v) each share of TCI
Ventures Group Series A Stock was converted into 1.04 shares of AT&T
Liberty Class A Tracking Stock, (vi) each share of TCI Ventures Group
Series B Stock was converted into 1.04 shares of AT&T Liberty Class B
Tracking Stock, (vii) each share of TCI's Convertible Preferred Stock,
Series C-TCI Group (the "Series C-TCI Group Preferred Stock") was
converted into 154.589253 shares of AT&T Common Stock, (viii) each
share of TCI's Convertible Preferred Stock Series C-Liberty Media Group
(the "Series C-Liberty Media Group Preferred Stock") was converted into
112.50 shares of AT&T Liberty Class A Tracking Stock, (ix) each share
of TCI's Redeemable Convertible TCI Group Preferred Stock, Series G
("Series G Preferred Stock") was converted into 1.3846245 shares of
AT&T Common Stock and (x) each share of TCI's Redeemable Convertible
Liberty Media Group Preferred Stock, Series H ("Series H Preferred
Stock") was converted into 1.18125 shares of AT&T Liberty Class A
Tracking Stock. Following the AT&T Merger, each share of Class B 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock ("Class B
Preferred Stock") continues to be outstanding as the Class B Preferred
Stock of TCI with the same rights and preferences such stock had prior
to the AT&T Merger. In general, the holders of shares of AT&T Liberty
Class A Tracking Stock and the holders of shares of AT&T Liberty Class
B Tracking Stock will vote together as a single class with the holders
of shares of AT&T Common Stock on all matters presented to such
stockholders, with the holders being entitled to 3/40th of a vote for
each share of AT&T Liberty Class A Tracking Stock held, 3/4ths of a
vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote
per share of AT&T Common Stock held.
(continued)
I-12
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are
intended to reflect the separate performance of the businesses and
assets attributed to Old Liberty Group and TCI Ventures Group at the
time of the AT&T Merger. References herein to "Liberty/Ventures Group"
refer to the combined assets and businesses of Old Liberty Group and
TCI Ventures Group for periods prior to the AT&T Merger, and subsequent
to the AT&T Merger such combined assets and business are referred to as
"Liberty Media Group." Pursuant to, and subject to the terms and
conditions set forth in the Agreement and Plan of Restructuring and
Merger, dated as of June 23, 1998 (the "Merger Agreement"), immediately
prior to the AT&T Merger, certain assets previously attributed to TCI
Ventures Group (including, among others, the shares of AT&T Common
Stock received in the merger of AT&T and Teleport Communications Group,
Inc. ("TCG"), the stock of At Home Corporation ("@Home") attributed to
TCI Ventures Group, the assets and business of the National Digital
Television Center, Inc. ("NDTC") and TCI Ventures Group's equity
interest in Western Tele-Communications, Inc. ("WTCI")) were
transferred to TCI Group in exchange for approximately $5.5 billion in
cash. Also, upon consummation of the AT&T Merger, through a new tax
sharing agreement between Liberty Media Group and AT&T, Liberty Media
Group became entitled to the benefit of approximately $2 billion of net
operating loss carryforwards attributable to all entities included in
TCI's consolidated federal income tax return as of the date of the AT&T
Merger. Such net operating loss carryforwards are subject to adjustment
by the Internal Revenue Service and are subject to limitations on usage
which may affect the ultimate amount utilized. Additionally, certain
warrants to purchase shares of General Instruments Corporation ("GI")
previously attributed to TCI Group were transferred to Liberty/Ventures
Group in exchange for approximately $176 million in cash. The transfer
of certain immaterial assets was also effected.
Immediately prior to the AT&T Merger, AT&T and Liberty Media
Corporation entered into an agreement relating to the carriage of
programming of Liberty Media Group to be distributed over the AT&T
cable systems. Pursuant to this agreement, Liberty Media Group will be
granted, among other rights, "preferred vendor status" with respect to
certain types of new programming services. Liberty Media Group will
also be entitled to the use of channel capacity equal to one six
megahertz channel to be used for category specific interactive video
channels. In addition, such agreement also provided for the extension
of existing affiliation agreements between TCI and programming
affiliates of Liberty Media Group to a date not less than 10 years from
the closing of the AT&T Merger, upon the terms and conditions set forth
in such agreement.
(continued)
I-13
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to amended corporate governance documents for the entities
included in Liberty Media Group and certain agreements among AT&T and
TCI, the business of Liberty Media Group will continue to be managed by
certain persons who were members of TCI's management prior to the AT&T
Merger. AT&T will initially designate one third of the directors of
such entities and its rights as the sole shareholder of the common
stock of such entities following the AT&T Merger will, in accordance
with Delaware law, be limited to actions which will require shareholder
approval. Therefore, management has concluded that TCI does not have a
controlling financial interest (as that term is used in Statement of
Financial Accounting Standards No. 94) in the entities comprising the
Liberty Media Group following the AT&T Merger, and will account for its
ownership interests in such entities under the equity method.
Immediately prior to the AT&T Merger, TCI restructured its ownership of
certain of its subsidiaries (the "Restructuring"). The Restructuring
included merging TCI's cable subsidiary, TCI Communications, Inc.
("TCIC"), into TCI. As a result of TCIC's merger with TCI, all assets
and liabilities of TCIC have been assumed by TCI, including TCIC's
public debt. In connection with TCIC's merger with TCI, each share of
TCIC's Cumulative Exchangeable Preferred Stock, Series A was converted
into 2.119 shares of TCI Group Series A Stock, and such shares of TCI
Group Series A Stock were subsequently converted into AT&T Common Stock
in connection with the AT&T Merger. All other public securities issued
by subsidiaries of TCIC (other than TCI Pacific Communications, Inc.
("Pacific")) otherwise remained unaffected. Furthermore, as part of the
Restructuring, (i) AT&T loaned TCI $5.5 billion pursuant to a
promissory note, (ii) certain asset transfers were made between TCI and
its subsidiaries, (iii) 123,896 shares of the Company's Convertible
Redeemable Participating Preferred Stock, Series F ("Series F Preferred
Stock") which were held by subsidiaries of TCI, were converted into
185,428,946 shares of TCI Group Series A Stock (which in turn were
converted into 215,755,850 shares of AT&T Common Stock in the AT&T
Merger and continue to be held by subsidiaries of TCI), (iv) the
remaining 154,411 shares of Series F Preferred Stock which were
formerly held by subsidiaries of TCI were distributed to TCI through a
series of liquidations and canceled, and (v) 125,728,816 shares of TCI
Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock,
6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of
Liberty Group Series B Stock, and 67,536 shares of Class B Preferred
Stock, each formerly held by subsidiaries of TCI, were distributed to
TCI through a series of liquidations and canceled.
Under the terms of the 5% Class A Senior Cumulative Exchangeable
Preferred Stock of Pacific (the "Exchangeable Preferred Stock"), each
share of that preferred stock is exchangeable, from and after August 1,
2001, for approximately 6.3375 shares of AT&T Common Stock, subject to
certain anti-dilution adjustments. Additionally, Pacific may elect to
make any dividend, redemption or liquidation payment on the
Exchangeable Preferred Stock in cash, by delivery of shares of AT&T
Common Stock or by a combination of the foregoing forms of
consideration.
(continued)
I-14
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The AT&T Merger has been accounted for using the purchase method of
accounting and has been deemed to be effective as of March 1, 1999 for
financial reporting purposes. Accordingly, the preliminary allocation
of AT&T's purchase price to acquire Old TCI has been reflected in TCI's
consolidated financial statements as of March 1, 1999. A final
allocation of such purchase price will be made upon resolution of
pre-acquisition contingencies and receipt of final third party
appraisals. Certain transactions occurring between March 1, 1999 and
March 9, 1999 that affected Old TCI's equity and stock compensation
have been reflected in the two-month period ended February 28, 1999.
The $52.2 billion aggregate value assigned to TCI's net assets as a
result of the application of purchase accounting was comprised of the
following:
<TABLE>
<CAPTION>
amounts in millions
<S> <C>
Issuance of AT&T Common Stock $ 26,798
Issuance of AT&T Liberty Tracking Stock 23,360
Assumption of convertible notes 1,593
Assumption of Class B Preferred Stock 154
Estimated merger costs 250
----------------
$ 52,155
================
</TABLE>
The value assigned to the AT&T Common Stock was based on the average
closing price of AT&T Common Stock a few days before and after the AT&T
Merger was agreed to and announced. The value assigned to the AT&T
Liberty Tracking Stock was based on the average closing price of
Liberty Group Stock a few days before and after the AT&T Merger was
agreed to and announced. The Liberty Group Stock was used to value the
AT&T Liberty Tracking Stock issued in the AT&T Merger because the fair
value of Liberty Group Stock was more readily determinable than the
fair value of the AT&T Liberty Tracking Stock.
