<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: March 27, 2000
AT&T CORP.
A New York Commission File I.R.S. Employer
Corporation No. 1-1105 No.13-4924710
32 Avenue of the Americas, New York, New York 10013-3412
Telephone Number (212) 387-5400
<PAGE> 2
Form 8-K AT&T Corp.
March 27, 2000
ITEM 5 OTHER EVENTS.
a) Pro forma financial information
AT&T is filing pro forma financial information included in Exhibit 99 as
follows:
1. Unaudited pro forma condensed financial introductory paragraphs.
2. Unaudited pro forma condensed balance sheet at December 31, 1999.
3. Unaudited pro forma condensed income statement for the year ended
December 31, 1999.
4. Notes to unaudited pro forma condensed financial information.
b) In support of the pro forma financial information included in Exhibit 99,
AT&T is filing the audited financial statements as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999
of MediaOne Group, Inc., including the report of independent accountants.
Filed as Exhibit 99.1 to this 8-K is the following information:
1. Report of Independent Accountants.
2. Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.
3. Consolidated Balance Sheets at December 31, 1999 and 1998.
4. Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
5. Consolidated Statement of Shareowners' Equity for the years ended
December 31, 1999, 1998 and 1997.
6. Notes to consolidated financial statements.
ITEM 7 Financial Statements and Exhibits.
c) Exhibits
Exhibit 23 Consent of Arthur Andersen LLP.
Exhibit 99 AT&T unaudited pro forma condensed financial results at and
for the year ended December 31, 1999.
Exhibit 99.1 MediaOne Group, Inc. financial results and other information
for the year ended December 31, 1999.
<PAGE> 3
Form 8-K AT&T Corp.
March 27, 2000
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
March 27, 2000
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
report dated February 28, 2000 included in MediaOne Group, Inc.'s consolidated
financial statements for the year ended December 31, 1999, filed in AT&T
Corp.'s Form 8-K dated March 27, 2000.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
March 27, 2000.
<PAGE> 1
Exhibit 99
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma information set forth below for AT&T gives effect to the
MediaOne Group, Inc. (MediaOne Group) and Tele-Communications, Inc. (TCI)
mergers as if they had been completed on January 1, 1999, for income statement
purposes, and as if the MediaOne Group merger had been completed on December 31,
1999, for balance sheet purposes, subject to the assumptions and adjustments in
the accompanying notes to the pro forma information. The TCI merger was
completed on March 9, 1999, and therefore, TCI is reflected in the December 31,
1999, balance sheet, accordingly there is no pro forma TCI impact on the balance
sheet. As a result of the TCI merger, AT&T is accounting for Liberty Media Group
(LMG) under the equity method of accounting because AT&T does not have a
controlling financial interest for financial accounting purposes in LMG.
The pro forma adjustments do not reflect any operating efficiencies and cost
savings that may be achieved with respect to the combined company. The pro forma
adjustments do not include any adjustments to historical sales for any future
price changes nor any adjustments to selling, marketing or any other expenses
for any future operating changes. Upon the closing of the MediaOne Group merger,
AT&T may incur certain integration related expenses not reflected in the pro
forma financial statements as a result of the elimination of duplicate
facilities, operational realignment and related workforce reductions. Such costs
would generally be recognized by AT&T as a liability assumed as of the merger
date resulting in additional goodwill in accordance with Emerging Issues Task
Force No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination ("EITF 95-3"). The assessment of integration related
expenses is ongoing. The following pro forma information is not necessarily
indicative of the financial position or operating results that would have
occurred had the MediaOne Group merger, and the TCI merger, been consummated on
the dates, or at the beginning of the periods, for which such transactions are
being given effect. The pro forma adjustments reflecting the consummation of the
merger are based upon the assumptions set forth in the notes hereto, including
the exchange of all of the outstanding shares of MediaOne Group for an aggregate
of approximately 608 million shares of AT&T common stock not including AT&T
stock options.
AT&T will account for the MediaOne Group merger under the purchase method of
accounting. Accordingly, AT&T will establish a new basis for MediaOne Group's
assets and liabilities based upon the fair values and the AT&T purchase price
including the costs of the merger. The purchase accounting adjustments made in
connection with the development of the pro forma condensed financial statements
are preliminary and have been made solely for purposes of developing such pro
forma condensed financial information. Such preliminary adjustments include the
allocation of consideration to certain investments of MediaOne Group identified
as "assets held for sale" by the AT&T Board of Directors based upon fair value
as determined by AT&T in conjunction with its financial advisors.
AT&T currently knows of no events other than those disclosed in these pro forma
notes that would require a material change to the preliminary purchase price
allocation of MediaOne Group. However, a final determination of required
purchase accounting adjustments will be made upon the completion of a study to
be undertaken by AT&T in conjunction with independent appraisers to determine
the fair value of certain of MediaOne Group's assets and liabilities, including
intangible assets and in-process research and development. Refer to note 3 for a
discussion of the sensitivity to earnings that may occur as a result of the
final determination of fair value. Assuming completion of the merger, the actual
financial position and results of operations will differ, perhaps significantly,
from the pro forma amounts reflected herein because of a variety of factors,
including access to additional information, changes in value not currently
identified and changes in operating results between the dates of the pro forma
financial data and the date on which the merger takes place.
<PAGE> 2
AT&T
Unaudited Pro Forma Condensed Balance Sheet
As of December 31, 1999
(In millions)
<TABLE>
<CAPTION>
MediaOne Pro Forma
Historical Group AT&T with
Historical MediaOne Pro Forma MediaOne
AT&T(1) Group(1) Adjustments Group
------- ------ ----------- -----
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................ $ 1,024 $ 7,471 $ (345)(3d) $ 7,722
20,201 (6)
(20,201)(3a)
(428)(3)
Receivables--net......................... 10,453 489 -- 10,942
Other current assets..................... 2,407 160 -- 2,567
------- ------- ------- --------
Total current assets............ 13,884 8,120 (773) 21,231
Property, plant and equipment net........ 39,618 5,090 -- 44,708
Franchise-net............................ 32,693 -- 21,942 (3n) 54,635
Licensing cost-net....................... 8,548 -- -- 8,548
Goodwill-net............................. 7,445 11,507 23,282 (3o) 30,727
(11,507)(3f)
Investment in Liberty Media Group and
related receivables..................... 38,460 -- -- 38,460
Other investments........................ 19,366 11,315 (969)(5) 42,824
13,112(3h)
Other assets............................. 9,392 2,816 (1,671)(5) 9,037
(1,500)(4)
Assets held for sale..................... -- 938 2,640 (5) 9,498
5,920(3i)
------- ------- ------- --------
Total assets............................. $169,406 $39,786 $ 50,476 $ 259,668
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C>
LIABILITIES:
Accounts payable......................... $ 6,771 $ 350 $ -- $ 7,121
Debt maturing within one year............ 12,633 1,506 20,201 (6) 32,840
(1,500)(4)
Other current liabilities................ 8,803 2,389 -- 11,192
------- ------- ------- --------
Total current liabilities................ 28,207 4,245 18,701 51,153
Long-term debt........................... 21,591 8,673 206 (3j) 30,470
Deferred income taxes.................... 24,199 7,711 12,706 (3m) 44,616
Other long-term liabilities and deferred
credits.................................. 7,765 168 -- 7,933
------- ------- ------- --------
Total liabilities........................ 81,762 20,797 31,613 134,172
Minority interest........................ 2,391 1,113 46 (3l) 3,550
Company-obligated convertible quarterly
income preferred securities of a
subsidiary trust holding solely
subordinated debt securities of AT&T.... 4,700 -- -- 4,700
Subsidiary-obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely subordinated debt securities
of subsidiaries......................... 1,626 1,060 (16)(3k) 2,670
Preferred stock subject to mandatory
redemption.............................. -- 50 (50)(3g) 50
50 (3c)
Common stock............................. 3,196 11,448 (11,020)(3e) 3,804
(428)(3e)
608 (3b)
Liberty Media Group Class A tracking
stock................................... 1,157 -- -- 1,157
Liberty Media Group Class B tracking
stock................................... 108 -- -- 108
Additional paid-in capital............... 60,792 -- 34,991 (3b) 95,783
Retained earnings........................ 6,712 4,123 (4,123)(3e) 6,712
Other.................................... 6,962 1,195 (1,195)(3e) 6,962
------- ------ ------- --------
Total shareowners' equity....... 78,927 16,766 18,833 114,526
Total liabilities and shareowners' equity $169,406 $39,786 $ 50,476 $ 259,668
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements
<PAGE> 4
AT&T
Unaudited Pro Forma Condensed Statement of Income
For the Year ended December 31, 1999
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Historical Liberty/
TCI Ventures Other TCI
Historical (Jan-Feb Group Pro Forma
AT&T(1) '99)(1) Adjustment(2) Adjustments(9)
<S> <C> <C> <C> <C>
REVENUE ......................... $ 62,391 $ 1,145 $ (204) $--
OPERATING EXPENSES:
Access and other
interconnection ................. 14,686 -- -- --
Network and other costs of
services ........................ 14,385 543 (79) --
Selling, general and
administrative .................. 13,516 677 (260) --
Depreciation and
amortization .................... 7,439 277 (22) 120
Net restructuring and other
charges ......................... 1,506 -- -- --
-------- -------- ------- --------
Total operating expenses ...... 51,532 1,497 (361) 120
OPERATING INCOME (LOSS) ......... 10,859 (352) 157 (120)
Equity losses from Liberty
Media Group .................... (2,022) -- (68) (156)
Other income (expense) Net ...... (501) 356 (321) (45)
Interest expense ................ 1,651 161 (25) 82
Income (loss) from continuing
operations before income
taxes ........................... 6,685 (157) (207) (403)
Provision (benefit) for income
taxes ........................... 3,257 119 (207) (111)
-------- -------- ------- --------
Income (loss) from continuing
operations ...................... 3,428 (276) -- (292)
Dividend requirements on
preferred stocks ................ -- (4) -- --
-------- -------- ------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ATTRIBUTABLE TO AT&T
COMMON SHAREOWNERS .............. $ 3,428 $ (280) $-- $ (292)
======== ======== ======= ========
AT&T EPS CALCULATION:
Income from continuing operations
attributable to AT&T common
shareowners ..................... $ 5,450
Weighted average shares
outstanding (basic) ............. 3,082
Basic EPS ....................... $ 1.77
Income from continuing operations
attributable to AT&T common
shareowners ..................... $ 5,476
Weighted average shares
outstanding (diluted) ........... 3,152
Diluted EPS ..................... $ 1.74
Liberty Media Group EPS
Basic and Diluted ............... $ (1.61)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
MediaOne AT&T With
Pro Forma Historical Group Pro TCI and
AT&T MediaOne Forma MediaOne
With TCI Group(1) Adjustments Group
<S> <C> <C> <C> <C>
REVENUE ............................................... $ 63,332 $ 2,695 $-- $ 66,027
OPERATING EXPENSES:
Access and other
interconnection........................................ 14,686 -- -- 14,686
Network and other costs of
services .............................................. 14,849 1,069 -- 15,918
Selling, general and
administrative......................................... 13,933 749 -- 14,682
Depreciation and
amortization .......................................... 7,814 1,248 1,131(7) 9,674
(519)(8)
Net restructuring and other
charges ............................................... 1,506 -- -- 1,506
-------- -------- ------- --------
Total operating expenses ............................ 52,788 3,066 612 56,466
OPERATING INCOME (LOSS) ............................... 10,544 (371) (612) 9,561
Equity losses from Liberty
Media Group .......................................... (2,246) -- -- (2,246)
Other income (expense) Net ............................ (511) 7,551 (970)(7) 7,570
1,500(4)
Interest expense ..................................... 1,869 449 1,192(10) 3,474
(36)(7)
Income (loss) from continuing
operations before income
taxes ................................................. 5,918 6,731 (1,238) 11,411
Provision (benefit) for income
taxes ................................................. 3,058 3,217 (887)(11) 5,388
-------- -------- ------- --------
Income (loss) from continuing
operations ............................................ 2,860 3,514 (351) 6,023
Dividend requirements on
preferred stocks ...................................... (4) (77) 46(12) (35)
-------- -------- ------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ATTRIBUTABLE TO AT&T
COMMON SHAREOWNERS .................................... $ 2,856 $ 3,437 $ (305) $ 5,988
======== ======== ======== ========
AT&T EPS CALCULATION:
Income from continuing operations
attributable to AT&T common
shareowners ........................................... $ 5,102 $ 8,234
Weighted average shares
outstanding (basic) .................................. 3,181 3,789
Basic EPS ............................................. $ 1.60 $ 2.17
Income from continuing operations
attributable to AT&T common
shareowners ........................................... $ 5,128 $ 8,260
Weighted average shares
outstanding (diluted) ................................ 3,299 3,916
Diluted EPS ........................................... $ 1.55 $ 2.11
Liberty Media Group EPS
Basic and Diluted ..................................... $ (1.78) $ (1.78)
</TABLE>
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements
<PAGE> 5
Notes to Unaudited AT&T Condensed Pro Forma Financial Statements
1. These columns reflect the historical results of operations and financial
position of the respective companies. AT&T's historical balance sheet as of
December 31, 1999, gives effect to the TCI merger.
2. This column reflects the deconsolidation to the equity method of accounting
of the historical results of operations for the interests represented by
the shares of LMG tracking stock. AT&T accounts for LMG under the equity
method because it does not possess a "controlling financial interest" for
financial accounting purposes in LMG.
3. This adjustment reflects the acquisition of MediaOne Group and the excess
consideration over net assets acquired (goodwill). Accordingly, the
historical shareowners' equity accounts of MediaOne Group have been
eliminated (entry 3e). For the purpose of these pro forma financial
statements, consideration has been calculated assuming a mixed cash and
stock election pursuant to the terms of the merger agreement of $30.85 in
cash and 0.95 of a share of AT&T common stock for each share of MediaOne
Group common stock outstanding at the pro forma balance sheet date. The
merger agreement specifies the aggregate number of shares of AT&T common
stock to be issued in exchange for shares of MediaOne Group common stock
and equivalents. The different election provisions are intended to satisfy
individual MediaOne Group shareholder and optionholder preferences to the
extent possible. Each election may be subject to proration depending upon
the consideration other shareholders and optionholders elect to receive in
the merger. Accordingly, under the terms of the merger, the impact of such
election provisions on the total consideration exchanged will not
materially differ from the mixed cash and stock election assumed in the pro
forma financial information. If the price of AT&T common stock is less than
$57.00 per share during a prescribed measurement period shortly prior to
the closing of the merger, an additional cash payment of up to $5.42 per
share of MediaOne Group common stock will be paid by AT&T for shares of
MediaOne Group common stock subject to the mixed cash and stock election.