(continued)
I-15
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table reflects the opening summarized balance sheet of
New TCI as adjusted to give effect to the Restructuring, the
preliminary allocation of AT&T's purchase price to acquire TCI (as
adjusted through September 30, 1999), and the deconsolidation of the
entities comprising Liberty Media Group following the AT&T Merger:
<TABLE>
<CAPTION>
amounts in millions
Assets
<S> <C>
Cash and cash equivalents $ 575
Restricted cash 55
Receivables and prepaid assets 518
Investment in Liberty Media Group 33,728
Investment in the Other Affiliates 11,919
Property and equipment 5,455
Intangible assets 35,274
Other assets 2,437
--------
$ 89,961
========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,742
Debt 16,844
Deferred income taxes 17,959
Other liabilities 1,053
--------
Total liabilities 37,598
--------
Minority interests in equity of consolidated
subsidiaries 2,566
Trust Preferred Securities 1,660
Stockholders' equity 52,155
Investment in AT&T (4,018)
--------
Total stockholders' equity 48,137
--------
$ 89,961
========
</TABLE>
The following table reflects the change in cash and cash equivalents as a result
of the Restructuring and the deconsolidation of Liberty Media Group:
<TABLE>
<CAPTION>
amounts in millions
<S> <C>
Cash and cash equivalents of
Old TCI at February 28,
1999 $ 433
Cash received from AT&T in
Restructuring 5,461
Decrease in cash due to
deconsolidation of Liberty
Media Group (5,319)
--------
Cash and cash equivalents of New TCI
at March 1, 1999 $ 575
========
</TABLE>
(continued)
I-16
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a result of the application of purchase accounting, New TCI has
recorded its assets and liabilities at their preliminary fair values on
March 9, 1999. During the third quarter of 1999, $19 billion of
goodwill recorded in connection with the preliminary allocation of
AT&T's purchase price to acquire Old TCI was reclassified to franchise
costs. Franchise costs represent the value attributable to the
agreements with local franchise authorities that allow access to homes
in TCI's service areas. As with goodwill, franchise costs are amortized
over 40 years. Generally accepted accounting principles require
deferred income taxes to be recorded on the difference between the
financial reporting basis and income tax basis of franchise costs,
whereas no such requirement exists for goodwill. Accordingly, during
the third quarter of 1999, New TCI recorded an increase to its deferred
income tax liability of approximately $12 billion, and recorded an
equal and offsetting increase to franchise costs. This reclassification
and its related deferred income tax effects were given retroactive
effect to the March 9, 1999 acquisition date in order to provide for
meaningful comparisons. Such retroactive treatment had no impact on New
TCI's net loss since the increased amortization of franchise costs was
fully offset by the deferred income tax benefit of such amortization.
During the second and third quarters of 1999, further refinements were
also made to the preliminary allocation of AT&T's purchase price to
acquire Old TCI as a result of the appraisal process. Refinements of
the allocation of AT&T's purchase price to acquire Old TCI are treated
as changes in estimates and accounted for prospectively. As of
September 30, 1999, the allocation of AT&T's purchase price to acquire
Old TCI had not been finalized. Accordingly, the Company may make
additional refinements to the preliminary allocation of AT&T's purchase
price to acquire Old TCI in future periods. In addition to the above,
certain of the more significant effects of purchase accounting are
described below.
New TCI's intangible assets in the March 1, 1999 opening consolidated
balance sheet also include $594 million of in-process research and
development costs. Such amount reflects the value, as of the
acquisition date, of the Company's research and development projects
which had not yet reached technological feasibility and which had no
alternative future use. Such in-process research and development costs
were written-off during March 1999.
As a result of the application of purchase accounting, the amount
assigned to New TCI's other liabilities includes $237 million which
represents New TCI's estimated liability for unvested stock
appreciation rights as of March 9, 1999. Such unvested stock
appreciation rights will vest over remaining periods ranging from 1 to
5 years. The amount assigned to New TCI's minority interests in equity
of consolidated subsidiaries includes $2.1 billion which represents the
fair value of the redeemable preferred stock of a subsidiary. For
additional information regarding the effects of purchase accounting on
New TCI's assets and liabilities, see notes 6, 8, 9 and 13.
(continued)
I-17
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following unaudited condensed results of operations for the nine
months ended September 30, 1999 and 1998 were prepared assuming the
AT&T Merger, the Restructuring and the deconsolidation of Liberty Media
Group occurred on January 1, 1998. These pro forma amounts are not
necessarily indicative of operating results which would have occurred
if the AT&T Merger, the Restructuring and the deconsolidation of
Liberty Media Group had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
----------- -----------
amounts in millions
<S> <C> <C>
Revenue $ 4,285 4,735
Net earnings (loss) before extraordinary items $ (2,958) 885
Net earnings (loss) $ (2,959) 858
</TABLE>
(3) Earnings (Loss) Per Common and Potential Common Share
Basic earnings per share ("EPS") is measured as the income or loss
attributable to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of
potential common shares as if they had been converted at the beginning
of the periods presented. Potential common shares that have an
anti-dilutive effect are excluded from diluted EPS. Basic and diluted
EPS are presented only for periods prior to the AT&T Merger. Subsequent
to the AT&T Merger, all shares of common stock of TCI are held by AT&T.
See notes 1 and 2.
(a) TCI Group Stock
The basic earnings (loss) attributable to TCI Group common
stockholders per common share for the two months ended
February 28, 1999 and the three and nine month periods ended
September 30, 1998 was computed by dividing net earnings
(loss) attributable to TCI Group common stockholders by the
weighted average number of common shares outstanding of TCI
Group Stock during the period.
The diluted loss attributable to TCI Group common stockholders
per common share for the two months ended February 28, 1999
was computed by dividing net loss attributable to TCI Group
common stockholders, which is increased by aggregate fees paid
on equity swap facilities of $4 million during 1999, by the
weighted average number of common shares outstanding of TCI
Group Stock during the period. Potential common shares were
not included in the computation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
(continued)
I-18
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted earnings attributable to TCI Group common
stockholders per common share for the three and nine months
ended September 30, 1998 was computed by dividing net earnings
attributable to TCI Group common stockholders, which is
adjusted by the addition of preferred stock dividends and
interest accrued during the three and nine months ended
September 30, 1998 to net earnings, assuming conversion of TCI
Group convertible securities as of the beginning of the period
to the extent that the assumed conversion of such securities
would have been dilutive, by the weighted average number of
common shares and dilutive potential common shares outstanding
of TCI Group Stock during the period. Shares issuable upon
conversion of the Series C-TCI Group Preferred Stock, the
Convertible Preferred Stock, Series D ("Series D Preferred
Stock"), the Series G Preferred Stock, certain stock rights,
preferred stock of subsidiaries, convertible notes payable,
stock options and other performance awards have been included
in the diluted calculation of weighted average shares to the
extent that the assumed issuance of such shares would have
been dilutive, as illustrated below. All of the outstanding
shares of Series D Preferred Stock were redeemed effective
April 1, 1998.
In connection with the March 9, 1999 AT&T Merger, TCI Group
Stock was converted into AT&T Common Stock. See note 2.
(continued)
I-19
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to TCI Group Stock is presented below:
<TABLE>
<CAPTION>
Old TCI
---------------------------------------------------------
Two months Three months Nine months
ended ended ended
February 28, 1999 September 30, 1998 September 30, 1998
----------------- ------------------ ------------------
amounts in millions, except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to common
stockholders $ (226) 47 130
========== ========== ==========
Weighted average common shares 539 523 521
========== ========== ==========
Basic earnings (loss) per share
attributable to common stockholders $ (.42) .09 .25
========== ========== ==========
Diluted EPS:
Earnings (loss) attributable to common
stockholders $ (226) 47 130
Add preferred dividend requirements -- -- --
Add interest expense -- -- --
Less fees paid on equity swap facilities (4) 1 2
---------- ---------- ----------
Adjusted earnings (loss) attributable to common
stockholders assuming conversion of preferred
shares $ (230) 48 132
========== ========== ==========
Weighted average common shares 539 523 521
---------- ---------- ----------
Add dilutive potential common shares:
Employee and director options and other
performance awards -- 12 10
Stock right -- 1 --
Convertible notes payable -- 24 24
Series C-TCI Group Preferred Stock -- -- --
Series D Preferred Stock -- -- --
Series G Preferred Stock -- -- --
Preferred stock of subsidiaries -- 45 45
---------- ---------- ----------
Dilutive potential common shares
-- 82 79
---------- ---------- ----------
Diluted weighted average common shares 539 605 600
========== ========== ==========
Diluted earnings (loss) per share attributable to
common stockholders $ (.43) .08 .22
========== ========== ==========
</TABLE>
I-20
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Liberty Group Stock
The basic earnings (loss) attributable to Old Liberty Group
common stockholders per common share for the two months ended
February 28, 1999 and the three and nine month periods ended
September 30, 1998 was computed by dividing net earnings
(loss) attributable to Old Liberty Group common stockholders
by the weighted average number of common shares outstanding of
Liberty Group Stock during the period.