In that event, a new measurement date for the purpose of valuing AT&T
common stock for accounting purposes would be established. The aggregate
purchase price consideration would change $608 million (not including the
additional cash payment) for each $1 per share change in the value of the
AT&T common stock based on the average price a few days before and after
the merger is consummated affecting net income by $15 million annually
based on a 40 year franchise/goodwill amortization period.
These pro forma financial statements reflect MediaOne Group's repurchase of
approximately 7.4 million shares of MediaOne Group common stock in January
and February 2000 as part of a share repurchase program authorized by the
MediaOne Group Board of Directors in 1998. The AT&T Series E preferred
stock to be issued as consideration in exchange for the MediaOne Group
Series E preferred stock has been valued based on the security's
liquidation value which approximates fair value. All outstanding and
unvested options to purchase shares of MediaOne Group common stock will
vest upon completion of the merger and have been included as consideration
assuming a "standard option election" pursuant to the terms of the merger
agreement. Under the standard option election, each MediaOne Group
optionholder will receive cash and a converted option to purchase AT&T
common stock, the fair value of which was determined by using the
Black-Scholes option-pricing model.
<PAGE> 6
This adjustment reflects the acquisition of MediaOne Group and the excess
consideration over net assets acquired (goodwill) (in millions, except per
share amounts).
<TABLE>
<S> <C>
Shares of MediaOne Group common stock outstanding at 12/31/99 .............. 647.4
Shares of MediaOne Group common stock repurchased in January and
February 2000 ............................................................ 7.4
Shares of MediaOne Group common stock to be exchanged for cash and AT&T
common stock ............................................................. 640
Cash per share.......................................................... $30.85
Cash consideration for outstanding shares............................... $19,744
Cash consideration for 28.4 million outstanding options (average cash
payment per option of $16.09)......................................... $457
a. Total cash consideration ......................................................... $ 20,201
AT&T common stock exchange ratio per share ....................................... 0.95
Equivalent AT&T shares (par value $1) ............................................ 608
AT&T common stock share price based on the average closing price a few days
before and after the merger was agreed to and announced ........................ $ 57.05
SUB-TOTAL ........................................................................ $ 34,686
AT&T stock options resulting from the conversion of MediaOne Group stock
options in the merger .......................................................... 27.0
Average fair value per option .................................................... $ 33.81
SUB-TOTAL ........................................................................ $ 913
b. AT&T common stock equity consideration ........................................... $ 35,599
c. Value of AT&T Series E preferred stock to be issued in exchange for MediaOne Group
Series E preferred stock at liquidation value (996 thousand outstanding
shares at $50 per share) ...................................................... 50
d. Merger costs (estimate) .......................................................... 345
TOTAL CONSIDERATION ............................................................ $ 56,195
e. Historical net book value of MediaOne Group, adjusted to reflect the
January and February 2000 MediaOne Group share repurchases ................... (16,338)
Pro Forma Adjustments relating to:
f. Existing MediaOne Group intangible assets ........................................ 11,507
g. Exchange of MediaOne Group Series E preferred stock .............................. (50)
h. Investments ...................................................................... (13,112)
i. Assets held for sale (see note 5) ................................................ (5,920)
j. Debt ............................................................................. 206
k. Subsidiary-Obligated Mandatorily redeemable preferred securities ................. (16)
l. Minority interest in Centaur Funding Corporation ................................. 46
m. Deferred tax impacts ............................................................. 12,706
n. Franchise intangible ............................................................. (21,942)
o. Preliminary goodwill....................................................... $ 23,282
</TABLE>
Upon the closing of the merger, the total consideration will be allocated to the
specific identifiable tangible and intangible assets and liabilities of MediaOne
Group after the completion of third-party appraisals during the allocation
period specified by Statement of Financial Accounting Standards No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. A
preliminary allocation of the purchase price has been made to certain
identifiable tangible assets, the franchise intangible, and liabilities of
MediaOne Group, including deferred income tax impacts, based upon information
available to the management of AT&T at the date of the preparation of the
accompanying pro forma condensed financial statements. Such information includes
quoted market prices where available and estimates of fair values provided in
conjunction with AT&T's financial advisors. The final purchase accounting
allocation may also include certain in-process research and development projects
and intangible assets such as customer relationships.
<PAGE> 7
Consideration allocated to in-process research and development projects would be
recorded as a charge against net income in the period the merger occurs. Each $1
billion allocated to in-process research and development would have the effect
of increasing net income in subsequent periods by $25 million annually by
reducing franchise/goodwill amortization expense. A preliminary estimate of
in-process research and development will not be available until the completion
of an independent evaluation of each project, if any, in process as of the
merger date.
Assuming an estimated useful life of 10 years, each $1 billion of consideration
allocated to intangible assets other than franchise/goodwill would have the
effect of decreasing net income by $46 million annually ($0.01 per diluted
share). Certain restructuring related costs may be recorded by AT&T as a
liability upon the closing of the merger in accordance with EITF 95-3 that would
result in additional goodwill to be amortized over 40 years.
4. As a result of the termination of the merger agreement between MediaOne
Group and Comcast, MediaOne Group paid Comcast a termination fee of $1.5
billion. The termination fee was loaned to MediaOne Group by AT&T and was
recorded on MediaOne Group's balance sheet as a note payable to AT&T. The
note bears interest at LIBOR plus 0.15% and matures on December 31, 2000.
The note is due on demand at any time following consummation of the merger.
For the purpose of the pro forma financial statements, the note payable to
AT&T has been eliminated in consolidation and the non-recurring charge has
been eliminated from the condensed statement of income for the year ended
December 31, 1999.
5. MediaOne Group and AT&T intend to divest over a period of time not expected
to exceed one year from the date of the closing of the merger certain
nonstrategic MediaOne Group assets preliminarily valued at $9,498 million.
MediaOne Group currently accounts for the majority of these assets as
equity method investments. The carrying value of assets intended to be sold
have been reclassified to the balance sheet caption "assets held for sale"
($969 million from "Other investments" and $1,671 million from "Other
assets"). Such assets have been valued at their expected disposition value
using valuation methodologies prevalent in the industry ($5,920 million
represents the excess of fair value over carrying value).
6. Reflects additional borrowings equal to the cash consideration to be
exchanged in the merger. The incremental borrowings are assumed to be
short-term indebtedness as AT&T intends to repay a portion of the debt with
the proceeds from the sale of certain nonstrategic MediaOne Group assets
that occurred in 1999 and are expected to occur in 2000 (see Note 5).
7. Represents the amortization of franchise and goodwill resulting from the
preliminary allocation of the excess of consideration over the net assets
of MediaOne Group. AT&T expects the amount of excess consideration
allocated to goodwill and franchise agreements upon completion of
third-party appraisals to be amortized over 40 years. The Chief
Accountant's office of the Securities and Exchange Commission (SEC) has
notified AT&T that as a result of competitive, technological and regulatory
forces, the SEC believes the expiration of the intangible assets associated
with the merger could occur sooner than 40 years. The SEC believes a more
reasonable amortization period to be in the range of 20 to 25 years. AT&T
has considered the views of the SEC but continues to believe that
consideration allocated to franchise agreements and goodwill has an
indeterminate life that is to be amortized over the maximum period of 40
years under current generally accepted accounting principles. The
amortization period for goodwill and franchise intangibles of 40 years is
based by AT&T upon the expected useful life of the franchise agreements and
value related to the access to homes passed that is integral to AT&T's
strategy of providing fully-integrated facilities-based residential
communications services on a national basis. The factors considered in
determining the appropriate amortization period included the expected life
of the associated technology including hybrid fiber optic cable, legal and
regulatory considerations, experience with renewing franchises and
territories, future changes in technology, anticipated market demand and
competition. If the franchise intangible and goodwill (including cable
investments) were amortized over a period of 25 years, AT&T's net income
would be reduced annually by $597 million, or $0.15 per diluted share. If
the amortization period were 20 years, AT&T's net income would be reduced
by $1,033 million, or $0.26 per diluted share annually . An allocation to
customer relationships and other intangible assets with shorter
amortization periods will be made, although the amounts allocated are not
expected to be material. AT&T will evaluate the periods of amortization
continually to determine whether later events and circumstances warrant
revised estimates of useful lives. As discussed in Note 3, amounts
allocated to other assets such as intangible assets may be amortized over
shorter periods resulting in a lower net income. Any amount allocated to
goodwill will also be impacted by any in-process research and development
charge that may be recorded. An assessment of the useful lives attributable
to other assets is not complete. Consideration allocated to MediaOne Group
investments has been amortized over the estimated period of benefit
preliminarily
<PAGE> 8
estimated to range from seven to 30 years. Interest expense accretion on
MediaOne Group debt and other mezzanine obligations has been recognized
over the remaining life of the debt.
8. Gives effect to the elimination of MediaOne Group historical amortization
expense.
9. Represents TCI merger purchase accounting adjustments. These adjustments
include the amortization of the excess of the purchase price over the net
assets acquired and incremental interest expense on additional borrowings.
The TCI merger closed on March 9, 1999.
10. Represent the recognition of incremental interest expense on the additional
borrowings incurred to fund the cash consideration to be exchanged in the
merger. See note 6. Interest expense was calculated using an interest rate
of 5.90%. The interest rate reflects the 90-day commercial paper rate in
effect as of February 29, 2000. An increase of 25 basis points in the
assumed interest rates would result in additional pre-tax interest expense
of $51 million.
11. Reflects the statutory tax effect of the pro forma adjustments.
12. Gives effect to the elimination of dividend requirements on MediaOne Group
Series C preferred stock, which were redeemed in the third quarter of 1999
and MediaOne Group Series D preferred stock which were converted into
MediaOne Group common stock in the fourth quarter of 1999.
<PAGE> 1
Exhibit 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of MediaOne Group, Inc.:
We have audited the accompanying Consolidated Balance Sheets of
MediaOne Group, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998, and the related Consolidated Statements of Operations,
Shareowners' Equity and Cash Flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
MediaOne Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 28, 2000.
44
<PAGE> 2
REPORT OF MANAGEMENT
The Consolidated Financial Statements of MediaOne Group have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis. The integrity and objectivity of information in these
financial statements, including estimates and judgments, are the responsibility
of management, as is all other financial information included in this report.
MediaOne Group maintains a system of internal accounting controls
designed to provide reasonable assurance as to the integrity and reliability of
financial statements, the safeguarding of assets and the prevention and
detection of material errors or fraudulent financial reporting. Monitoring of
such systems includes an internal audit program designed to objectively assess
the effectiveness of internal controls and recommend improvements therein.
Limitations exist in any system of internal accounting controls based
upon the recognition that the cost of the system should not exceed the benefits
derived. MediaOne Group believes that the Company's system does provide
reasonable assurance that transactions are executed in accordance with
management's general or specific authorizations and is adequate to accomplish
the stated objectives.
The independent certified public accountants, whose report is included
herein, were engaged to express an opinion on our Consolidated Financial
Statements. Their opinion is based on procedures performed in accordance with
generally accepted auditing standards, including examining, on a test basis,
evidence supporting the amounts and disclosures in the Consolidated Financial
Statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
In an attempt to assure objectivity, the financial information
contained in this report is subject to review by the Audit Committee of the
Board of Directors. The Audit Committee is composed of outside directors who
meet regularly with management, internal auditors and independent auditors to
review financial reporting matters, the scope of audit activities and the
resolution of audit findings.
Charles M. Lillis
President and Chief Executive Officer
Richard A. Post
Executive Vice President and
Chief Financial Officer
February 28, 2000
45
<PAGE> 3
MEDIAONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- -------- -------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Sales and other revenues ..................................... $ 2,695 $ 2,882 $ 3,847
Operating expenses:
Cost of sales and other revenues .......................... 1,069 1,013 1,255
Selling, general and administrative ....................... 749 926 1,305
Depreciation and amortization ............................. 1,248 1,182 1,257
------- -------- -------
Total operating expenses ............................... 3,066 3,121 3,817
------- -------- -------
Operating income (loss) ...................................... (371) (239) 30
Interest expense ............................................. (449) (491) (678)
Equity losses in unconsolidated ventures ..................... (256) (417) (909)
Gains (losses) on investments:
Sales of domestic investments ............................. 510 54 206
Sales and exit costs of international investments - net ... 6,582 16 215
Exchange of AirTouch investment ........................... 2,482 -- --
Sale of domestic wireless investment ...................... -- 3,869 --
PrimeStar investment ...................................... (49) (163) --
Minority interest expense in Centaur Funding ................. (122) -- --
Guaranteed minority interest expense ......................... (95) (74) (87)
Merger costs ................................................. (1,810) -- --
Other income - net ........................................... 309 83 16
------- -------- -------
Income (loss) from continuing operations before income taxes . 6,731 2,638 (1,207)
(Provision) benefit for income taxes ......................... (3,217) (1,208) 380
------- -------- -------
Income (loss) from continuing operations ..................... 3,514 1,430 (827)
Income from discontinued operations - net of tax:
Results of operations ..................................... -- 747 1,524
Gain on Separation ........................................ -- 24,461 --
------- -------- -------
Income before extraordinary item ............................. 3,514 26,638 697
Extraordinary item - early extinguishment of debt - net of tax 17 (333) --
------- -------- -------
NET INCOME ................................................... $ 3,531 $ 26,305 $ 697
======= ======== =======
Preferred stock dividends and accretion ...................... (49) (55) (52)
Loss on redemption of preferred securities ................... (28) (53) --
------- -------- -------
EARNINGS AVAILABLE FOR COMMON STOCK(1)........................ $ 3,454 $ 26,197 $ 645
======= ======== =======
</TABLE>
- ----------
(1) In 1998 the Company distributed $25,345 as a dividend to New U S WEST
stockholders upon the Separation representing the fair value of the
businesses comprising New U S WEST.