The diluted loss attributable to Old Liberty Group common
stockholders per common share for the two months ended
February 28, 1999 and the three months ended September 30,
1998 was computed by dividing the net loss attributable to Old
Liberty Group stockholders by the weighted average number of
common shares outstanding of Liberty Group Stock during the
period. Potential common shares were not included in the
computation of weighted average shares outstanding because
their inclusion would be anti-dilutive.
The diluted earnings attributable to Old Liberty Group common
stockholders per common and potential common share for the
nine months ended September 30, 1998 was computed by dividing
earnings attributable to Old Liberty Group common stockholders
by the weighted average number of common and dilutive
potential common shares outstanding of Liberty Group Stock
during the period. Shares issuable upon conversion of the
Series C-Liberty Media Group Preferred Stock, the Series D
Preferred Stock, the Series H Preferred Stock, convertible
notes payable, stock options and other performance awards have
been included in the diluted calculation of weighted average
shares to the extent that the assumed issuance of such shares
would have been dilutive, as illustrated below. All of the
outstanding shares of Series D Preferred Stock were redeemed
effective April 1, 1998. Numerator adjustments for dividends
and interest associated with the convertible preferred shares
and convertible notes payable, respectively, were not made to
the computation of diluted earnings per share as such
dividends and interest were paid by TCI Group.
In connection with the AT&T Merger, Liberty Group Stock was
converted into AT&T Liberty Tracking Stock. See note 2.
(continued)
I-21
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to Liberty Group Stock is presented below:
<TABLE>
<CAPTION>
Old TCI
------------------------------------------------------------
Two months Three months Nine months
ended ended ended
February 28, 1999 September 30, 1998 September 30, 1998
----------------- ------------------ ------------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to common
stockholders $ (49) (11) 227
============ ============ ============
Weighted average common shares 367 357 357
============ ============ ============
Basic earnings (loss) per share attributable to
common stockholders $ (.13) (.03) .64
============ ============ ============
Diluted EPS:
Earnings (loss) attributable to common
stockholders $ (49) (11) 227
============ ============ ============
Weighted average common shares 367 357 357
------------ ------------ ------------
Add dilutive potential common shares:
Employee and director options and other
performance awards -- -- 8
Convertible notes payable -- -- 19
Series C-Liberty Media Group Preferred Stock -- -- 4
Series D Preferred Stock -- -- --
Series H Preferred Stock -- -- 4
------------ ------------ ------------
Dilutive potential common shares -- -- 35
------------ ------------ ------------
Diluted weighted average common shares 367 357 392
============ ============ ============
Diluted earnings (loss) per share attributable to
common stockholders $ (.13) (.03) .58
============ ============ ============
</TABLE>
(c) TCI Ventures Group Stock
The basic earnings (loss) attributable to TCI Ventures Group
common stockholders per common share for the two months ended
February 28, 1999 and the three and nine month periods ended
September 30, 1998 was computed by dividing net earnings
(loss) attributable to TCI Ventures Group common stockholders
by the weighted average number of common shares outstanding of
TCI Ventures Group Stock during the period.
The diluted loss attributable to TCI Ventures Group common
stockholders per common share for the two months ended
February 28, 1999 was computed by dividing the net loss
attributable to TCI Ventures Group stockholders by the
weighted average number of common shares outstanding of TCI
Ventures Group during the period. In 1999, the net loss
attributable to TCI Ventures Group common stockholders is
increased by $29 million for charges recorded directly to
equity upon settlement of an equity swap transaction. See note
10. For purposes of computing diluted EPS such amount is
assumed to be charged to earnings. Potential common shares
were not included in the computation of weighted average
shares outstanding because their inclusion would be
anti-dilutive.
(continued)
I-22
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted earnings attributable to TCI Ventures Group common
stockholders per common share for the three and nine month
periods ended September 30, 1998 was computed by dividing net
earnings attributable to TCI Ventures Group common
stockholders by the weighted average number of common shares
outstanding of TCI Ventures Group Stock during the period.
Shares issuable upon conversion of convertible notes payable,
stock options and other performance awards have been included
in the diluted calculation of weighted average shares to the
extent that the assumed issuance of such shares would have
been dilutive, as illustrated below. Numerator adjustments for
interest associated with convertible notes payable were not
made to the computation of diluted earnings per share as such
interest was paid by TCI Group.
In connection with the March 9, 1999 AT&T Merger, TCI Ventures
Group Stock was converted into AT&T Liberty Tracking Stock.
See note 2.
Information concerning the reconciliation of basic EPS to diluted EPS with
respect to TCI Ventures Group is presented below:
<TABLE>
<CAPTION>
Old TCI
-----------------------------------------------------------
Two months Three months Nine months
ended ended ended
February 28, 1999 September 30, 1998 September 30, 1998
----------------- ------------------ ------------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings (loss) attributable to common
stockholders $ (10) 1,299 1,012
============ ============ ============
Weighted average common shares 423 423 422
============ ============ ============
Basic earnings (loss) per share attributable to common
stockholders $ (.02) 3.07 2.40
============ ============ ============
Diluted EPS:
Earnings (loss) attributable to common stockholders
$ (10) 1,299 1,012
============ ============ ============
Weighted average common shares 423 423 422
------------ ------------ ------------
Add dilutive potential common shares:
Employee and director options and other performance
awards -- 7 9
Convertible notes payable -- 21 21
------------ ------------ ------------
Dilutive potential common shares -- 28 30
------------ ------------ ------------
Diluted weighted average common shares 423 451 452
============ ============ ============
Diluted earnings (loss) per share attributable to
common stockholders $ (.09) 2.88 2.24
============ ============ ============
</TABLE>
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $395 million, $287 million and $905 million
for the seven months ended September 30, 1999, the two months ended
February 28, 1999 and the nine months ended September, 1998,
respectively. Cash paid for income taxes was not material during such
periods.
(continued)
I-23
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant non-cash investing and financing activities and certain
supplemental disclosures with respect to the statement of cash flows
are reflected below:
<TABLE>
<CAPTION>
New TCI Old TCI
------------------ --------------------------------------
Seven months Two months Nine months
ended ended ended
September 30, 1999 February 28, 1999 September 30, 1998
------------------ ----------------- ------------------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Recorded value of assets acquired $ (34) (353) (906)
Net liabilities assumed -- -- 79
Deferred tax liability recorded in
acquisitions -- -- 105
Change in minority interests in equity
of consolidated subsidiaries -- -- (215)
Elimination of notes receivable from
affiliates -- -- 350
Common stock issued in acquisitions -- -- 376
------------ ------------ ------------
Cash paid for acquisitions $ (34) (353) (211)
============ ============ ============
Cash received (paid) in exchanges:
Recorded value of assets acquired $ (2,243) -- (72)
Historical cost of assets exchanged 2,202 -- 87
Gain recorded on exchange of assets -- -- 30
------------ ------------ ------------
Cash received (paid) in exchanges $ (41) -- 45
============ ============ ============
Capitalized costs of distribution
agreements for @Home $ 79 -- 83
============ ============ ============
</TABLE>
(continued)
I-24
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company ceased to include TV Guide, Inc. ("TV Guide") in its
consolidated financial results and began to account for TV Guide using
the equity method of accounting effective February 28, 1999 (see note
7). In addition, during the second quarter of 1999, the Company ceased
to include @Home in its consolidated financial results and began to
account for @Home using the equity method of accounting (see note 6).
The effects of changing the method of accounting for the Company's
ownership interests in TV Guide and @Home from the consolidation method
to the equity method are summarized below:
<TABLE>
<CAPTION>
Seven months Two months
ended ended
September 30, 1999 February 28, 1999
------------------ -----------------
amounts in millions
<S> <C> <C>
Assets (other than cash and cash equivalents)
reclassified to investments in affiliates $ (918) (572)
Liabilities reclassified to investments in
affiliates 357 190
Minority interests in equity of subsidiaries
reclassified to investments in affiliates 474 63
Gain on issuance of equity by subsidiary, net of
taxes 488 372
------------ ------------
Decrease in cash and cash equivalents $ 401 53
============ ============
</TABLE>
For a description of certain additional non-cash transactions, see
notes 2, 6 and 7.
The Company's restricted cash of $19 million at September 30, 1999,
includes amounts held in escrow of $10 million and proceeds received in
connection with certain asset dispositions. Such proceeds, which
aggregated $9 million, are designated to be reinvested in certain
identified assets for income tax purposes.