The accompanying notes are an integral part of the
Consolidated Financial Statements.
46
<PAGE> 4
MEDIAONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- --------
IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS
<S> <C> <C> <C>
MEDIAONE GROUP STOCK(1)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations ........ $ 5.62 $ 2.18 $ (1.45)
Income from discontinued operations(2) .......... -- 0.26 0.57
Gain on Separation .............................. -- 40.25 --
Extraordinary item - early extinguishment of debt 0.03 (0.55) --
-------- -------- --------
Basic earnings (loss) per common share ............. $ 5.65 $ 42.14 $ (0.88)
======== ======== ========
BASIC AVERAGE COMMON SHARES OUTSTANDING ............ 611,623 607,648 606,749
======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations ........ $ 5.32 $ 2.10 $ (1.45)
Income from discontinued operations(2) .......... -- 0.24 0.57
Gain on Separation .............................. -- 37.46 --
Extraordinary item - early extinguishment of debt 0.03 (0.51) --
-------- -------- --------
Diluted earnings (loss) per common share(3) ........ $ 5.34 $ 39.29 $ (0.88)
======== ======== ========
DILUTED AVERAGE COMMON SHARES OUTSTANDING .......... 654,911 652,955 606,749
======== ======== ========
</TABLE>
- ----------
(1) For additional earnings per share information of MediaOne Group Stock
and earnings per share information of Communications Stock, see Note 17
- Earnings Per Share - to the Consolidated Financial Statements.
(2) Amounts represent the operations of U S WEST Dex, Inc., which were
discontinued as of June 12, 1998.
(3) Amounts may not add due to rounding of components.
The accompanying notes are an integral part of the
Consolidated Financial Statements.
47
<PAGE> 5
MEDIAONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
DOLLARS IN
MILLIONS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 7,471 $ 415
Accounts and notes receivable, less allowance for credit
losses of $20 and $31, respectively ................... 489 255
Income tax receivable ................................... -- 375
Current portion of deferred tax asset ................... 69 74
Prepaid and other ....................................... 29 33
Marketable securities ................................... 62 48
------- -------
Total current assets ....................................... 8,120 1,200
Property, plant and equipment-net .......................... 5,090 4,069
Investment in Vodafone Group / AirTouch Communications ..... 8,718 5,919
Investment in Time Warner Entertainment .................... 2,597 2,442
Net investment in international ventures held for sale ..... 938 --
Net investment in international ventures ................... -- 1,344
Intangible assets - net .................................... 11,507 11,647
Other assets ............................................... 2,816 1,571
------- -------
Total assets ............................................... $39,786 $28,192
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt ......................................... $ 1,506 $ 569
Accounts payable ........................................ 350 332
Employee compensation ................................... 92 80
Deferred revenue and customer deposits .................. 174 87
Current income taxes payable ............................ 1,552 --
Other ................................................... 571 546
------- -------
Total current liabilities .................................. 4,245 1,614
Long-term debt ............................................. 8,673 4,853
Deferred income taxes ...................................... 7,711 6,035
Deferred credits and other ................................. 168 641
Commitments and contingencies
Minority interest in Centaur Funding ....................... 1,113 1,099
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Company-guaranteed subordinated debentures .............. 1,060 1,061
Preferred stock subject to mandatory redemption ............ 50 100
Shareowners' equity:
Series D Preferred Stock - $1.00 per share par value,
20,000,000 shares authorized, zero and 19,999,478
shares issued and outstanding ........................ -- 927
Common shares -
MediaOne Group Stock - $0.01 per share par value,
2,000,000,000 shares authorized, 669,148,081 and
630,915,792 issued, and 647,361,370 and 603,475,920
outstanding, respectively ............................ 11,448 10,324
Retained earnings ....................................... 4,123 669
Accumulated other comprehensive income .................. 1,195 869
------- -------
Total shareowners' equity .................................. 16,766 12,789
------- -------
Total liabilities and shareowners' equity .................. $39,786 $28,192
======= =======
</TABLE>
The accompanying notes are an integral part of the
Consolidated Financial Statements.
48
<PAGE> 6
MEDIAONE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- -------- -------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ......................................... $ 3,531 $ 26,305 $ 697
Adjustments to net income:
Discontinued operations ......................... -- (747) (1,524)
Gain on Separation .............................. -- (24,461) --
Extraordinary (gain) loss on debt extinguishment (17) 333 --
Depreciation and amortization ................... 1,248 1,182 1,257
Equity losses in unconsolidated ventures ........ 256 417 909
Merger costs .................................... 1,810 -- --
Gains on sales of domestic investments .......... (510) (54) (206)
Net gain on sales and exit costs of international
investments .................................. (6,582) (16) (215)
Gain on exchange of AirTouch investment ......... (2,482) -- --
Gain on sale of domestic wireless investment .... -- (3,869) --
Loss on PrimeStar investment .................... 49 163 --
Deferred income taxes and amortization of
investment tax credits ....................... 1,509 1,579 (149)
Provision for uncollectibles .................... 31 42 74
Distribution from unconsolidated ventures .......... 12 51 9
Separation costs paid .............................. -- (140) --
Changes in operating assets and liabilities
Accounts and notes receivable, and other current
assets ....................................... (211) 120 (207)
Accounts payable and accrued liabilities ........ 127 (304) 239
Current income taxes payable .................... 1,927 -- --
Other-net .......................................... (180) (37) 111
------- -------- -------
Cash provided by operating activities .............. 518 564 995
------- -------- -------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment ..... (1,983) (1,726) (1,522)
Payment to Continental Cablevision shareowners ..... -- -- (1,150)
Investments in international ventures .............. (130) (583) (334)
Investments in domestic ventures ................... (104) (108) (249)
Purchase of miscellaneous assets ................... -- (92) (25)
Proceeds from sales of investments ................. 6,507 241 1,827
Proceeds on exchange of investment in AirTouch ..... 534 -- --
Cash from net investment in assets held for sale ... -- 31 231
Other-net .......................................... 32 (164) --
------- -------- -------
Cash provided by (used for) investing activities ... 4,856 (2,401) (1,222)
------- -------- -------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt .. (314) 728 (3,556)
Proceeds from issuance of long-term debt-net ....... 2,330 1,642 4,123
Proceeds from issuance of Preferred Securities-net . -- 484 --
Proceeds from issuance of common stock ............. 97 144 106
Proceeds from issuance of Centaur Funding Preference
Shares-net ...................................... -- 1,099 --
Repayments of long-term debt ....................... (333) (5,447) (379)
Repayments of Preferred Securities ................. -- (582) --
Purchases of treasury stock ........................ (46) (383) (53)
Dividends paid on common stock ..................... -- (519) (992)
Dividends paid on preferred stock .................. (52) (51) (50)
------- -------- -------
Cash provided by (used for) financing activities ... 1,682 (2,885) (801)
------- -------- -------
Cash provided by discontinued operations ........... -- 4,953 1,091
------- -------- -------
CASH AND CASH EQUIVALENTS
Increase ........................................ 7,056 231 63
Beginning balance ............................... 415 184 121
------- -------- -------
Ending balance .................................. $ 7,471 $ 415 $ 184
======= ======== =======
</TABLE>
The accompanying notes are an integral part of the
Consolidated Financial Statements.
49
<PAGE> 7
MEDIAONE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME/(LOSS)
----------------------------------
UNREALIZED
GAIN/(LOSS)
PREFERRED COMMON RETAINED FOREIGN ON DEBT AND
STOCK STOCK EARNINGS LESOP CURRENCY EQUITY COMPREHENSIVE
AMOUNT AMOUNT (DEFICIT) GUARANTEE TRANSLATION SECURITIES TOTAL INCOME
--------- ------- --------- --------- ----------- ------------ ------ -------------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 ... $ 920 $10,741 $ 17 $(91) $ (39) $ 1 $ (38)
Issuance of Communications
Stock .................... 138
Issuance of MediaOne Group
Stock .................... 40
Purchase of treasury stock .. (53)
Common dividends declared
($2.14 per Communications
share) ................... (1,034)
Preferred dividends ......... 3 (52)
Other ....................... 10 13 45
Comprehensive Income:
Net income ............... 697 $ 697
Market value adjustments
for debt and equity
securities, net ....... 24 24
Foreign currency
translation ........... (56) (56)
------
Other comprehensive
income, net ......... (32) (32)
-------
Total comprehensive income .. $ 665
----- ------- -------- ---- ----- ------ ------ =======
BALANCE DECEMBER 31, 1997 ... 923 10,876 (359) (46) (95) 25 (70)
Issuance of Communications
Stock .................... 24
Distribution of New U S WEST (421) (24,924)
Issuance of MediaOne Group
Stock .................... 81
Purchase of treasury stock .. (383)
Common dividends declared
($0.535 per Communications
share) ................... (260)
Preferred dividends and
accretion ................ 4 (55)
Loss on redemption of
Preferred Securities ..... (53)
Other ....................... 147 15 46
Comprehensive Income:
Net income ............... 26,305 $26,305
Market value adjustments
for debt and equity
securities and
Exchangeable Notes, net 943 943
Foreign currency
translation ........... (4) (4)
------
Other comprehensive
income, net ......... 939 939
-------
Total comprehensive income .. $27,244
----- ------- -------- ---- ----- ------ ------ =======
BALANCE DECEMBER 31, 1998 ... 927 10,324 669 -- (99) 968 869
Issuance of MediaOne Group
Stock .................... 97
Exchange of Series D
Preferred Stock .......... (931) 931
Purchase of treasury stock .. (46)
Preferred dividends and
accretion ................ 4 (49)
Loss on redemption of Series
C Preferred Stock ........ (28)
Other ....................... 142
Comprehensive Income:
Net income ............... 3,531 $ 3,531
Market value adjustments
for debt and equity
securities and
Exchangeable Notes, net 329 329
Foreign currency
translation ........... (3) (3)
------
Other comprehensive
income, net ......... 326 326
-------
Total comprehensive income .. $ 3,857
----- ------- -------- ---- ----- ------ ------ =======
BALANCE DECEMBER 31, 1999 ... $ -- $11,448 $ 4,123 $ -- $(102) $1,297 $1,195
===== ======= ======== ==== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of the
Consolidated Financial Statements.
50
<PAGE> 8
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: BUSINESS OVERVIEW
MediaOne Group, Inc. ("MediaOne Group" or the "Company") is a
diversified global broadband communications company with domestic operations
incorporating large clusters in Atlanta, Massachusetts, California, Chicago,
Florida, Detroit, and Minneapolis/St. Paul, having the capability to offer
video, high speed Internet access and telephone services simultaneously over its
broadband network. Among its domestic investments, MediaOne Group owns an
investment in Time Warner Entertainment Company, L.P. ("TWE" or "Time Warner
Entertainment"), which provides cable programming, filmed entertainment and
broadband communications services, and is the second largest cable television
system operator in the United States. The Company also owns an interest in a
joint venture to provide high speed Internet access services under the
"RoadRunner" brand name (the "RoadRunner Joint Venture").
Internationally, the Company owns various investments in international
broadband and wireless ventures. As a result of the anticipated merger with AT&T
Corp. ("AT&T") described below, MediaOne Group formalized a plan during 1999 to
sell its international broadband and wireless investments, and, as a result,
these investments are classified as held for sale on the Consolidated Balance
Sheets. See Note 7 - Net Investment In International Ventures - to the
Consolidated Financial Statements.
AT&T MERGER
On May 6, 1999, MediaOne Group entered into an agreement with AT&T to
merge its operations with those of AT&T, and terminated the merger agreement
previously entered into with Comcast Corporation ("Comcast"). On October 21,
1999, MediaOne Group's shareowners approved the merger with AT&T. The
transaction is expected to close in the second quarter of 2000, subject to legal
and regulatory approval.
Under the terms of the AT&T definitive merger agreement, MediaOne Group
shareowners will have the right to receive, for each share of MediaOne Group
common stock ("MediaOne Group Stock"), (i) 1.4912 shares of AT&T common stock,
(ii) $85.00 in cash, or (iii) .95 of a share of AT&T common stock and cash of
$30.85. Since AT&T has agreed to pay a set amount of AT&T common stock in the
merger, MediaOne Group shareowners who elect to receive all AT&T common stock or
all cash may be subject to proration in the event that the common stock to be
issued is over or under subscribed. With respect to MediaOne Group shareowners
who receive AT&T common stock, if the volume-weighted average sale price of the
AT&T common stock for the 20 trading days ending three trading days prior to the
effective date of the merger (the "AT&T Price") is between $51.30 and $57.00 per
share, an additional amount in cash will be paid so that the total value of the
AT&T common stock (based on the AT&T Price) and cash received per share of
MediaOne Group Stock will be $85.00. If the AT&T Price is less than $51.30 per
share, the additional cash payment will be made based on an assumed AT&T Price
of $51.30 per share, and the total value of cash and AT&T common stock (based on
the AT&T Price) received per share of MediaOne Group Stock will be less than
$85.00. If the AT&T Price is above $57.00 per share, the total value of cash and
AT&T common stock (based on the AT&T Price) received per share of MediaOne Group
Stock will be more than $85.00. If a shareowner chooses the AT&T stock plus cash
election, the maximum additional cash payment would be $5.42 per share of
MediaOne Group Stock. If a shareowner chooses the AT&T stock election, the
maximum additional cash payment would be $8.50 per share of MediaOne Group
Stock.
51
<PAGE> 9
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: BUSINESS OVERVIEW (CONTINUED)
In order to avoid disputes as to whether the AT&T merger would violate
the non-competition provisions of the TWE partnership agreement, on August 3,
1999, MediaOne Group sent a notice of termination to TWE which terminated these
non-competition provisions as to MediaOne Group. See Note 6 - Investment in Time
Warner Entertainment - to the Consolidated Financial Statements.
In addition, Time Warner, Inc. ("Time Warner") has expressed its view
that, absent Time Warner's consent, completion of the AT&T merger will violate
the TWE partnership agreement unless AT&T and MediaOne Group delay completion of
the merger at least until August 3, 2000, one year following delivery of the
termination notice. While AT&T and MediaOne Group disagree with this view, if
Time Warner's view prevails and if Time Warner does not consent to an earlier
closing, AT&T and MediaOne Group may have to delay completing the merger to
August 3, 2000. Any such delay could delay the ability to realize the expected
financial and operating benefits of the merger.
During 1999, MediaOne Group incurred total pretax merger costs of
$1,810, comprised primarily of the $1.5 billion fee paid to Comcast to terminate
the Company's merger agreement with Comcast as outlined in the Comcast merger
agreement. The fee was funded by AT&T on the Company's behalf and AT&T received
in exchange a note payable from MediaOne Group. See Note 10 - Debt - to the
Consolidated Financial Statements. Merger costs also included $310 of costs
related to employee bonuses paid in accordance with the AT&T merger agreement,
as well as change of control payments made to select employees which were
triggered as a result of the shareowners' approval to merge with AT&T, and
miscellaneous legal and advisory fees.
THE SEPARATION
Prior to June 12, 1998, MediaOne Group was known as "U S WEST, Inc."
("Old U S WEST"). On June 12, 1998, Old U S WEST separated its businesses into
two independent public companies (the "Separation"). Until the Separation, Old U
S WEST conducted its businesses through two groups: U S WEST Media Group (the
"Media Group") and U S WEST Communications Group (the "Communications Group").
Upon Separation, Old U S WEST was renamed "MediaOne Group, Inc." and retained
the multimedia businesses of Media Group, except for U S WEST Dex, Inc. ("Dex"),
the domestic directory business. The telecommunications businesses of the
Communications Group became an independent public company and retained the "U S
WEST, Inc." name ("New U S WEST"). In addition, Dex was aligned with New U S
WEST (the "Dex Alignment").
The Separation was consummated pursuant to the terms of a separation
agreement between MediaOne Group and New U S WEST (the "Separation Agreement").
The Company accounted for the distribution of New U S WEST stock to the
Communications Group stockholders, and to the Media Group stockholders for the
Dex Alignment, as a discontinuance of the businesses comprising New U S WEST.
See Note 25 - Discontinued Operations - to the Consolidated Financial
Statements.
Prior to the Separation, Old U S WEST had outstanding two separate
classes of common stock which reflected the performance of its two groups. The
performance of Media Group was reflected by the U S WEST Media Group common
stock (the "Media Stock") and the performance of the Communications Group was
reflected by the U S WEST Communications Group common stock (the "Communications
Stock"). Upon Separation, and in accordance with the Separation Agreement, each
outstanding share of Media Stock remains outstanding and represents one share of
MediaOne Group Stock. Each issued and outstanding share of Communications Stock
was redeemed for one share of New U S WEST common stock. See Note 16 -
Shareowners' Equity - to the Consolidated Financial Statements.
52
<PAGE> 10
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: BUSINESS OVERVIEW (CONTINUED)
In connection with the Dex Alignment, (i) each holder of Media Stock
received as a dividend .02731 shares of New U S WEST common stock for each share
of Media Stock held (the "Dex Dividend"), and (ii) $3.9 billion of Old U S WEST
debt was refinanced by New U S WEST.
In connection with the Separation, MediaOne Group refinanced
substantially all of the indebtedness issued or guaranteed by Old U S WEST
through a combination of tender offers, prepayments and consent solicitations
(the "Refinancing"). On June 12, 1998, $4.9 billion notional medium and
long-term debt was redeemed for a total cash redemption amount of $5.5 billion.
MediaOne Group extinguished the debt by issuing commercial paper at a
weighted-average interest rate of 5.85 percent. In accordance with the
Separation Agreement, New U S WEST funded to MediaOne Group $3.9 billion related
to the Dex Alignment. The Company used the funds to repay a portion of the
amount of commercial paper issued in connection with the Refinancing. Debt
extinguishment costs related to the Refinancing totaled $333 (net of income tax
benefits of $209) and are reflected in the Consolidated Statements of Operations
as an extraordinary item. In addition to refinancing costs, such costs included
the difference between the market and face value of the debt redeemed and a
charge for unamortized debt issuance costs. MediaOne Group financed the debt
extinguishment costs by issuing commercial paper, net of a $140 reimbursement by
New U S WEST for shared costs. Remaining commercial paper issued in connection
with the Refinancing was subsequently repaid with proceeds generated from a debt
offering in August 1998. See Note 10 - Debt - to the Consolidated Financial
Statements.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The Consolidated Financial Statements include
the accounts of the Company and its majority-owned subsidiaries. Effective
January 1, 1999 for the Consolidated Statements of Operations, and December 31,
1998 for the Consolidated Balance Sheets, the Consolidated Financial Statements
include the activity of the capital assets segment. Prior to this time, the
capital assets segment had been reported as a net investment in assets held for
sale. See Note 24 - Net Investment In Assets Held For Sale - to the Consolidated
Financial Statements. All significant intercompany amounts and transactions
within continuing operations have been eliminated. Investments in less than
majority-owned ventures not held for sale are generally accounted for using the
equity method.
Certain reclassifications within the Consolidated Financial Statements
have been made to conform to the current year presentation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles ("GAAP") requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents. Cash and cash equivalents include highly
liquid investments with original maturities of three months or less that are
readily convertible into cash and are not subject to significant risk from
fluctuations in interest rates.
Property, Plant and Equipment. The investment in property, plant and
equipment, including construction materials, is carried at cost less accumulated
depreciation. Additions, replacements and substantial betterments are
capitalized. Costs for normal repair and maintenance of property, plant and
equipment are expensed as incurred.
53
<PAGE> 11
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MediaOne of Delaware, Inc. ("MediaOne"), the domestic cable and
broadband subsidiary of the Company, provides for depreciation of certain
property, plant and equipment using various straight-line group methods and
remaining economic lives. When depreciable property, plant and equipment
accounted for on the group methods is retired, the original cost less the net
salvage value is generally charged to depreciation. The Company's remaining
assets are depreciated using the straight-line method. Gains or losses on
disposal are included in income.
The Company depreciates buildings between 10 to 35 years, cable
distribution systems between 3 to 15 years, and general purpose computers and
other between 3 to 20 years.
Interest related to qualifying construction projects, including
construction projects of equity method investees, is capitalized and reflected
as a reduction of interest expense. Amounts capitalized were $16, $19 and $36
for the years ended 1999, 1998 and 1997, respectively.
Computer Software. On January 1, 1999, the Company adopted Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 requires that certain costs of internal
use software, whether purchased or developed internally, be capitalized and
amortized over the estimated useful life of the software. Capitalized software
costs are amortized over periods ranging up to 5 years. All other computer
software costs not meeting the criteria of SOP 98-1 are expensed.
At December 31, 1999 and 1998, capitalized computer software of $147
and $89, respectively, are recorded as a component of property, plant and
equipment. MediaOne amortized capitalized computer software costs of $42, $13
and $10 in 1999, 1998 and 1997, respectively.
Intangible Assets. Intangible assets are recorded when the cost of
acquired companies exceeds the fair value of their net tangible assets. The
costs of identified intangible assets and goodwill are amortized by the
straight-line method over periods ranging from 5 to 25 years. These assets are
evaluated for impairment with other related assets, using the methodology as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."
Investments in Debt and Equity Securities. Debt and marketable equity
securities are classified as available for sale and are carried at fair market
value with unrealized gains and losses included in equity as a component of
other comprehensive income.
Foreign Currency Translation. Assets and liabilities of international
subsidiaries and investments are translated at year-end exchange rates, and
income statement items are translated at average exchange rates for the year.
Resulting translation adjustments are included in equity as a component of other
comprehensive income. Gains and losses resulting from foreign currency
transactions are included in income.
Financial Instruments. Synthetic instrument accounting is used for
interest rate swaps if the index, maturity, and amount of the instrument match
the terms of the underlying debt. Net interest accrued is recognized over the
life of the instruments as an adjustment to interest expense and is a component
of cash provided by operating activities. Any gain or loss on the termination of
an instrument that qualifies for synthetic instrument accounting would be
deferred and amortized over the remaining life of the original instrument.
Deferral accounting is used for foreign currency forward and purchased
option contracts which qualify for and are designated as hedges of firm equity
investment commitments and for forward and purchased
54
<PAGE> 12
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
option contracts which qualify as hedges of future debt issues or investments in
debt and equity securities. To qualify for deferral accounting, the contracts
must have a high inverse correlation to the exposure being hedged, and reduce
the risk or volatility associated with changes in foreign exchange rates,
interest rates, or equity prices. Qualified foreign exchange contracts are
carried at market value with gains and losses recorded in equity until sale of
the investment. Qualified interest rate contracts are associated with the
related debt and amortized as yield adjustments. Qualified interest rate and
equity contracts associated with investments in debt or equity securities are
carried at market value, with gains and losses recorded to the associated
investment account. Any gain or loss on the termination of a contract that
qualifies for deferral accounting would be deferred and accounted for with the
underlying transaction being hedged. If a contract does not maintain the
required correlation with the hedged item, deferral accounting is terminated and
a gain or loss is recognized in the Consolidated Statement of Operations for the
difference between the change in the fair value of the contract and the change
in the fair value of the hedged item.
Market value accounting is used for derivative contracts which do not
qualify for synthetic instrument or hedge accounting. Market value accounting is
also used for foreign exchange contracts designated as hedges of foreign
denominated receivables and payables. These contracts are carried at market
value in other assets or liabilities with gains and losses recorded as other
income or expense. The Company does not enter into derivative financial
instruments for trading purposes.
Stock Options. MediaOne Group accounts for its stock incentive plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company also follows the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." See Note
18 - Stock Incentive Plans - to the Consolidated Financial Statements.
Revenue Recognition. Cable television, local telephone and high speed
Internet access services are generally billed monthly in advance, and revenues
are recognized the following month when services are provided. Revenues derived
from other cable television services, including pay-per-view and advertising,
are recognized as the service is provided. Installation revenue is recognized as
the service is provided, to the extent of direct selling costs, in accordance
with SFAS No. 51, "Financial Reporting by Cable Television Companies."
On December 3, 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes the SEC's views on the application
of GAAP to revenue recognition. The Company has reviewed SAB No. 101 and
believes that it is in compliance with the SEC's interpretation of revenue
recognition.
Advertising Costs. Costs related to advertising are expensed as
incurred. Advertising expense was $75, $114 and $206 in 1999, 1998 and 1997,
respectively.
Income Taxes. The provision for income taxes consists of an amount for
taxes currently payable or receivable and an amount for tax consequences
deferred to future periods.
Earnings Per Common Share. MediaOne Group computes basic and diluted
earnings per common share in accordance with SFAS No. 128, "Earnings Per Share."
See Note 17 - Earnings Per Share - to the Consolidated Financial Statements.
Unless otherwise indicated, all per share amounts in the notes to the
Consolidated Financial Statements are computed based on basic weighted average
common shares outstanding.
55
<PAGE> 13
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards. On January 1, 1999, MediaOne Group adopted
SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 required,
among other things, that the costs related to start-up activities of a new
entity, facility, product or service be expensed. Adoption of SOP 98-5 did not
have a material impact on the financial position or results of operations of the
Company.
Future Implementation of New Accounting Standards. In June 1999, the
Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - An Amendment of SFAS No. 133," which deferred the
effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
As a result, the Company will adopt SFAS No. 133 in the year 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Among other things, the statement requires that an
entity recognize all derivative instruments on the balance sheet as either
assets or liabilities, and to account for those instruments at fair value. The
Company is evaluating the impact of SFAS No. 133.
NOTE 3: DOMESTIC ACQUISITIONS, DISPOSITIONS AND OTHER
Cable Systems. During third quarter of 1999, MediaOne Group, Time
Warner Cable, a division of Time Warner and TWE, and Cox Communications, Inc.,
("Cox") completed the exchange of certain cable systems previously announced.
Effective July 31, 1999, MediaOne Group exchanged cable systems in Ohio and
Maine, serving approximately 280,000 subscribers, for Time Warner Cable cable
systems in Massachusetts and New Hampshire, serving approximately 240,000
subscribers, and $40 in cash. Effective August 31, 1999, MediaOne Group
exchanged cable systems in California, serving approximately 67,000 subscribers,
and $39 in cash for Time Warner Cable cable systems in Georgia, serving
approximately 72,000 subscribers; and MediaOne Group cable systems in
Connecticut and Rhode Island, serving approximately 51,000 subscribers, and cash
of $10 for Cox cable systems in Massachusetts, serving approximately 54,000
subscribers.
As a result of the cable system trades with Time Warner Cable and Cox,
MediaOne Group recognized a pretax gain of $368 ($226 after tax). The pretax
gain is net of a $26 deferred gain related to a cable system traded with TWE, of
which MediaOne Group owns a 25.51 percent interest. The deferred gain will be
amortized to earnings over 15 years.
MediaOne Group accounted for the cable systems acquired in the trades
under the purchase method of accounting. The excess of the purchase price over
the fair market value of net tangible assets acquired totaled $435 and will be
amortized over 25 years. The purchase price allocation is based on preliminary
information and may be modified upon the receipt of final asset appraisals.
On October 13, 1998, MediaOne Group and Tele-Communications, Inc.
("TCI") signed a definitive agreement to exchange certain of MediaOne Group's
cable television systems in Illinois and Michigan for certain of TCI's cable
television systems in South Florida and California (the "TCI trade"). In March
1999, TCI was acquired by AT&T. Effective on June 1, 1999, due to the proposed
merger of MediaOne Group with AT&T, the companies deferred closing on the TCI
trade until the merger with AT&T is completed. If the merger with AT&T does not
occur, the TCI trade will take place as planned. In the meantime, the Company's
cable systems in Illinois and Michigan will continue to be owned by MediaOne
Group, but will be managed by AT&T, and the AT&T cable systems in South Florida
and California will remain under both the ownership and management of AT&T. As a
result of the deferral of the TCI trade, the Company
56
<PAGE> 14
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: DOMESTIC ACQUISITIONS, DISPOSITIONS AND OTHER (CONTINUED)
recorded a $25 one-time depreciation and amortization charge to catch-up for
depreciation and amortization expense suspended in the fourth quarter of 1998.