(continued)
I-25
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investment in Liberty Media Group
As described in note 2, immediately following the AT&T Merger, the
entities comprising the Liberty Media Group were deconsolidated. The
Company's investment in Liberty Media Group includes non-interest
bearing receivables from Liberty Media Group. Summarized unaudited
results of operations for Liberty Media Group for the period in which
the Company used the equity method to account for Liberty Media Group
are as follows:
<TABLE>
<CAPTION>
Seven months
ended
September 30, 1999
------------------
amounts in millions
<S> <C>
Revenue $ 506
Operating costs and expenses (408)
Stock compensation (432)
Depreciation and amortization (394)
------------
Operating loss (728)
Interest expense (87)
Share of losses of affiliates, net (597)
Other, net 189
------------
Loss before income taxes (1,223)
Income tax benefit 405
------------
Net loss $ (818)
============
</TABLE>
During March and April 1999, certain convertible debentures of a
subsidiary attributed to the Liberty Media Group were converted into
shares of AT&T Liberty Tracking Stock. The $354 million principal
amount of such converted debentures has been reflected as an increase
to New TCI's "Additional paid-in capital."
The accompanying consolidated statement of stockholders' equity for the
seven months ended September 30, 1999 includes changes in Liberty Media
Group's unrealized holding gains for available-for-sale securities
totaling $2,320 million, net of taxes, and Liberty Media Group's
foreign currency translation adjustments totaling $88 million, net of
taxes.
During the third quarter of 1999, AT&T utilized $85 million of Liberty
Media Group's net operating loss carryforwards to offset AT&T's current
federal income tax liability. Liberty Media Group did not receive any
consideration for the utilization of such net operating loss
carryforwards. Accordingly, AT&T's utilization of Liberty Media Group's
net operating loss carryforwards has been reflected as a decrease to
New TCI's "Additional paid-in capital."
(continued)
I-26
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Investments in the Other Affiliates
The Company has various investments in the Other Affiliates accounted
for under the equity method. The following table includes the Company's
carrying value of its more significant investments in the Other
Affiliates as of the indicated dates:
<TABLE>
<CAPTION>
New TCI Old TCI
------------- ------------
September 30, December 31,
1999 1998
------------- ------------
amounts in millions
<S> <C> <C>
Cablevision Systems
Corporation ("CSC")(a) $ 3,130 945
@Home(b) 2,866 --
Lenfest Communications,
Inc. 2,196 (138)
Texas Cable Partners, L.P. 1,570 111
Bresnan Communications
Group LLC ("Bresnan") 873 --
Falcon Communications, L.P.
("Falcon") 660 189
InterMedia Capital Partners IV,
L.P. ("InterMedia IV") and
InterMedia Capital Management IV, L.P.
("ICM IV") 641 201
USA Networks, Inc. and related
investments(c) -- 1,042
Various foreign equity
investments(c) -- 1,492
Other 2,457 867
------------ ------------
$ 14,393 4,709
============ ============
</TABLE>
-----------------
(a) CSC
On March 4, 1998, the Company contributed to CSC certain of
its cable television systems serving approximately 830,000
customers in exchange for approximately 48.9 million newly
issued CSC Class A common shares (the "CSC Transaction"). CSC
also assumed and repaid approximately $574 million of debt
owed by the Company to external parties and $95 million of
debt owed to the Company. As a result of the CSC Transaction,
the Company recognized a $506 million gain in the accompanying
consolidated statement of operations for the nine months ended
September 30, 1998. Such gain represents the excess of the
$1,161 million fair value of the CSC Class A common shares
received over the historical cost of the net assets
transferred by the Company to CSC.
(continued)
I-27
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At September 30, 1999, the Company owned 48,942,172 shares of
CSC Class A common stock, which had a closing market price of
$72.75 per share on such date. Such shares represented an
approximate 32% equity interest in CSC's total outstanding
shares and an approximate 9% voting interest in CSC in all
matters except for (i) the election of directors, in which
case the Company effectively has the right to designate two of
CSC's directors, and (ii) any increase in authorized shares,
in which case the Company has agreed to vote its interest in
proportion with the public holders of CSC Class A common
shares. The ability of the Company to sell or increase its
investment in CSC is subject to certain restrictions and
limitations set forth in a stockholders agreement with CSC. As
a result of the deconsolidation of Liberty Media Group,
1,040,400 shares of CSC Class A common stock held by Liberty
Media Group are no longer included in the Company's investment
in CSC. See note 2.
(b) @Home
During the second quarter of 1999, the stockholders of @Home
approved certain changes in the corporate governance of @Home.
As a result of these changes, management concluded that TCI no
longer held a controlling financial interest (as that term is
used in Statement of Financial Accounting Standards No. 94) in
@Home and, accordingly, during the second quarter of 1999, TCI
ceased to consolidate @Home and began to account for @Home
using the equity method of accounting.
On May 28, 1999, @Home consummated a merger agreement with
Excite, Inc. ("Excite"), a global Internet media company that
offers consumers and advertisers comprehensive Internet
navigation services with extensive personalization
capabilities. Under the terms of the merger agreement, @Home
issued approximately 116 million shares of its common stock
for all of the outstanding common stock of Excite based on an
exchange ratio of 2.083804 shares of @Home's common stock for
each share of Excite's common stock. @Home may issue up to
approximately 46 million additional shares of common stock in
connection with the assumption of obligations under Excite's
stock option and employer stock purchase plans and outstanding
warrants. As a result of the merger, TCI's economic interest
in @Home decreased from 38% to 26%. Due to the resulting
increase in @Home's equity, net of the dilution of TCI's
ownership interest in @Home, TCI recorded a $488 million
increase to "Additional paid-in capital" and a $312 million
increase to "Deferred income tax liability." At September 30,
1999, the Company owned 63,720,000 shares of @Home Class A
common stock, which had a closing market price of $41.44 per
share on such date.
(continued)
I-28
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the two months ended February 28, 1999, @Home issued
2.2 million common shares. Due to the resulting increase in
@Home's equity, net of the dilution of TCI's ownership
interest in @Home, TCI recognized a gain of $17 million.
(c) Liberty Media Group Investments
As a result of the deconsolidation of Liberty Media Group, the
indicated investments are no longer included in the Company's
consolidated investments. See note 2.
At September 30, 1999, the aggregate carrying value of the Company's
investments in the Other Affiliates exceeded the Company's aggregate
proportionate share of the Other Affiliates' underlying equity by $14.0
billion, of which $8.4 billion, $4.2 billion and $1.4 billion is being
amortized over 40 years, 25 years and 7 years, respectively.
TCI has entered into various agreements, which, among other matters,
contemplate the disposition of certain of its investments in the Other
Affiliates. See note 7.
Summarized unaudited combined results of operations for the Other
Affiliates for the periods in which the Company used the equity method
to account for the Other Affiliates are as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------
Combined Operations 1999 1998
------------------- ------------ ------------
amounts in millions
<S> <C> <C>
Revenue $ 7,282 11,198
Operating expenses (5,661) (10,179)
Depreciation and amortization (2,110) (2,177)
------------ ------------
Operating loss (489) (1,158)
Interest expense (1,052) (1,458)
Other, net (149) (33)
------------ ------------
Net loss $ (1,690) (2,649)
============ ============
</TABLE>
(7) Acquisitions and Dispositions
On May 4, 1999, AT&T and Comcast Corporation ("Comcast") announced that
they had signed a letter of intent to exchange various cable systems,
including certain cable systems of TCI. In addition, Comcast will
receive an option from AT&T to purchase, over the next three years,
additional cable systems with a total of approximately 1.25 million
subscribers, which may include cable subscribers of TCI. The foregoing
letter of intent is subject to completion of definitive agreements,
consummation of certain other transactions, and regulatory and legal
approvals.
(continued)
I-29
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 6, 1999, AT&T and Cox Communications, Inc. ("Cox") signed an
agreement whereby AT&T would redeem approximately 50.3 million shares
of AT&T Common Stock held by Cox in exchange for cable television
systems of TCI serving approximately 316,000 customers and TCI's
interest in certain equity method investments. The transaction is
subject to receipt of necessary government and regulatory approvals. No
assurance can be given that such transaction will be consummated. See
note 6.
TCI has entered into agreements with Century Communications Corp.
("Century") whereby TCI will contribute cable television systems
serving approximately 249,000 customers located in Southern California
to a newly formed limited partnership in which TCI will have an
approximate 25% partnership interest. TCI will also exchange with the
new partnership a cable television system serving approximately 100,000
customers in Southern California for cable television systems in
Northern California serving approximately 100,000 customers. The
transactions are subject to various closing conditions. No assurance
can be given that such transactions will be consummated. On October 1,
1999, a merger was consummated in which Century merged with and into
Adelphia Communications Corporation ("Adelphia"). As a result of such
merger, Adelphia assumed all of Century's rights and obligations
relating to the above described transaction.