Depreciation and amortization expense was suspended on these properties while
they were held for sale.
During the first quarter of 1999, MediaOne Group sold its cable
television systems in Reno, Nevada and Mammoth and June Lake, California for
total proceeds of $32, resulting in a pretax gain of $14. The cable systems
served approximately 10,000 and 7,000 subscribers, respectively.
In December 1998, the Company acquired Time Warner's cable systems in
the cities of Dearborn and Wayne, Michigan for $57. The systems serve
approximately 31,000 subscribers. In addition, during 1998, MediaOne Group sold
various cable television systems in California, Idaho, Iowa and Washington,
serving approximately 33,000 subscribers, for total proceeds of $50.
RoadRunner Joint Venture. On June 15, 1998, MediaOne Group formed the
RoadRunner Joint Venture with Time Warner, TWE and Time Warner
Entertainment-Advance/Newhouse Partnership ("TWE/AN") to deliver high speed
Internet access services. The parties to the joint venture contributed certain
of their respective high speed Internet access assets into the RoadRunner Joint
Venture in exchange for common equity interests of approximately 31.4 percent
for MediaOne Group, 10.7 percent for Time Warner, 25.0 percent for TWE and 32.9
percent for TWE/AN. Taking into account MediaOne Group's ownership in TWE, the
Company would hold a 43.2 percent proportionate ownership in the venture. In
addition, Microsoft Corporation and Compaq Computer Corporation each contributed
$212.5 million for a respective 10 percent preferred equity investment in the
RoadRunner Joint Venture. The preferred shares are convertible into a combined
20 percent common equity interest in the RoadRunner Joint Venture. MediaOne
Group provides high speed Internet access services under the "RoadRunner" brand
name.
Assuming the conversion of the preferred shares and taking into account
MediaOne Group's ownership in TWE, MediaOne Group would hold a proportionate
diluted common equity interest in the RoadRunner Joint Venture of approximately
34.6 percent. MediaOne Group accounts for its investment in the RoadRunner Joint
Venture under the equity method of accounting. As of April 1, 1999, MediaOne
Group suspended recording equity losses for the RoadRunner Joint Venture as its
investment had been reduced to zero and the Company had no future funding
commitments to the venture. Unrecognized equity losses for the joint venture
during 1999 totaled approximately $50.
The RoadRunner Joint Venture is responsible for maintaining connections
to the Internet, providing technical customer support and developing national
content. The parties to the joint venture operate their respective high speed
Internet access businesses and are responsible for their respective customers'
billing and customer service issues. Accordingly, MediaOne Group continues to
reflect high speed Internet access service revenues in its consolidated results,
as well as a service fee payable to the RoadRunner Joint Venture for services
provided.
Other. Effective on March 31, 1999, MediaOne Group sold its investments
in Continental Fiber Technologies, Inc. and Alternet of Virginia, Inc.,
providers of business telephony services in Jacksonville, Florida and Richmond,
Virginia, respectively, for net proceeds of $82. The sale resulted in a pretax
gain of $44. In addition, the capital assets group sold various leveraged leases
for net proceeds of $64 and a pretax gain of $12.
PrimeStar. Prior to April 1, 1998, the Company held a 10.4 percent
interest in PrimeStar Partners, L.P. ("Old PrimeStar"). In addition, MediaOne
Group distributed PrimeStar direct broadcast
57
<PAGE> 15
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: DOMESTIC ACQUISITIONS, DISPOSITIONS AND OTHER (CONTINUED)
satellite ("DBS") services to subscribers in its service areas and, as a result,
reflected consolidated operating results with respect to such subscribers. On
April 1, 1998, the Company contributed its interest in Old PrimeStar, as well as
its PrimeStar subscribers and certain related assets, to PrimeStar, Inc.
("PrimeStar"), a newly formed entity, in exchange for an approximate 10 percent
interest in PrimeStar and $77 in cash (the "PrimeStar Contribution").
In December 1998, PrimeStar management provided a business plan to its
board of directors, of which MediaOne Group is a part. Additionally, in January
1999, Hughes Electronics Corporation ("Hughes") entered into an agreement to
purchase PrimeStar's DBS assets. Based on its review of PrimeStar's business
plan and on the anticipated sale to Hughes, the Company believed it would not
receive proceeds on the sale of its investment in PrimeStar. As a result,
MediaOne Group recorded a charge of $163 ($100 after tax) to reduce the carrying
amount of its investment in PrimeStar to zero as of December 31, 1998.
On March 31, 1999, certain PrimeStar shareholders, including MediaOne
Group, signed a separate funding agreement to cover various operation and
transition costs of the PrimeStar DBS medium-power business. On April 28, 1999,
PrimeStar received required consents from lenders and closed the DBS
medium-power business sale. As a result of these transactions, MediaOne Group
was released as guarantor on a $75 letter of credit for PrimeStar. The Company
remains a guarantor for PrimeStar on a $25 letter of credit. During 1999,
MediaOne Group funded $55 in connection with the PrimeStar funding agreement, of
which $49 ($30 after tax) was expensed in 1999.
NOTE 4: INVESTMENT IN VODAFONE GROUP / AIRTOUCH COMMUNICATIONS
AirTouch Transaction. On April 6, 1998, MediaOne Group sold its
domestic wireless businesses to AirTouch Communications, Inc. ("AirTouch") in
exchange for (i) debt assumption of $1,350, (ii) the issuance to MediaOne Group
of $1,650 in liquidation preference of 5.143 percent dividend bearing AirTouch
preferred stock (fair value of $1,493), and (iii) the issuance to MediaOne Group
of 59,314,000 shares of AirTouch common stock. The domestic wireless businesses
included cellular communication services provided to 2.6 million customers in 12
western and midwestern states and a 25 percent interest in PrimeCo Personal
Communications, L.P. ("PrimeCo"). The transaction resulted in a pretax gain of
$3,869 ($2,257 after tax).
Vodafone/AirTouch Merger. Effective on June 30, 1999, AirTouch merged
its operations into a subsidiary of Vodafone Group Public Limited Company
("Vodafone"). Under the terms of the Vodafone merger, each share of AirTouch
common stock was converted into $9.00 in cash plus 1/2 of a Vodafone American
Depository Receipt ("ADR"). The AirTouch preferred stock, consisting of 825,000
shares each of AirTouch 5.143 percent Class D Cumulative Preferred Stock, Series
1998, (the "Class D ATI Shares") and 5.143 percent Class E Cumulative Preferred
Stock, Series 1998, (the "Class E ATI Shares" and together with the Class D ATI
Shares, the "ATI Shares"), remained outstanding as preferred shares of AirTouch,
a subsidiary of Vodafone, with the following modifications: (a) the early
redemption option on the Class D ATI Shares was eliminated, (b) the maturity
date on the Class E ATI Shares was extended to April 1, 2020, and (c) an
extraordinary dividend of $25.00 per share, or a total of $21, was paid on
August 16, 1999 on each Class E ATI Share.
MediaOne Group recognized a pretax gain of $2,482 ($1,530 after tax) on
the exchange and modification of its AirTouch common and preferred shares into
Vodafone ADRs and preferred shares, and received $534 in cash related to its
investment in AirTouch common stock. The pretax gain was the result of the
difference between the cost basis and fair market value of the investment in
AirTouch as of the
58
<PAGE> 16
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INVESTMENT IN VODAFONE GROUP / AIRTOUCH COMMUNICATIONS (CONTINUED)
effective date. MediaOne Group accounts for its investment in Vodafone under the
cost method of accounting, as available for sale securities.
In October 1999, Vodafone executed a five for one stock split of its
Vodafone ADRs. References to Vodafone shares prior to the stock split will be
referred to in the Notes to the Consolidated Financial Statements as
"pre-split." On a consolidated basis as of December 31, 1999, MediaOne Group
held a total of approximately 148,284,000 Vodafone ADRs.
Vodafone Collar. During May and September 1999, the Company contributed
11,662,000 shares of AirTouch common stock to MediaOne SPC IV ("MediaOne SPC
IV"), and 3,600,000 pre-split shares of its investment in Vodafone ADRs to
MediaOne SPC VI ("MediaOne SPC VI"), both wholly-owned subsidiaries of MediaOne
Group. MediaOne SPC IV subsequently entered into a series of purchased and
written options (the "SPC IV Collar") on its AirTouch common shares and issued
$1,128 in debt. MediaOne SPC VI also entered into a series of purchased and
written options (the "SPC VI Collar" and together with the SPC IV Collar, the
"Collars") on its Vodafone ADRs and issued $717 in debt. See Note 10 - Debt - to
the Consolidated Financial Statements. Upon the Vodafone merger in June 1999,
the SPC IV Collar was automatically transferred to Vodafone ADRs and the put and
call prices were adjusted accordingly. As of December 31, 1999, MediaOne SPC IV
holds approximately 29,154,000 Vodafone ADRs and MediaOne SPC VI holds
approximately 18,000,000 Vodafone ADRs.
The Collars have been designated and are effective as a hedge of the
market risk associated with the Company's investment in Vodafone ADRs. The
Collars are therefore carried at intrinsic value with gains or losses recorded
in equity as a component of other comprehensive income together with any change
in the fair value of the Vodafone ADRs. As of December 31, 1999, the Company
recorded a loss in equity of $19 related to the Collars.
At expiration of the SPC IV Collar, the Company will receive cash if
the market value of a Vodafone ADR is less than approximately $34.00 per share,
effectively eliminating downside risk on the stock below $34.00. Conversely, if
the market value of a Vodafone ADR is greater than approximately $49.00 per
share, the Company will be required to pay cash which will be offset by the
corresponding increase in the value of the Vodafone ADRs. The SPC IV Collar
expires quarterly, in equal installments, starting in the second quarter of 2003
and ending in the second quarter of 2005.
At expiration of the SPC VI Collar, the Company will receive cash if
the market value of a Vodafone ADR is less than approximately $40.00 per share,
effectively eliminating downside risk on the stock below $40.00 per share.
Conversely, if the market value of a Vodafone ADR is greater than approximately
$58.00 per share, the Company will be required to pay cash which will be offset
by the corresponding increase in the value of the Vodafone ADRs. The SPC VI
Collar expires quarterly, in equal installments, starting in the second quarter
of 2003 and ending in the fourth quarter of 2005.
MediaOne Group intends to use proceeds from the sale of the Vodafone
ADRs to fund any cash obligations related to the Collars.
AirTouch Interest Rate Swap Agreement. Prior to the Vodafone merger,
MediaOne Group accounted for its investment in AirTouch stock under the cost
method of accounting, as available for sale securities. The AirTouch preferred
stock was reported at fair value on the Consolidated Balance Sheet, in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." To minimize MediaOne Group's exposure to fluctuations in the
fair value of the AirTouch preferred stock, the Company entered into an interest
rate swap agreement in April 1998 and an interest rate option
59
<PAGE> 17
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INVESTMENT IN VODAFONE GROUP / AIRTOUCH COMMUNICATIONS (CONTINUED)
agreement in October 1998. The interest rate swap agreement matured in October
1998, and the interest rate option agreement in December 1998.
During September 1998, the change in the value of the AirTouch
preferred stock and interest rate swap did not achieve the required correlation
to continue deferral accounting. Consequently, the Company recognized a net loss
of $31 (net of income tax benefits of $19) in other income for the change in the
fair value of the AirTouch preferred stock not offset by the fair value of the
interest rate swap agreement, in accordance with SFAS No. 80, "Accounting for
Futures Contracts." In addition, the Company recorded a charge of $12 (net of
income tax benefits of $8) for the purchase of the interest rate option offset
by a gain on the portion of the interest rate option associated with the
issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Company-guaranteed subordinated debentures
("Preferred Securities"). The gain on the interest rate option associated with
the Preferred Securities was $6 (net of income tax expense of $4).
NOTE 5: OPERATING SEGMENTS
The Company reports on its operating segments in accordance with SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Operating segments are components of an enterprise for which separate financial
information is available and which is evaluated regularly by the Company's chief
operating decision maker, or decision making group, in deciding how to allocate
resources and assess performance. Operating segments are managed separately and
represent strategic business units that offer different products and serve
different markets.
The Company's reportable segments include: (1) domestic cable and
broadband, (2) international services, and (3) other. The domestic cable and
broadband segment is comprised of MediaOne and Multimedia Ventures. MediaOne
consists of cable television properties serving 5.0 million domestic subscribers
and passing 8.6 million domestic homes. Multimedia Ventures includes the
Company's equity interest in Time Warner Entertainment. The international
services segment includes the cable and broadband and wireless communications
operations located abroad, in addition to international corporate overhead.
Other includes the discontinued operations of New U S WEST, capital assets
(which was held for sale until December 31, 1998), investments in domestic
interactive services, the domestic wireless business (which was sold in April
1998 in conjunction with the AirTouch Transaction), the international
directories operations (of which the wholly owned operations in the United
Kingdom and Poland were sold in 1997), and corporate overhead.
MediaOne Group believes that proportionate financial data facilitates
the understanding and assessment of its results. Therefore, "Sales and Other
Revenues" for each segment is presented on a proportionate basis. Proportionate
results reflect the relative weight of MediaOne Group's ownership in each of its
respective domestic and international equity ventures together with the
consolidated results of its subsidiaries. In addition, the Company believes
earnings before interest, taxes, depreciation, amortization and other ("EBITDA")
is an important indicator of the operating performance of its businesses. As
such, EBITDA is also presented, on a proportionate basis, for each segment. The
computation of EBITDA excludes gains on asset sales, equity losses, guaranteed
minority interest expense, and restructuring charges. Adjustments made to "Sales
and Other Revenues" and EBITDA to arrive at proportionate results are reversed
in the column labeled "Eliminations and Adjustments," in conformance with SFAS
No. 131, so that in total, "Sales and Other Revenues" and EBITDA reflect
consolidated results. All other line items presented in the tables reflect
consolidated results.
60
<PAGE> 18
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: OPERATING SEGMENTS (CONTINUED)
Consolidated results for the operating segments reflect the accounting
policies described in Note 2 - Summary of Significant Accounting Policies - to
the Consolidated Financial Statements. Intersegment sales and transfers are
accounted for at fair value as if the sales were to third parties. For
proportionate results, the ventures' management determines its accounting
policies.
Industry segment financial information follows:
<TABLE>
<CAPTION>
DOMESTIC CABLE
& BROADBAND
----------------------
MULTIMEDIA ELIMINATIONS
MEDIAONE VENTURES(1) INTERNATIONAL OTHER & ADJUSTMENTS CONSOLIDATED
-------- ----------- ------------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1999
Sales and other revenues ..... $ 2,686 $ 3,358 $ 1,715 $ 7 $(5,071) $ 2,695
EBITDA(2) .................... 980 1,342 352 (63) (1,734) 877
Net income (loss) ............ (161) 114 3,954 (376) -- 3,531
Equity gains (losses) in
unconsolidated ventures ... (10) 170 (392) (24) -- (256)
Total assets ................. 17,270 3,394 1,885 17,237 -- 39,786
Investments in equity ventures 38 2,597 741 5 -- 3,381
Capital expenditures ......... 1,960 -- 1 22 -- 1,983
1998
Sales and other revenues ..... $ 2,467 $ 3,124 $ 1,456 $ 439 $(4,604) $ 2,882
EBITDA(2) .................... 941 800 205 46 (1,049) 943
Net income (loss) ............ (536) (11) (317) 27,169 -- 26,305
Equity gains (losses) in
unconsolidated ventures ... (24) 7 (352) (48) -- (417)
Total assets ................. 16,003 2,551 2,308 7,330 -- 28,192
Investments in equity ventures 46 2,442 1,083 71 -- 3,642
Capital expenditures ......... 1,618 -- 12 96 -- 1,726
1997
Sales and other revenues ..... $ 2,323 $ 2,887 $ 1,230 $ 1,471 $(4,064) $ 3,847
EBITDA(2) .................... 930 711 77 300 (731) 1,287
Net income (loss) ............ (402) (21) (488) 1,608 -- 697
Equity gains (losses) in
unconsolidated ventures ... (22) 13 (775) (125) -- (909)
Total assets ................. 15,719 2,534 2,164 6,366 -- 26,783
Investments in equity ventures 61 2,486 624 523 -- 3,694
Capital expenditures ......... 1,216 -- 21 265 -- 1,502
</TABLE>
- ----------
(1) Multimedia Ventures includes MediaOne Group's 25.51 percent equity
interest in TWE, as well as domestic cable overheads. The reported TWE
results are prepared in accordance with GAAP and have not been adjusted
to report TWE's investments accounted for under the equity method on a
proportionate basis.
(2) EBITDA should not be considered an alternative to operating or net
income as an indicator of the performance of MediaOne Group's
businesses, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in
accordance with GAAP.
61
<PAGE> 19
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: OPERATING SEGMENTS (CONTINUED)
A portion of general and administrative costs, including executive
management, legal, tax, accounting and auditing, treasury, strategic planning
and public policy services, are directly assigned to the Company's subsidiaries
based on actual utilization or are allocated based on operating expenses, number
of employees, external revenues, average capital and/or average equity.
Total assets are those assets and investments that are used in, or
pertain to, each segment's operations. The "Other" column includes primarily
cash; debt and equity securities; net assets of discontinued operations and net
investment in assets held for sale for the capital assets segment in 1997; the
domestic wireless businesses; investments in domestic interactive services; and
other corporate assets.
The following table presents a geographic breakout for proportionate
revenues and EBITDA and a reconciliation to consolidated amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
PROPORTIONATE REVENUE:
United States ..................... $ 6,040 $ 5,966 $ 6,571
United Kingdom .................... 999 856 609
Central Europe .................... 625 510 378
Asia and other .................... 102 154 353
------- ------- -------
Proportionate revenue ................ 7,766 7,486 7,911
Less: Proportionate adjustments ...... (5,071) (4,604) (4,064)
------- ------- -------
Consolidated revenues ............. $ 2,695 $ 2,882 $ 3,847
======= ======= =======
PROPORTIONATE EBITDA:
United States ..................... $ 2,261 $ 1,779 $ 1,937
United Kingdom .................... 185 106 (23)
Central Europe .................... 202 169 102
Asia and other .................... (37) (62) 2
------- ------- -------
Proportionate EBITDA ................. 2,611 1,992 2,018
Less: Proportionate adjustments ...... (1,734) (1,049) (731)
------- ------- -------
Consolidated EBITDA ............... $ 877 $ 943 $ 1,287
======= ======= =======
</TABLE>
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, the Company acquired 25.51 percent pro-rata
priority capital and residual equity interests ("equity interests") in Time
Warner Entertainment for an aggregate purchase price of $2.553 billion. The
remaining interest in TWE is owned by Time Warner. TWE owns and operates
substantially all of the entertainment assets previously owned by Time Warner,
consisting primarily of its filmed entertainment, programming-HBO and cable
television businesses.
In order to avoid disputes as to whether the AT&T merger would violate
the non-competition provisions of the TWE partnership agreement, on August 3,
1999, MediaOne Group sent a notice of termination to TWE which terminated these
non-competition provisions as to MediaOne Group. The non-competition provisions
continue to apply to Time Warner. Delivery of the notice of termination
permitted TWE to terminate most of MediaOne Group's management rights in TWE,
which it did on August 4, 1999. Most of these rights would have terminated in
any event upon the change of control of
62
<PAGE> 20
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
MediaOne Group in the merger. The delivery of the termination notice and the
resulting termination of management rights is irrevocable, however, even if the
merger does not occur. The loss of these management rights may have a material
adverse effect on the value of MediaOne Group's interest in TWE. Notwithstanding
the notice of termination, MediaOne Group retains certain rights under the
partnership agreement, including the right to approve such matters as a merger
of TWE, TWE's entrance into new lines of business and the issuance of new
partnership interests.
The Company has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is exercisable, in whole
or in part, between January 1, 1999 and May 31, 2005, for an aggregate cash
exercise price ranging from $1.25 billion to $1.8 billion, depending upon the
year of exercise. Either TWE or the Company may elect that the exercise price
for the option be paid with partnership interests rather than cash.
Pursuant to the TWE Partnership Agreement, there are four levels of
capital. From the most to least senior, the capital accounts are: senior
preferred (held by the general partners); A preferred priority capital (held pro
rata by the general and limited partners); B preferred priority capital (held by
the general partners); and residual equity capital (held pro rata by the general
and limited partners). Of the $2.553 billion contributed by the Company, $1.658
billion represents a preferred priority capital and $895 represents residual
equity capital. The TWE Partnership Agreement provides for special allocations
of income and distributions of partnership capital. Partnership income, to the
extent earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax allocations");
(2) to the partners' preferred capital accounts in order of priority described
above, at various rates of return ranging from 8 percent to 13.25 percent; and
(3) to the partners' residual equity capital accounts according to their
residual partnership interests. To the extent partnership income is insufficient
to satisfy all special allocations in a particular accounting period, the
unearned portion is carried over until satisfied out of future partnership
income. Partnership losses generally are allocated in reverse order, first to
eliminate prior allocations of partnership income, except senior preferred and
special tax income, next to reduce initial capital amounts, other than senior
preferred, then to reduce the senior preferred account, and finally, to
eliminate special tax allocations.
63
<PAGE> 21
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
A summary of the contributed capital and priority capital rates of
return follows:
<TABLE>
<CAPTION>
PRIORITY CAPITAL TIME LIMITED PARTNERS
RATES OF RETURN WARNER (OWNERSHIP %)
UNDISTRIBUTED CUMULATIVE (% PER ANNUM GENERAL -----------------
PRIORITY OF CONTRIBUTED PRIORITY COMPOUNDED PARTNERS TIME MEDIAONE
CONTRIBUTED CAPITAL CAPITAL(a) CAPITAL(b) QUARTERLY)(d) 8.00% WARNER GROUP
------------------- ---------- ---------- ------------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Senior preferred ............... $ -0- $ -0-(c) 8.00% 100.00% -- --
A Preferred priority capital.... 5,600 14,500 13.00% 63.27% 11.22% 25.51%
B Preferred priority capital.... 2,900 7,700 13.25% 100.00% -- --
Residual equity capital ........ 3,300 3,300 -- 63.27% 11.22% 25.51%
</TABLE>
- ----------
(a) Represents the estimated fair value of net assets contributed as of
formation of TWE, excluding partnership income or loss allocated
thereto.
(b) Cumulative priority capital is not necessarily indicative of the fair
value of the underlying priority capital interests.
(c) Net of $2,100 of cumulative cash distributions received by Time Warner.
(d) To the extent income allocations are concurrently distributed, the
priority capital rates of return on the A preferred capital and the B
preferred capital are 11% and 11.25%, respectively.
Cash distributions are required to be made to the partners to permit
them to pay income taxes at statutory rates based on their allocable taxable
income from TWE ("Tax Distributions"). The aggregate amount of such Tax
Distributions is computed generally by reference to the taxes that TWE would
have been required to pay if it were a corporation. Tax Distributions are paid
to the partners on a current basis. For distributions other than those related
to taxes or the senior preferred, the TWE Partnership Agreement requires certain
cash distribution thresholds be met to the limited partners before the general
partners receive their full share of distributions. No cash distributions have
been made to the Company.
The Company accounts for its investment in TWE under the equity method
of accounting. The excess of fair market value over the book value of total
partnership net assets implied by the Company's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
The Company's recorded share of TWE operating results represents allocated TWE
net income adjusted for the amortization of the excess of fair market value over
the book value of the partnership net assets. As a result of this amortization
and the special income allocations described above, the Company's recorded
pretax share of TWE's operating results before extraordinary item was $170, $7
and $11 in 1999, 1998 and 1997, respectively. The Company's 1999 recorded pretax
share of TWE's operating results is net of a $21 deferred gain on the exchange
of cable systems with MediaOne Group. MediaOne Group will amortize the gain to
income over the next 15 years.
As consideration for its expertise and participation in the cable
operations of TWE, the Company earned a management fee of $130 over five years,
ending in September 1998. The fee was payable over a four-year period beginning
in 1995, and final payment was received in September 1998. Management fees of
$18 and $26 were recorded to other income in 1998 and 1997. In addition,
MediaOne purchases cable television programming from TWE and Time Warner at
market prices. These services totaled $171, $168 and $110 in 1999, 1998 and
1997, respectively.
64
<PAGE> 22
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
SUMMARIZED OPERATING RESULTS 1999 1998 1997
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues .......................................... $ 13,164 $ 12,246 $ 11,318
Operating expenses(1,2) ........................... 8,937 10,527 9,874
Interest and other expense, net(3,4) .............. (1,318) (1,301) (722)
Income before income taxes and extraordinary item.. 2,909 418 722
Income before extraordinary item .................. 2,759 326 637
Net income ........................................ 2,759 326 614
</TABLE>
- ----------
(1) Includes depreciation and amortization of $1,364, $1,436 and $1,370, in
1999, 1998 and 1997, respectively.
(2) Operating expenses for 1999 include a net pretax gain of approximately
$215 related to the early termination of a long-term distribution
agreement with Metro-Goldwyn-Mayer, Inc., a net pretax gain of $97
related to the sale of an interest in CanalSatellite, and a one-time
non-cash pretax charge of $106 relating to certain Warner Bros.' retail
stores. Operating expenses are also reflected net of $2,119, $90 and
$200 of net pretax gains related to the sale or exchange of certain
cable television systems in 1999, 1998 and 1997, respectively.
(3) Includes corporate services of $73 in 1999, and $72 in each of 1998 and
1997, and minority interest expense of $422, $264 and $305 in 1999,
1998 and 1997, respectively.
(4) 1998 interest and other expense includes a charge of approximately $210
principally to reduce the carrying value of TWE's interest in
PrimeStar. 1997 interest and other expense includes a gain of
approximately $250 related to the sale of TWE's interest in E!
Entertainment Television, Inc.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
SUMMARIZED FINANCIAL POSITION 1999 1998
- ----------------------------- ---- ----
<S> <C> <C>
Current assets(1) ........................................ $ 5,311 $ 4,183
Noncurrent assets(2) ..................................... 19,532 18,047
Current liabilities ...................................... 5,723 4,936
Noncurrent liabilities, including minority interests ..... 11,971 11,584
Senior preferred capital ................................. -- 603
Partners' capital(3) ..................................... 7,149 5,107
</TABLE>
- ----------
(1) Includes cash of $517 and $87 at December 31, 1999 and 1998,
respectively.
(2) Includes a loan receivable from Time Warner of $400 at December 31,
1998.
(3) Contributed capital is based on the estimated fair value of the net
assets that each partner contributed to the partnership. The aggregate
of such amounts is significantly higher than TWE's partners' capital as
reflected in this Summarized Financial Position, which is based on the
historical cost of the contributed net assets.
Time Warner Telecom. On July 14, 1998, MediaOne Group received an 18.85
percent ownership interest in Time Warner Telecom, Inc. ("TW Telecom") as a
result of TWE, TWE-A/N and Time Warner
65
<PAGE> 23
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
contributing the assets and liabilities of the Time Warner competitive local
exchange business (the "Time Warner Telecom Business") into a newly formed
entity. The Time Warner Telecom Business had been jointly operated by the
parties to provide telephony services to business customers in their respective
cable markets. TWE and TWE-A/N distributed their ownership interest in TW
Telecom on a pro rata basis to Time Warner, MediaOne Group and Advance/Newhouse.
Since the investment in TW Telecom resulted from a distribution by TWE, MediaOne
Group's investment balance in TWE was reduced in 1998 by $48, the book value of
the TW Telecom investment attributable to MediaOne Group.
In May 1999, TW Telecom completed an initial public offering of its
common stock. As of December 31, 1999, TW Telecom shares had a fair market value
of $49.94 per share, resulting in the Company recording $716 of gross unrealized
gains on its investment. MediaOne Group accounts for its investment in TW
Telecom under the cost method of accounting, as available for sale securities,
and includes the investment in "Other Assets" in the Consolidated Balance Sheet.