On October 1, 1999, TCI, InterMedia IV, and InterMedia Partners, a
California Limited Partnership and a consolidated subsidiary of the
Company ("InterMedia Partners"), entered into a series of transactions
with unaffiliated third parties that resulted in the disposition of
certain cable television systems, the acquisition by InterMedia IV of
all of its partnership interests that were not owned by TCI and the
exchange of certain of InterMedia IV's and InterMedia Partners' cable
television systems. As a result of such transactions, InterMedia IV
became a consolidated subsidiary of TCI. See notes 6 and 12.
During the second quarter of 1999, TCI entered into separate agreements
to sell the majority of its 50% interest in Bresnan (the "Bresnan
Transaction") and its 46% interest in Falcon (the "Falcon Transaction")
to Charter. In accordance with the terms of the Bresnan Transaction,
TCI would receive consideration of approximately $900 million in the
form of cash, and an approximate 4.5% interest in a new entity to be
formed by Charter. In accordance with the terms of the Falcon
Transaction, TCI would receive cash proceeds of approximately $725
million for its interest in Falcon Communications, L.P. The
transactions are subject to various closing conditions. No assurance
can be given that such transactions will be consummated. See note 6.
(continued)
I-30
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the second quarter of 1999, the Company paid $41 million in cash
and traded cable television systems serving approximately 618,000
customers located in Florida, Hawaii, Maine, New York, Ohio, Texas and
Wisconsin in exchange for cable television systems serving
approximately 565,000 customers located in Illinois, New Jersey, Oregon
and Pennsylvania (the "1999 Exchange"). The 1999 Exchange was
consummated pursuant to an agreement that was executed in November
1998. No gain was recognized on the 1999 Exchange due to the Company's
application of purchase accounting in connection with the AT&T Merger.
During the two months ended February 28, 1999, the Company completed a
transaction whereby the Company contributed cable television systems to
Bresnan, an entity in which the Company had an approximate 80%
ownership interest. Through a series of transactions, including the
contribution of cash by a third party in exchange for an ownership
interest in Bresnan, the Company's ownership interest in Bresnan was
reduced to a non-controlling 50% ownership interest (the "1999
Contribution Transaction"). In connection with the associated dilution
of the Company's ownership interest, the Company deconsolidated assets
and liabilities related to cable television systems serving
approximately 614,000 customers. The deconsolidated liabilities
included $210 million of debt owed to external parties and $709 million
of intercompany debt owed to the Company. In connection with the 1999
Contribution Transaction, the Company has agreed to take certain steps
to support compliance by Bresnan with its payment obligations under
certain debt instruments. See note 13. As a result of the dilution of
the Company's ownership interest from 80% to 50%, the Company recorded
a $9 million increase (net of deferred income taxes of $5 million) to
additional paid-in capital in connection with the 1999 Contribution
Transaction. No gain was recognized due to the Company's aforementioned
commitment to support the entity's payment obligations under certain
debt instruments.
During February 1999, the Company sold cable television assets serving
approximately 145,000 customers to an unaffiliated third party for
approximately $300 million. The Company recorded a $123 million gain on
such disposition.
During the year ended 1998, the Company completed various transactions
in addition to the CSC Transaction described in note 6, wherein the
Company contributed cable television systems serving in the aggregate
approximately 1.9 million customers to several joint ventures
(collectively, the "1998 Joint Ventures") in exchange for
non-controlling ownership interests in each of the 1998 Joint Ventures,
and the assumption and repayment by the 1998 Joint Ventures of debt
owed by the Company to external parties aggregating $323 million and
intercompany debt owed to the Company aggregating $2,374 million. In
connection with such transactions, the Company has agreed to take
certain steps to support compliance by the 1998 Joint Ventures with
their payment obligations under certain debt instruments. See notes 6
and 13.
(continued)
I-31
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective February 28, 1999, TV Guide (formerly United Video Satellite
Group, Inc. ("UVSG")) and The News Corporation Limited ("News Corp.")
completed a transaction whereby News Corp.'s TV Guide properties were
combined with UVSG to create a platform for offering television guide
services to consumers and advertising and the resulting company was
named TV Guide. As part of this combination, a unit of News Corp.
received consideration consisting of $800 million in cash and 60
million shares of UVSG's stock, including 22.5 million shares of its
Class A common stock and 37.5 million shares of its Class B common
stock. In addition, News Corp. elected to purchase approximately 6.5
million additional shares of UVSG Class A common stock for $129 million
in order to equalize its ownership with that of Liberty/Ventures Group.
Prior to such transactions, UVSG was a subsidiary of TCI. Immediately
following these transactions, and another transaction completed on the
same date, News Corp., Liberty/Ventures Group and TV Guide's public
stockholders owned on an economic basis approximately 44%, 44% and 12%,
respectively, of TV Guide and News Corp. and Liberty/Ventures Group
each had approximately 49% of the voting power of TV Guide's
outstanding stock. Due to the resulting increase in TV Guide's equity,
net of the dilution of TCI's ownership interest in TV Guide, TCI
recognized a $372 million gain (before deducting deferred income tax
expense of $147 million).
Effective September 1, 1998, Telewest Communications plc ("Telewest")
and General Cable PLC ("General Cable") consummated a merger in which
General Cable merged with and into Telewest. As a result of such
merger, TCI's ownership interest in Telewest decreased to 22%. In
connection with such dilution, TCI recognized a gain of $58 million
(before deducting deferred income tax expense of $20 million).
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T
was consummated. See note 11. On April 22, 1998, TCG completed a merger
transaction with ACC Corp. ("ACC") in which ACC shares were exchanged
for shares of TCG. As a result of ACC's merger with TCG, Old TCI's
interest in TCG was reduced to approximately 26%. In connection with
the dilution of Old TCI's interest in TCG, Old TCI recorded a gain of
$201 million (before deducting deferred income tax expense of $71
million).
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("Superstar/Netlink")
in exchange for an approximate 20% interest in Superstar/Netlink. As a
result of this transaction, the Company's ownership interest in
Superstar/Netlink decreased from 100% to approximately 80% and the
Company recognized a gain of $38 million (before deducting deferred
income tax expense of $15 million). Turner Vision's contribution to
Superstar/Netlink was accounted for as a purchase, and the $61 million
excess of the purchase price over the fair value of the assets acquired
was recorded as goodwill.
(continued)
I-32
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
New TCI Old TCI
------------- ------------
September 30, December 31,
1999 1998
------------- ------------
amounts in millions
<S> <C> <C>
AT&T Notes (a) $ 8,559 --
Other notes payable (b) 9,154 9,412
Bank credit facilities (c) -- 3,773
Commercial paper -- 109
Convertible notes (d) -- 40
Capital lease obligations and other debt 295 718
------------ ------------
$ 18,008 14,052
============ ============
</TABLE>
(a) Amounts outstanding under the notes payable to AT&T ("AT&T
Notes") bear interest at the London Interbank Offered Rate
("LIBOR") plus 15 basis points (6.23% at September 30, 1999)
and are due and payable on or before March 9, 2004. Interest
on the AT&T Notes is compounded quarterly.
(b) During the seven months ended September 30, 1999, the Company
redeemed certain notes payable which had an aggregate
principal balance of $64.6 million and fixed interest rates
ranging from 7.875% to 8.75%. In connection with such
redemptions, the Company recognized a pre-tax gain on early
extinguishment of debt of $6 million. Such gain related to the
excess of the fair value assigned to the debt in purchase
accounting over the amount paid to redeem the debt.
During the two months ended February 28, 1999, the Company
redeemed certain notes payable which had an aggregate
principal balance of $21 million and fixed interest rates
ranging from 8.75% to 9.25%. In connection with such
redemptions, the Company recognized a pre-tax loss on early
extinguishment of debt of $4 million. Such loss related to
prepayment penalties and the retirement of deferred loan
costs.
During the nine months ended September 30, 1998, the Company
redeemed certain notes payable which had an aggregate
principal balance of $352 million and fixed interest rates
ranging from 8.67% to 10.25%. In connection with such
redemptions, the Company recognized a pre-tax loss on early
extinguishment of debt of $44 million in 1998. Such loss
related to prepayment penalties amounting to $39 million and
the retirement of deferred loan costs.
(c) During the two months ended February 28, 1999, the Company
repaid a bank credit facility. In connection with such
repayment, the Company recognized a pre-tax loss on early
extinguishment of debt of $4 million. Such loss related to the
retirement of deferred loan costs.
(continued)
I-33
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As security for borrowings under one of Old TCI's credit
facilities, Old TCI had pledged a portion of its Time Warner
common stock. As a result of the deconsolidation of
Liberty/Ventures Group, such borrowings and the associated
Time Warner common stock are no longer reflected in the
Company's consolidated debt and asset balances.
(d) The convertible notes, which were stated net of unamortized
discount of $166 million at December 31, 1998, were scheduled
to mature on December 12, 2021. The notes required an annual
interest payment equal to 1.85% of the face amount of the
notes. On March 26, 1999, all of the notes were converted into
shares of AT&T Common Stock, AT&T Liberty Class A Tracking
Stock and TCI Satellite Entertainment, Inc. Series A common
stock, $1.00 par value per share ("Satellite Series A Common
Stock") in accordance with the terms of the notes. Following
such conversion, none of such notes remain outstanding. Such
notes were held by a then director of the Company, as well as
several members of his family. In connection with the AT&T
Merger, such director resigned. Immediately prior to the AT&T
Merger, the notes were convertible, at the option of the
holders, into an aggregate of 24,163,259 shares of TCI Group
Series A Stock, 19,416,889 shares of Liberty Group Series A
Stock, 20,711,364 shares of TCI Ventures Group Series A Stock
and 3,451,897 shares of Satellite Series A Common Stock.
Pursuant to the terms of the Merger Agreement and a certain
stock purchase agreement, dated as of July 9, 1986, among the
Company and the holders of such convertible notes, the
conversion feature of the convertible notes was adjusted such
that as of the March 9, 1999 consummation date of the AT&T
Merger, such notes were convertible into an aggregate of
28,632,122 shares of AT&T Common Stock, 60,373,632 shares of
AT&T Liberty Class A Tracking Stock and 3,451,897 shares of
Satellite Series A Common Stock.
Certain debt instruments of a subsidiary of the Company contain
restrictive covenants which require, among other things, the
maintenance of certain earnings, specified cash flow and financial
ratios (primarily the ratios of cash flow to total debt and cash flow
to debt service, as defined), and include certain limitations on
indebtedness, investments, guarantees, dispositions, stock repurchases
and/or dividend payments.
The aggregate fair value assigned in purchase accounting to New TCI's
debt and related variable and fixed interest rate exchange agreements
("Interest Rate Swaps") exceeded the aggregate recorded value at the
date of the AT&T Merger by $938 million. Such excess is being amortized
over the respective remaining 1 to 30 year lives of the underlying debt
obligations and Interest Rate Swaps. See note 2.
The fair value of the Company's debt, exclusive of the AT&T Notes, is
estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the
same remaining maturities. At September 30, 1999, the fair value of the
Company's debt, exclusive of the AT&T Notes, was $9,007 million, as
compared to a carrying value of $9,449 million on such date. Due to its
related party nature, it is not practical to obtain a reasonable
estimate of the fair value of the AT&T Notes.
(continued)
I-34
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company may enter into Interest Rate Swaps pursuant
to which it (i) pays fixed interest rates (the "Fixed Rate Agreements")
and receives variable interest rates and (ii) pays variable interest
rates (the "Variable Rate Agreements") and receives fixed interest
rates. At December 31, 1998, all of the Company's Fixed Rate Agreements
had expired. During the nine months ended September 30, 1998, the
Company's payments pursuant to the Fixed Rate Agreements were less than
$1 million. During the seven months ended September 30, 1999, the two
months ended February 28, 1999 and the nine months ended September 30,
1998, the Company's net receipts pursuant to the Variable Rate
Agreements were $16 million, $1 million and $8 million, respectively.
Information concerning the Company's Variable Rate Agreements at
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Amount to be
Expiration Interest rate Notional received (paid) upon
date to be received amount termination (a)
---------- -------------- -------- --------------------
dollar amounts in millions
<S> <C> <C> <C>
February 2000 5.8%-6.6% $ 300 $ 1
March 2000 5.8%-6.0% 675 --
September 2000 5.1% 75 (1)
March 2027 9.7% 300 2
December 2036 9.7% 200 (3)
---------- ----------
$ 1,550 $ (1)
========== ==========
</TABLE>
--------------------
(a) The estimated amount that the Company would receive (pay) to
terminate the agreements at September 30, 1999, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
In addition to the Variable Rate Agreements, the Company has entered
into Interest Rate Swaps pursuant to which it pays a variable rate
based on LIBOR (6.4% at September 30, 1999) and receives a variable
rate based on the Constant Maturity Treasury Index ("CMT") (6.1% at
September 30, 1999) on a notional amount of $400 million through
September 2000; and pays a variable rate based on LIBOR (6.3% at
September 30, 1999) and receives a variable rate based on CMT (6.2% at
September 30, 1999) on notional amounts of $95 million through February
2000. During each of the seven months ended September 30, 1999, the two
months ended February 28, 1999 and the nine months ended September 30,
1998, the Company's net payments pursuant to such agreements were $1
million. At September 30, 1999, the Company would be required to pay
less than $1 million to terminate such Interest Rate Swaps.
(continued)
I-35
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties. Further, the Company does not anticipate material
near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of September 30,
1999.
(9) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities
The Trust Preferred Securities are presented together in a separate
line item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities."
Dividends accrued on the Trust Preferred Securities aggregated $83
million, $23 million and $106 million during the seven months ended
September 30, 1999, the two months ended February 28, 1999 and the nine
months ended September 30, 1998, respectively, and are included in
minority interests in earnings of consolidated subsidiaries in the
accompanying consolidated financial statements.
The aggregate fair value assigned to the Trust Preferred Securities in
purchase accounting exceeded the aggregate recorded value at the date
of the AT&T Merger by $160 million. Such excess is being amortized over
the remaining 28 to 46 year terms of such securities.
(10) Stockholders' Equity
Treasury Stock and Common Stock Held by Subsidiaries, at Cost
In conjunction with the AT&T Merger, Old TCI shares held in treasury
and Old TCI shares held by subsidiaries were canceled. See note 2.
General
During 1997, Old TCI entered into certain equity swap facilities. Due
to Old TCI's ability to issue shares to settle periodic price
fluctuations and fees under the equity swap facilities, Old TCI
recorded all amounts received or paid under these arrangements as
increases or decreases, respectively, to equity. From February 1, 1999
to March 5, 1999, Old TCI terminated all transactions under the equity
swap facilities and the related swap agreements. In connection with the
termination of such transactions, the Company received aggregate cash
payments of $677 million. Such cash payments are reflected in Old TCI's
consolidated financial statements for the two months ended February 28,
1999.
(continued)
I-36
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In July 1998, the Company entered into an equity swap transaction with
a commercial bank, which provided the Company with the right but not
the obligation to acquire 1,084,056 shares of TCI Group Series A Stock
for approximately $45 million on or before April 19, 1999. During the
two months ended February 28, 1999, the Company acquired the 1,084,056
shares of TCI Group Series A Stock under the agreement. Such shares
were used to satisfy the exchange requirements of a subsidiary's
preferred stock. The $29 million excess of the amount paid for the TCI
Group Series A Stock over the Company's minority interest in such
subsidiary has been reflected as a decrease to stockholders' equity in
the accompanying consolidated financial statements for the two months
ended February 28, 1999.
(11) Transactions with Related Parties
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. As a result of such merger, TCI received in exchange
for all of its interest in TCG, 70,429,248 shares of AT&T Common Stock.
TCI recognized a $2.3 billion gain on such transaction during the third
quarter of 1998 based on the difference between the carrying amount of
TCI's interest in TCG and the fair value of the AT&T Common Stock
received. Prior to the AT&T Merger, TCI had accounted for its ownership
interest in AT&T Common Stock as an available-for-sale security. Such
AT&T Common Stock was transferred from Liberty/Ventures Group to TCI
Group in connection with the AT&T Merger. See note 2. In addition,
immediately prior to the AT&T Merger, certain shares of Series F
Preferred Stock were converted into shares of TCI Group Stock which, in
turn, were converted into 215,755,850 shares of AT&T Common Stock. Such
converted shares are recorded at Old TCI's historical cost basis. New
TCI treats its investment in AT&T Common Stock as an investment in its
parent. Accordingly, New TCI's investment in AT&T Common Stock is
reflected as a reduction of TCI's equity. Old TCI recognized dividend
income of $15.5 million on its AT&T Common Stock during the third
quarter of 1998. The Company has not received any dividends on its
investment in AT&T Common Stock subsequent to the AT&T Merger.
The Company's non-interest bearing intercompany account with AT&T ($27
million at September 30, 1999) is included in TCI's "Investment in
AT&T" in the accompanying consolidated balance sheet.
Certain entities attributed to Liberty Media Group produce and/or
distribute programming to the Company. Charges to the Company
aggregated $121 million for the seven months ended September 30, 1999.