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES
As a result of the anticipated merger with AT&T, MediaOne Group
formalized a plan during 1999 to sell its international broadband and wireless
investments, including its international consolidated entities, Cable Plus a.s.
("Cable Plus"), a cable operator in the Czech Republic, and Russian
Telecommunications Development Corporation ("RTDC"), a Russian venture that
holds various wireless investments. The carrying value of the net investments in
international ventures are reflected as "net investments in international
ventures held for sale" on the Consolidated Balance Sheet for 1999. In addition,
during 1999, the results of operations of Cable Plus and RTDC are no longer
consolidated with MediaOne Group's results but are rather reflected as part of
"equity losses in unconsolidated ventures" in the Consolidated Statements of
Operations.
As a result of the decision to exit its international businesses, the
Company recorded a $43 charge ($28 after tax) during 1999. The exit charge
includes employee severance and foreign income tax settlement costs of $33 for
122 people, and lease termination, relocation and other costs of $10. The charge
is reflected as a component of "gains on investments - sales and exit costs of
international investments - net" in the Consolidated Statement of Operations.
During 1999, the Company paid $6 related to this charge and 44 people left under
the exit plan.
Combined Financial Results of International Equity Investments. The
following table reflects summarized combined financial information for the
Company's investments in international ventures accounted for on the equity
method. For 1999, the information presented excludes a portion of the fourth-
quarter 1999 activity related to the Company's investments in BPL Cellular
Limited ("BPL Cellular") in India and RTDC since MediaOne Group suspended equity
method accounting for these investments as the investments had been reduced
below zero due to the recognition of equity losses and debt guarantees. Any
suspended equity losses on these investments will need to be recognized to the
extent MediaOne Group funds additional amounts to these ventures in the future.
For 1999 and 1998, the information presented excludes activity related to the
Company's investments in Binariang SDN BHD in Malaysia and PT ARIAWEST
International ("ARIAWEST") in Indonesia. Both investments were determined to be
66
<PAGE> 24
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
impaired at the end of 1997 and the Company terminated or suspended equity
method accounting on these investments in 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
COMBINED RESULTS OF OPERATIONS 1999 1998 1997
- ------------------------------ ---- ---- ----
<S> <C> <C> <C>
Revenues .......................... $ 3,352 $ 4,031 $ 3,353
Operating income (loss) ........... 90 (161) (601)
Net loss .......................... (642) (948) (1,696)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
COMBINED FINANCIAL POSITION 1999 1998
- --------------------------- ---- ----
<S> <C> <C>
Current assets ................................... $ 1,071 $ 1,535
Property, plant and equipment - net .............. 8,580 7,889
Other assets ..................................... 628 2,541
------- -------
Total assets ..................................... $10,279 $11,965
======= =======
Current liabilities .............................. $ 1,706 $ 1,630
Long-term debt ................................... 6,111 7,388
Other liabilities ................................ 194 1,177
Equity ........................................... 2,268 1,770
------- -------
Total liabilities and equity ..................... $10,279 $11,965
======= =======
</TABLE>
Investment Dispositions, Announced Agreements and Other
One 2 One. On October 1, 1999, MediaOne Group sold its 50 percent
ownership in Mercury Personal Communications ("One 2 One"), a wireless operation
in the United Kingdom, to Deutsche Telekom for $5.7 billion, including
approximately $190 for the repayment of shareholder loans owed to the Company.
In connection with the sale of One 2 One, the Company entered into put options
to minimize its exposure to declines in the exchange rate on the British Pound,
for a cost of approximately $75. In September 1999, the Company unwound certain
of the put options and entered into forward contracts related to the British
Pound. The put options and forward contracts expired in October 1999. The cost
of the put options and the settlement value on the forward contract was included
in the calculation of the gain on the sale of One 2 One. The sale resulted in a
pretax gain of $6,012 ($3,711 after tax).
Telewest. On October 4, 1999, the Company signed an agreement to sell
its interest in Telewest Communications plc ("Telewest"), a cable and
telecommunications provider in the United Kingdom, to Microsoft Corporation
("Microsoft") for approximately 30 million shares of Microsoft common stock with
a value of approximately $3.7 billion as of December 31, 1999. The terms and
conditions of the sale are subject to certain approvals. The sale is expected to
occur in 2000.
In the fourth quarter of 1999, the Company entered into an agreement
with Microsoft whereby the Company has the option to sell its Flextech plc
("Flextech") shares to Microsoft at a fixed price. As of December 31, 1999,
MediaOne Group owned approximately 10,519,000 Flextech shares.
During the fourth quarter of 1999, Telewest notified its shareholders
of its intention to raise cash through a rights offering and use the proceeds to
fund the acquisition of the remaining 50 percent of Cable
67
<PAGE> 25
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
London plc. MediaOne Group's interest in Telewest was diluted to 27.2 percent as
the Company did not participate in the rights offering. The Company recorded a
pretax gain of $157 ($97 after tax) to recognize the increase in the value of
its interest in Telewest.
At December 31, 1999 and 1998, the Company's interest in Telewest,
which is the only equity method investment for which a quoted market price is
available, had a market value of $3,527 and $1,803, respectively.
On September 1, 1998, Telewest acquired General Cable plc ("General
Cable"), a cable provider in the United Kingdom, for approximately $1.1 billion
in stock and cash. Telewest raised cash for the acquisition through a rights
offering to its existing shareholders, including MediaOne Group. MediaOne Group
purchased 85 million new Telewest shares at a cost of $131. In addition, the
Company recorded a gain in equity of $39, net of deferred taxes of $25, related
to Telewest's acquisition of General Cable. On November 10, 1998, MediaOne Group
purchased an additional 175 million Telewest shares from Southwestern Bell
International Holdings at a price of $2.25 per share, or $394. At December 31,
1998, the Company held a 29.9 percent interest in Telewest.
A2000. On September 3, 1999, United Pan-Europe Communications N.V.
("UPC") purchased MediaOne Group's interests in A2000, a cable operator located
in the Netherlands, for proceeds of $229, including $14 for the repayment of
shareholder loans and receivables owed to the Company. The sale resulted in a
pretax gain of $154 ($94 after tax).
Cable Plus. On October 27, 1999, the Company sold its interest in Cable
Plus to UPC for proceeds of $150. The sale resulted in a pretax gain of $74 ($45
after tax).
Central European Wireless. On October 22, 1999, MediaOne Group agreed
to sell its interests in most of its Central European wireless ventures for $2
billion. These ventures include Polska Telefonia Cyfrowa, a wireless operator
located in Poland, Westel 900 and Westel Radiotelefon, wireless operators
located in Hungary, and RTDC. This transaction is expected to close in early
2000.
In July 1998, Westel 900 repurchased shares of its stock. This
repurchase resulted in an increase in MediaOne Group's interest in Westel 900 to
49.0 percent from 46.6 percent.
Listel. On June 2, 1999, the Company sold its interest in Listel, a
South American directories operation, to BellSouth Corporation, for proceeds of
$55 and a pretax gain of $20 ($9 after tax).
Lyonnaise. On September 8, 1999, the Company sold its interest in
Lyonnaise Communications, a cable operator in France, for proceeds of $22, which
resulted in a pretax gain of $10 ($6 after tax).
Optus Shares. During the first half of 1999, the Company disposed of
its remaining investment in shares of Cable & Wireless Optus Limited ("Optus"),
for net proceeds of $164 and a gain of $155 ($95 after tax). MediaOne Group had
received 13.6 million shares of Optus in the first quarter of 1999 as a result
of having met certain performance measures at Optus and purchased 5.6 million
additional Optus shares related to the Company's anti-dilution rights. In
addition, MediaOne Group had received 50 million Optus shares in November 1998
when it converted a note with Optus into Optus shares. The Company also acquired
24.2 million Optus shares, related to MediaOne Group's anti-dilution rights, in
1998 for $30. Such shares were subsequently sold in 1998 for $39, realizing a
gain of $9 ($6 after tax).
68
<PAGE> 26
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
In addition, during 1999, MediaOne Group recognized a $62 commission
fee from Optus in income. The Company earned the fee as a result of Optus having
met certain performance measures.
Telenet. On November 19, 1999, MediaOne Group sold its interest in
Telenet, a cable operator located in Belgium, to the remaining shareholders of
Telenet for proceeds of $98, resulting in a gain of $44 ($27 after tax). In
connection with the sale of Telenet, the Company entered into put options to
minimize its exposure to declines in the exchange rate on Euro Dollars, for a
cost of approximately $3. The cost of the put options was included in the
calculation of the gain on the sale of Telenet.
If within one year of MediaOne Group's sale to the Telenet shareholders
this interest is subsequently sold, the Company is entitled to receive
approximately 62 percent of the difference between the new transaction price and
MediaOne Group's sale price.
WatchMark. On July 16, 1999, MediaOne Group sold WatchMark, a wholly
owned wireless network management software operation, to Lucent Technologies for
proceeds of $7, resulting in a pretax loss of $1.
TITUS and Chofu. During the second and third quarters of 1999, the
Company increased its ownership in TITUS Communication Corporation ("TITUS"), a
broadband network operation in Japan, and Chofu Cable Television ("Chofu"), a
cable operation in Japan. As part of the acquisition, MediaOne Group assumed
outstanding debt guarantees totaling approximately $50. During fourth quarter
1999, the Company made additional capital contributions, further increasing
MediaOne Group's investment in TITUS to a total interest of 60 percent. As of
December 31, 1999, MediaOne Group's interest in Chofu was 33.3 percent.
Subsequent to year-end 1999, the Company entered into an agreement to sell its
interests in TITUS and Chofu. See Note 23 - Subsequent Events - to the
Consolidated Financial Statements.
ARIAWEST. On May 13, 1999, ARIAWEST reached an agreement to restructure
its debt into a non-recourse debt facility. MediaOne Group will evaluate any
probable funding obligations as they arise.
Other. In 1997, MediaOne Group recorded a charge related to its
investment in ARIAWEST for probable funding commitments. During fourth-quarter
1999, the Company redesignated $37 of this charge to RTDC for RTDC's debt
guarantees and accounts receivable.
69
<PAGE> 27
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
The Company's key equity method investments in international ventures
follow:
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP
DECEMBER 31,
VENTURE(1) 1999 1998
- -------- ---- ----
<S> <C> <C>
CABLE AND BROADBAND
Telewest Communications, United Kingdom 27.2 29.9
A2000 (KTA), Netherlands(2) - 50.0
Telenet, Belgium(2) - 25.0
Singapore Cablevision, Singapore 25.0 25.0
Titus Communications Corp., Japan 60.0 25.0
Chofu Cable Television, Japan 33.3 19.1
WIRELESS
One 2 One, United Kingdom(2) - 50.0
Delta Telecommunications, Russia(3),(4) 42.5 42.5
Moscow Cellular Communications, Russia(3),(4) 22.0 22.0
Westel Radiotelefon, Hungary 49.0 49.0
Westel 900 GSM Mobile Telecommunications, Hungary 49.0 49.0
Eurotel Praha, Czech Republic 24.5 24.5
Eurotel Bratislava, Slovak Republic 24.5 24.5
Polska Telefonia Cyfrowa, Poland 22.5 22.5
BPL Cellular Limited, India(4) 49.0 49.0
</TABLE>
- -----------
(1) MediaOne Group sold its 50 percent investment in a South American directory
operation in June 1999.
(2) MediaOne Group sold its interest in these investments during 1999.
(3) Investments are held by RTDC, owned 66.5 percent by the Company.
(4) The Company suspended equity method accounting for RTDC and BPL Cellular in
the fourth quarter of 1999.
At December 31, 1999 and 1998, the difference between the carrying
amount and the Company's interest in the underlying equity of its international
ventures was approximately $250 and $160, respectively.
Foreign Currency Transactions. The Company selectively enters into
forward and purchased option contracts to manage the market risks associated
with fluctuations in foreign exchange rates after considering offsetting foreign
exposures among international operations. The use of forward and purchased
option contracts allows the Company to fix or cap the cost of firm foreign
investment commitments, the amount of foreign currency proceeds from sales of
foreign investments, the repayment of foreign currency denominated receivables
and the repatriation of dividends. All foreign exchange contracts have
maturities of one year or less. The use of such contracts was limited in 1999
and 1998. There were no foreign exchange contracts outstanding as of December
31, 1999 and December 31, 1998.
70
<PAGE> 28
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
Forward contracts were selectively used to hedge foreign denominated
proceeds from the sale of foreign investments and foreign denominated
receivables during 1999 and 1998. Foreign currency pretax hedging losses of $1
was included in each of 1999 and 1998. The counterparties to these contracts are
major financial institutions. The Company is exposed to credit loss in the event
of nonperformance by these counterparties. The Company does not have significant
exposure to an individual counterparty and does not anticipate nonperformance by
any counterparty.
For the years ended 1999, 1998 and 1997, the Company recorded foreign
currency transaction pretax losses of $4, pretax gains of $13, and pretax losses
of $40, respectively.
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Land and buildings $ 308 $ 117
Cable distribution systems 4,754 3,736
General purpose computers and other 947 785
Construction in progress 677 299
----- ------
6,686 4,937
Less accumulated depreciation 1,596 868
----- ------
Property, plant and equipment - net $5,090 $4,069
====== ======
</TABLE>
Depreciation expense was $729, $657 and $727 for the years ended 1999,
1998 and 1997, respectively.
NOTE 9: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Identified intangibles, primarily franchise value $ 9,487 $ 9,089
Goodwill 3,635 3,741
------- -------
13,122 12,830
Less accumulated amortization 1,615 1,183
------- -------
Total intangible assets - net $11,507 $11,647
======= =======
</TABLE>
Amortization expense for 1999, 1998 and 1997 was $519, $525 and $530,
respectively.
71
<PAGE> 29
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Notes payable:
Commercial paper $ -- $ 216
AT&T note 1,500 --
Current portion of long-term debt 6 353
------ ------
Total $1,506 $ 569
====== ======
</TABLE>
MediaOne Group maintains 365-day and 5-year revolving bank credit
facilities totaling $2.0 billion to support its commercial paper program and to
provide financing, all of which were available as of December 31, 1999. The
weighted average interest rate on commercial paper was 6.09 percent at December
31, 1998.