Such amount is included in operating costs and expenses in the
accompanying consolidated statements of operations.
AT&T provides long distance service and allocates certain other
administrative costs to the Company. During the seven months ended
September 30, 1999, such amounts aggregated $29 million and are
included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
(continued)
I-37
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NDTC leases transponder facilities to entities attributed to Liberty
Media Group. Charges by NDTC for such arrangements were $14 million for
the seven months ended September 30, 1999 and are included in revenue
in the accompanying consolidated statements of operations.
During the third quarter of 1999, AT&T utilized $495 million of TCI's
net operating loss carryforwards to offset AT&T's current federal
income tax liability. TCI did not receive any consideration for the
utilization of such net operating loss carryforwards. Accordingly, TCI
has reflected AT&T's utilization of the net operating loss
carryforwards as a decrease to "Additional paid-in capital" in the
accompanying consolidated financial statements.
(12) Transactions with Officers and Directors
After the Company's stockholders voted to approve the terms of the AT&T
Merger, on February 17, 1999, TCI's Board of Directors approved the
payment by Liberty/Ventures Group of $1 million to each of two
directors of the Company for their services on the Special Committee of
TCI's Board of Directors in evaluating the AT&T Merger and the
consideration to be received by the stockholders of the Company. In
addition, Liberty/Ventures Group paid $10 million to a director and
executive officer of TCI, immediately prior to the AT&T Merger, for his
services in negotiating the merger agreement and completing the AT&T
Merger.
Prior to the AT&T Merger, a limited liability company owned by Dr.
Malone, a director of the Company and TCI's former Chairman and Chief
Executive Officer, acquired, from certain subsidiaries of Old TCI,
working cattle ranches located in Wyoming in exchange for $17 million.
The purchase price paid by such limited liability company was in the
form of a 12-month note in the amount of $17 million having an interest
rate of 7%. Such note is payable to an entity attributed to Liberty
Media Group at any time without penalty and is personally guaranteed by
Dr. Malone. No gain or loss was recognized by TCI on this transaction.
As described more fully in note 7, the Company, on October 1, 1999,
became the owner of all of the partnership interests in InterMedia IV.
An individual who was a director and executive officer of TCI had a
.001% special limited partnership interest in ICM IV, which in turn has
a 1.19% limited partnership interest in InterMedia IV. Such
individual's special limited partnership interest in ICM IV was created
in August 1997 in connection with TCI's acquisition of all of the
partnership interests (other than a .002% general partnership interest
and a .001% special limited partnership interest) in ICM IV. In
connection with the transaction described in note 7, such individual,
by virtue of his .001% special limited partnership interest in ICM IV,
participated in a profit sharing mechanism of InterMedia IV and
received cash consideration of approximately $11 million based on the
valuation of InterMedia IV.
For additional transactions involving the Company's officers and
directors, see notes 8 and 13.
(continued)
I-38
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Commitments and Contingencies
The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act") imposed certain rate regulations on the cable
television industry. Under the 1992 Cable Act, all cable systems are
subject to rate regulation, unless they face "effective competition,"
as defined by the 1992 Cable Act and expanded in the Telecommunications
act of 1996 (the "1996 Act"), in their local franchise area.
Although the Federal Communications Commission (the "FCC") has
established regulations required by the 1992 Cable Act, local
government units (commonly referred to as local franchising
authorities) are primarily responsible for administering the regulation
of a cable system's basic service tier ("BST"). The FCC itself directly
administered rate regulation of any cable programming service tier
("CPST"). The FCC's authority to regulate CPST rates expired on March
31, 1999. The FCC has taken the position that it will still adjudicate
CPST complaints filed after this sunset date (but no later than 180
days after the last CPST rate increase imposed prior to March 31,
1999), and will strictly limit its review (and possible refund orders)
to the time period predating the sunset date.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had
their rate increases governed by a complicated price structure that
allows for the recovery of inflation and certain increased costs, as
well as providing some incentive for expanding channel carriage.
Operators also have the opportunity to bypass this "benchmark"
regulatory structure in favor of the traditional "cost-of-service"
regulation in cases where the latter methodology appears favorable.
Premium cable services offered on a per-channel or per-program basis
remain unregulated, as do affirmatively marketed packages consisting
entirely of new programming product.
The Company believes that it has complied in all material respects with
the provisions of the 1992 Cable Act and the 1996 Act, including its
rate setting provisions. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund
the excess portion of rates received. Any refunds of the excess portion
of CPST rates would be retroactive to the date of complaint. Any
refunds of the excess portion of BST or equipment rates would be
retroactive to one year prior to the implementation of the rate
reductions.
(continued)
I-39
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is obligated and/or has guaranteed Liberty Media Group's
obligation to pay fees for the rights to exhibit certain films that are
released by various producers through 2017 (the "Film Licensing
Obligations"). Based on customer levels at September 30, 1999, these
agreements require minimum payments aggregating approximately $440
million. The aggregate amount of the Film Licensing Obligations under
these license agreements is not currently estimable because such amount
is dependent upon the number of qualifying films released theatrically
by certain motion picture studios as well as the domestic theatrical
exhibition receipts upon the release of such qualifying films.
Nevertheless, required aggregate payments under the Film Licensing
Obligations could prove to be significant.
The Company is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, the Company is
committed to carry such suppliers' programming on its cable systems.
Additionally, certain of such agreements provide for penalties and
charges in the event the programming is not carried or not delivered to
a contractually specified number of customers.
The Company is committed to purchase billing services from a third
party pursuant to three successive five-year agreements. Pursuant to
such arrangement, the Company is obligated at September 30, 1999 to
make minimum payments aggregating approximately $1.5 billion through
2012. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $47 million at September 30, 1999. The Company also has
agreed to take certain steps to support debt compliance with respect to
obligations aggregating $1,720 million of certain cable television
partnerships in which the Company has non-controlling ownership
interests. See note 7. The Company also has guaranteed the performance
of certain affiliates and other parties with respect to such parties'
contractual and other obligations. Although there can be no assurance,
management of the Company believes that it will not be required to meet
its obligations under such guarantees, or if it is required to meet any
of such obligations, that they will not be material to the Company.
During 1999, a subsidiary of the Company entered into a contribution
agreement ("Contribution Agreement") with certain shareholders of
Phoenixstar, Inc. (formerly Primestar, Inc.) ("Phoenixstar") pursuant
to which the Company would, to the extent it is relieved of $166
million of contingent liabilities then owed to certain creditors of
Phoenixstar and its subsidiaries, contribute up to $166 million to
Phoenixstar to the extent necessary to satisfy liabilities of
Phoenixstar. During the second quarter of 1999 and the fourth quarter
of 1998, the Company recorded charges of $50 million and $90 million,
respectively, to provide for the estimated losses that were expected to
result from the Contribution Agreement. During 1999, the Company
contributed approximately $116 million to Phoenixstar in partial
satisfaction of its obligation. The Company's remaining obligation
under the Contribution Agreement will expire in 2001. An individual who
is a director of TCI is also the Chairman of the Board of TCI Satellite
Entertainment, Inc. ("TSAT"). TSAT has an approximate 37% ownership
interest in Phoenixstar.
(continued)
I-40
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TCI has agreed to make fixed monthly payments to an entity attributed
to Liberty Media Group pursuant to an affiliation agreement. The fixed
annual commitments increase annually from $190 million in 1999 to $267
million in 2003, and will increase with inflation through 2022. In
addition, TCI is obligated to make minimum revenue payments through
2017 and minimum license fee payments through 2007 aggregating $385
million to an entity attributed to Liberty Media Group. Such minimum
payments are subject to inflation and other adjustments pursuant to the
terms of the underlying agreements.
Effective as of December 16, 1997, NDTC on behalf of the Company and
other cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement with GI to purchase
a minimum of 6.5 million set-top devices during calendar years 1998,
1999 and 2000 at an average price of $318 per set-top device. The 1998
purchase commitment of 1.5 million set-top devices was met. The
agreement with GI was amended in the third quarter of 1999 to change
the remaining minimum purchase commitment for set-top devices to
1,880,000 devices in 1999 and 2,500,000 devices in 2000. During the
nine months ended September 30, 1999, approximately 1.4 million set-top
devices had been purchased under the 1999 commitment. In connection
with NDTC's purchase commitment, GI agreed to grant warrants to
purchase its common stock proportional to the number of devices ordered
by each organization. In connection with the AT&T Merger, such warrants
were transferred to Liberty/Ventures Group in exchange for
approximately $176 million in cash. To the extent such warrants do not
vest because TCI fails to meet its purchase commitments, as amended,
TCI is required to repay a proportional amount of such cash to Liberty
Media Group. NDTC has the right to terminate the agreement if, among
other reasons, GI fails to meet a material milestone designated in the
agreement with respect to the development, testing and delivery of
advanced digital set-top devices.
(continued)
I-41
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 17, 1998, the Company acquired 21.4 million shares of common
stock of GI in exchange for (i) certain of the assets of NDTC's set-top
authorization business, (ii) the license of certain related software to
GI, (iii) a $50 million promissory note from the Company to GI, and
(iv) a nine-year revenue guarantee from the Company in favor of GI. In
connection therewith, NDTC also entered into a services agreement
pursuant to which it will provide certain postcontract services to GI's
set-top authorization business. As a result of the deconsolidation of
Liberty Media Group, the 21.4 million shares of GI common stock are no
longer included in the Company's consolidated assets. The excess of the
fair value of GI common stock received in 1998 over (i) the book value
of certain assets transferred from NDTC to GI, and (ii) the present
value of the promissory note due from the Company to GI, was deferred
by the Company. As a result of the application of purchase accounting
in connection with the AT&T Merger, the deferred amount related to the
revenue guarantee was reduced to $61 million and the remaining deferred
amount was reduced to $48 million.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it
is reasonably possible the Company may incur losses upon conclusion of
such matters, an estimate of any loss or range of loss cannot be made.
In the opinion of management, it is expected that amounts, if any,
which may be required to satisfy such contingencies will not be
material in relation to the accompanying consolidated financial
statements.
(14) Year 2000
During the nine months ended September 30, 1999, the Company continued
its enterprise-wide, comprehensive efforts to assess and remediate its
computer systems and related software and equipment to verify that such
systems, software and equipment recognize, process and store
information in the year 2000 and thereafter. The Company's year 2000
remediation efforts include an assessment of its most critical systems,
such as customer service and billing systems, headends and other cable
plant systems that support the Company's programming services, business
support operations, and other equipment and facilities. The Company
also continued its efforts to verify the year 2000 readiness of its
significant suppliers and vendors and continued to communicate with
significant business partners and affiliates to assess such partners'
and affiliates' year 2000 status.
(continued)
I-42
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 efforts. The PMO is responsible for
overseeing the process and standards of the Company's year 2000
efforts, controlling data, and reporting on the Company's year 2000
efforts. At September 30, 1999, the PMO was comprised of a 133-member,
full-time staff, accountable to executive management of the Company.
During the nine months ended September 30, 1999, the Company continued
its survey of third-party vendors and suppliers whose systems, services
or products are important to the Company's operations, and whose year
2000 readiness is critical to continued provision of the Company's
cable service. The Company has examined the public disclosures
regarding the year 2000 readiness status made by vendors of critical
systems products utilized by the Company (such as addressable
controllers, accounting systems and other critical hardware and
software), and the public disclosures regarding the year 2000 readiness
status made by critical suppliers (such as utilities, banking, and
similar critical operational services). Verification of the survey
results may include, as deemed necessary, conducting functionality
tests, reviewing vendors' and suppliers' test data, scripts and
certifications, engaging in regular conferences with vendors' and
suppliers' year 2000 teams, or re-examining public disclosures for
changes in status. The Company generally has required any new vendors
to provide assurances that their products and services are year 2000
ready. For those critical vendors that may not be year 2000 ready by
year end, contingency plans will be implemented.
Significant market value is associated with the Company's investments
in certain public and private corporations, partnerships and other
businesses. Accordingly, the Company is monitoring the public
disclosure of such publicly-held business entities, including CSC and
@Home, to determine their year 2000 readiness. In addition, the Company
has surveyed and monitored the year 2000 status of certain
privately-held business entities in which the Company has significant
investments.
Year 2000 expenses and capital expenditures incurred during the seven
months ended September 30, 1999 were $47 million and $18 million,
respectively. Year 2000 expenses and capital expenditures incurred
during the two months ended February 28, 1999 were $11 million and $2
million, respectively. Year 2000 expenses and capital expenditures for
the seven months ended September 30, 1999 are exclusive of costs
attributable to Liberty Media Group, which was deconsolidated as of
March 1, 1999. See note 2. Management of the Company currently
estimates the remaining costs, exclusive of future costs attributable
to the assessment and remediation of year 2000 issues associated with
Liberty Media Group, to be not less than $25 million, bringing the
total estimated cost associated with the Company's year 2000
remediation efforts to be not less than $117 million (including $36
million for replacement of noncompliant information technology
systems). Also included in this estimate is $7 million in future
payments to be made pursuant to unfulfilled executory contracts or
commitments with vendors for year 2000 remediation services.
(continued)
I-43
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There
can be no assurance that the Company's systems or the systems of other
companies on which the Company relies will be converted in time or that
any such failure to convert by the Company or other companies will not
have a material adverse effect on its financial position, results of
operations or cash flows.
(15) Information about the Company's Operating Segments
Prior to the AT&T Merger, Old TCI had two reportable segments: domestic
cable and communications services and domestic programming services.
Domestic cable and communications services receive video, audio and
data signals from various sources, and amplify and distribute the
signals by coaxial cable and optical fiber to the premises of customers
who pay a fee for the service. Domestic programming services are
produced, acquired, and distributed, through all available formats and
media, branded entertainment and informational programming and
software, including multimedia products, delivered in both analog and
digital form. Old TCI's domestic cable and communications services
business and assets were included in TCI Group, and Old TCI's domestic
programming business and assets were included in Old Liberty Group. Old
TCI's principal international businesses and assets and Old TCI's
remaining non-cable and non-programming domestic businesses and assets
were included in TCI Ventures Group.
As described in note 2, immediately prior to the AT&T Merger, Old TCI
purchased certain assets from Liberty/Ventures Group and the net assets
attributed to Liberty Media Group were deconsolidated. As a result of
these transactions, domestic cable and communications services is the
only reportable segment of New TCI. Accordingly, segment information is
not provided for New TCI.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Old TCI evaluated
performance based on a measure of "Operating Cash Flow" (defined by the
Company as operating income before depreciation, amortization, other
non-cash items, year 2000 costs, AT&T merger and integration costs and
stock compensation). Operating Cash Flow is a measure of value and
borrowing capacity within the cable television industry and is not
intended to be a substitute for cash flow provided by operating
activities, or a measure of performance prepared in accordance with
generally accepted accounting principles, and should not be relied upon
as such.
Old TCI generally accounted for intersegment sales and transfers as if
the sales or transfers were to third parties, that is, at current
market prices.
Old TCI's reportable segments were strategic business units that
offered different products and services. They were managed separately
because each segment required different technology and marketing
strategies.
(continued)
I-44
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Old TCI utilized the following interim financial information for
purposes of making decisions about allocating resources to a segment
and assessing a segment's performance:
<TABLE>
<CAPTION>
Domestic cable Domestic
& communications programming All
services services other Total
---------------- ------------ ------------ ------------
amounts in millions
<S> <C> <C> <C> <C>
Two months ended
February 28, 1999:
External and intersegment revenue $ 902 128 165 1,195
Intersegment revenue $ -- 39 11 50
Segment Operating Cash Flow $ 301 30 25 356
Three months ended
September 30, 1998:
External and intersegment revenue $ 1,497 176 249 1,922
Intersegment revenue $ (4) 69 14 79
Segment Operating Cash Flow $ 603 31 43 677
Nine months ended
September 30, 1998:
External and intersegment revenue $ 4,613 498 685 5,796
Intersegment revenue $ (13) 210 36 233
Segment Operating Cash Flow $ 1,882 75 88 2,045
</TABLE>
(continued)
I-45
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of reportable segment Operating Cash Flow to Old TCI's
consolidated earnings (loss) before income taxes and extraordinary
items is as follows:
<TABLE>
<CAPTION>
Old TCI
------------------------------------------
Two months Nine months
ended ended
February 28, 1999 September 30, 1998
------------------ ------------------
amounts in millions
<S> <C> <C>
Total Operating Cash Flow for reportable segments 331 1,957
Other Operating Cash Flow 25 88
Other items excluded from Operating
Cash Flow:
Year 2000 costs (11) (6)
AT&T merger and integration costs (65) (11)
Stock compensation (366) (423)
Reserve for loss arising from contingent obligation -- --
Write-off of in-process research and development costs -- --
Depreciation and amortization (277) (1,289)
Interest expense (161) (807)
Interest and dividend income 13 72
Share of losses of Liberty Media Group -- --
Share of losses of the Other Affiliates, net (161) (986)
Minority interest in earnings of consolidated
subsidiaries, net (26) (95)
Gains on issuance of equity interests by subsidiaries 389 55
Gain on issuance of stock by equity investee -- 259
Gains on disposition of assets, net 144 3,704
Other, net 8 (25)
------------------ ------------------
Earnings (loss) before income taxes and
extraordinary items (157) 2,493
================== ==================
</TABLE>
I-46