Short-term Debt Issuance. As a result of the termination of the Comcast
merger, AT&T funded the $1.5 billion termination fee to Comcast on behalf of
MediaOne Group, and MediaOne Group issued a note payable to AT&T. The AT&T note
bears interest at 3-month LIBOR plus 0.15 percent and matures on December 31,
2000. The note is due on demand at any time following consummation of the merger
between the Company and AT&T.
Short-term Debt Maturities. On May 15, 1999, $254 of Debt Exchangeable
for Common Stock ("DECS") matured. In accordance with the terms of the original
debt issuance, the DECS were redeemed for shares of Financial Security Assurance
Holdings Ltd. ("FSA") held by the Company, resulting in a pretax gain of $21
($14 after tax).
On December 15, 1998, $130 of DECS matured and were redeemed for shares
of Enhance Financial Services Group, Inc. ("Enhance") held by MediaOne Group, in
accordance with the terms of the original debt issuance. In addition, the
Company settled an option issued in 1997 for the purchase of MediaOne Group's
residual shares of Enhance common stock at the DECS' maturity resulting in a
pretax gain of $9. As a result of both transactions, the Company has disposed of
its ownership in shares of Enhance.
In connection with the sale of the domestic wireless businesses in
April 1998, AirTouch assumed $1,350 of short-term debt from MediaOne Group.
LONG-TERM DEBT
Exchangeable Notes. During 1999 and 1998, the Company issued debt
mandatorily redeemable at MediaOne Group's option into (i) Vodafone ADRs held by
MediaOne Group, (ii) the cash equivalent, or (iii) a combination of cash and
Vodafone ADRs, (the "Exchangeable Notes"). The maturity value of the
Exchangeable Notes varies based upon the fair market value of a Vodafone ADR.
72
<PAGE> 30
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
Following is a summary of the Exchangeable Notes outstanding:
<TABLE>
<CAPTION>
EXCHANGEABLE NOTES 1999 1998
- ------------------ ---- ----
<S> <C> <C>
Interest Rate 7.0 percent 6.25 percent
Number of Shares 26 million 29 million(1)
Maturity Date Nov. 15, 2002 Aug. 15, 2001
Issuance Date Nov. 1999 Aug. & Sept. 1998
Gross Proceeds on Issuance $1,129 $1,686
Issuance Price per Share $43.4375 $58.125
New cost basis:(2)
Total n/a $2,529
Per share n/a $87.212
</TABLE>
- -----------
(1) As a result of the exchange of two shares of AirTouch common
stock for one Vodafone ADR, and the five for one split of
Vodafone ADRs, the redemption value of the 1998 Exchangeable
Notes is now based on 72,500,000 Vodafone ADRs.
(2) As a result of the exchange of AirTouch common stock for
Vodafone ADRs and $9.00 cash proceeds per share, the cost
basis for the 1998 Exchangeable Notes was revised as shown.
Debt proceeds were used by the Company to reduce outstanding commercial
paper and for general corporate purposes.
The redemption formula for the 1999 Exchangeable Notes is as follows:
(a) If the fair market value of a Vodafone ADR is greater than or
equal to $51.2563, each 1999 Exchangeable Note is equivalent
to 0.8475 of a Vodafone ADR;
(b) If the fair market value of a Vodafone ADR is less than or
equal to $43.4375, each 1999 Exchangeable Note is equivalent
to one Vodafone ADR; or
(c) If the fair market value of a Vodafone ADR is less than
$51.2563 but greater than $43.4375 per share, each 1999
Exchangeable Note is equivalent to a fraction of a Vodafone
ADR equal to (i) the issuance price per 1999 Exchangeable Note
of $43.4375 divided by (ii) the fair market value of one
Vodafone ADR.
Upon issuance of the 1998 Exchangeable Notes, their maturity value was
based on the fair market value of AirTouch common stock. As a result of the
Vodafone merger in June 1999, the terms of the 1998 Exchangeable Notes were
modified so that the maturity value of the debt would be based on the fair
market value of Vodafone ADRs. The redemption formula was also modified for the
five for one Vodafone stock split.
73
<PAGE> 31
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
The number of Vodafone ADRs to be exchanged at maturity for each 1998
Exchangeable Note, and/or the cash equivalent, will be based upon a redemption
value of $9.00 in cash plus 2 1/2 times the fair market value of a Vodafone ADR
(the "Maturity Price"), as follows:
(a) If the Maturity Price is greater than or equal to $71.75 per
share, each 1998 Exchangeable Note is equivalent to .8101 of
the Maturity Price;
(b) If the Maturity Price is less than or equal to $58.125 per
share, each 1998 Exchangeable Note is equivalent to the
Maturity Price; or
(c) If the Maturity Price is less than $71.75 per share but
greater than $58.125 per share, each 1998 Exchangeable Note is
equivalent to $58.125.
The Exchangeable Notes are being accounted for as indexed debt
instruments since the maturity value of the Exchangeable Notes is dependent upon
the fair market value of the underlying Vodafone ADRs. For the 1999 debt
issuance, the Company has eliminated the market risk on a decline in value of
Vodafone ADRs below $43.4375 per share on 26,000,000 of the 148,284,000 Vodafone
ADRs held by the Company. Conversely, MediaOne Group would be entitled to 15.25
percent of the fair market value in excess of $51.2563 per Vodafone ADR on
26,000,000 Vodafone ADRs. For the 1998 debt issuance, the Company has eliminated
the market risk on a decline in value of Vodafone ADRs below $19.65 per share on
72,500,000 of the 148,284,000 Vodafone ADRs held by the Company. Conversely,
MediaOne Group would be entitled to approximately 19 percent of the fair market
value in excess of $25.10 per share on 72,500,000 Vodafone ADRs. At December 31,
1999, the Vodafone ADRs had a fair market value of $49.50 per share.
Since the Vodafone ADRs are a cost method investment being accounted
for as "available for sale" securities under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," changes in the maturity
value of the Exchangeable Notes are being recorded in equity as unrealized gains
or losses.
The Exchangeable Notes are unsecured obligations of MediaOne Group,
ranking equally in right of payment with all other unsecured and unsubordinated
obligations of MediaOne Group.
Floating Rate Debt. On June 3, 1999 and September 23, 1999, MediaOne
SPC IV and MediaOne SPC VI issued approximately $1,128 and $717 of floating rate
debt, respectively, at 3-month LIBOR plus 0.5 percent. MediaOne SPC IV and
MediaOne SPC VI also paid $321 and $216, respectively, to fix and pre-fund
interest payments on approximately $1.1 billion and $700 notional amount of
their respective debt through interest swap agreements (the "Zero Coupon Swap").
The MediaOne SPC IV debt and corresponding Zero Coupon Swap mature in equal
quarterly installments beginning in the second quarter of 2003 and ending in the
second quarter of 2005. The MediaOne SPC VI debt and corresponding Zero Coupon
Swap mature in equal quarterly installments beginning in the second quarter of
2003 and ending in the fourth quarter of 2005. The Company has therefore
deferred the costs of the Zero Coupon Swaps and will amortize the costs as
adjustments of interest expense associated with the respective floating rate
debt. As a result of the amortization and payments received under the Zero
Coupon Swap, the Company expects to have a fixed effective interest rate of 5.91
percent on the MediaOne SPC IV debt and 6.02 percent on the MediaOne SPC VI
debt.
In August 1999, MediaOne SPC IV redeemed approximately $105 of its
floating rate debt for face value. The debt was redeemed with the cash proceeds
received in June 1999 from the exchange of the Company's investment in AirTouch
common stock for Vodafone ADRs. In addition, the Company received
74
<PAGE> 32
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
proceeds of $30 upon the termination of the corresponding portion of the Zero
Coupon Swap which had a carrying value of approximately $29.
The assets of MediaOne SPC IV, which are primarily the 29,154,000
Vodafone ADRs, are not available to pay the creditors of any member of the
Company except the creditors of MediaOne SPC IV. The assets of MediaOne SPC VI,
which are primarily the 18,000,000 Vodafone ADRs, are not available to pay the
creditors of any member of the Company except the creditors of MediaOne SPC VI.
Long-term Debt Redemptions. On June 1, 1999, the Company redeemed the
11.0 percent senior subordinated debentures of MediaOne with a carrying value of
$345. The debt extinguishment resulted in an after tax gain of $17 (net of
income tax expense of $11) primarily related to the write-off of excess debt
premiums. The gain is reflected as an extraordinary item in the Consolidated
Statement of Operations. MediaOne Group also redeemed a third-party note for its
carrying value of $12. MediaOne Group financed the redemptions with cash on
hand.
Other. In conjunction with the Refinancing in 1998, MediaOne Group
assumed from Old U S WEST $351 of medium and long-term debt securities which
remained outstanding after the Refinancing. The debt securities had already been
allocated to MediaOne Group's operations prior to the Separation.
Since the capital assets segment is no longer accounted for as "held
for sale," its results are reflected in the Company's Consolidated Balance
Sheets. At December 31, 1999 and 1998, the Company's consolidated debt balances
included $150 and $155 of long-term debt associated with the capital assets
segment, respectively. Long-term debt of the capital assets segment primarily
represents non recourse loans issued in September 1997 by MediaOne Financial
Services, Inc. ("Financial Services"), a subsidiary of the Company and a member
of the capital assets segment, which are securitized by certain finance
receivables of Financial Services. The loans bear interest at an average rate of
6.9 percent and mature in April, 2009.
MediaOne Group's long-term debt components are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Exchangeable Notes $ 4,248 $ 1,702
Senior unsecured notes, debentures and medium-term notes 2,333 2,346
Secured debt 1,893 154
Senior subordinated debt -- 300
Capital lease obligations 7 1
Other -- 89
Unamortized discount-net (3) --
Unamortized premium-net 195 261
------- -------
Total $ 8,673 $ 4,853
======= =======
</TABLE>
Senior unsecured notes and debentures totaling $2.0 billion as of
December 31, 1999 were assumed by the Company in connection with its acquisition
of Continental Cablevision, Inc. ("Continental") in 1996, and are not guaranteed
by the Company. These notes and debentures limit MediaOne's ability to, among
other things, pay dividends, create liens, incur additional debt, dispose of
property, investments and leases, and require certain minimum ratios of cash
flow to debt and cash flow to related fixed charges.
75
<PAGE> 33
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
Interest rates and maturities of long-term debt at December 31, 1999
follow:
<TABLE>
<CAPTION>
MATURITIES
----------------------------------------------------------
THERE- TOTAL TOTAL
INTEREST RATES 2001 2002 2003 2004 AFTER 1999 1998
- -------------- ---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Above 5% to 6% $ -- $ -- $ 341 $ 455 $ 227 $ 1,023 $ 1
Above 6% to 7% 3,119 37 214 291 411 4,072 1,948
Above 7% to 8% -- 1,132 -- 5 42 1,179 45
Above 8% to 9% 200 -- 100 -- 1,375 1,675 1,680
Above 9% to 10% -- -- -- -- 525 525 528
Above 10% -- -- -- -- -- -- 300
------- ------- ------- ------- ------- ----- -----
$ 3,319 $ 1,169 $ 655 $ 751 $ 2,580 8,474 4,502
======= ======= ======= ======= =======
Capital lease obligations and other 7 90
Unamortized discount - net (3) --
Unamortized premium - net 195 261
------- -------
Total $ 8,673 $ 4,853
======= =======
</TABLE>
Interest payments, net of amounts capitalized, were $404, $709 and $572
for 1999, 1998 and 1997, respectively, of which $16, $33 and $47, respectively,
related to the capital assets segment.
INTEREST RATE RISK MANAGEMENT
The objective of an interest rate risk management program is to
minimize the total cost of debt over time and the interest rate variability.
This is achieved through the use of interest rate swaps, which adjust the ratio
of fixed- to variable-rate debt. Under an interest rate swap, the Company agrees
with another party to exchange interest payments at specified intervals over a
defined term. Interest payments are calculated by reference to the notional
amount based on the fixed- and variable-rate terms of the swap agreements. Apart
from the Zero Coupon Swaps discussed above, MediaOne Group had no other swaps or
interest rate contracts outstanding as of December 31, 1999.
During fourth-quarter 1996, the Company purchased $1.5 billion notional
of put options on U. S. Treasury Bonds to protect against an increase in
interest rates in conjunction with the 1997 refinancing of debt assumed from
Continental. The contracts closed in January 1997 and a gain of $5 was deferred.
The gain was recognized in 1998 in conjunction with the Refinancing as part of
the loss on debt extinguishment.
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.
The carrying values of mandatorily redeemable preferred stock and
long-term receivables approximate the fair values based on quoted market prices
or discounted future cash flows. The carrying values of foreign exchange
contracts approximate the fair values based on estimated amounts the Company
would receive or pay to terminate such agreements. It is not practicable to
estimate the fair value of financial guarantees because there are no quoted
market prices for similar transactions.
76
<PAGE> 34
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of interest rate swaps are based on estimated amounts
the Company would receive or pay to terminate such agreements taking into
account current interest rates and creditworthiness of the counterparties. The
fair values of the Zero Coupon Swaps are based on discounting future cash flows
using current interest rates.
The fair values of the Collars are calculated using an option valuation
model that includes dividends, volatility, price of underlying instrument and
interest rates.
The fair values of long-term debt and Preferred Securities and minority
interest in Centaur Funding are based on quoted market prices where available
or, if not available, are based on discounting future cash flows using current
interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Debt - net (includes short-term portion) $ 10,179 $ 10,241 $ 5,422 $ 5,861
Zero Coupon Swaps - assets (460) (499) -- --
-------- -------- -------- --------
Debt - net $ 9,719 $ 9,742 $ 5,422 $ 5,861
======== ======== ======== ========
Minority interest in Centaur Funding $ 1,113 $ 1,159 $ 1,099 $ 1,169
======== ======== ======== ========
Preferred Securities $ 1,060 $ 1,044 $ 1,061 $ 1,073
======== ======== ======== ========
</TABLE>
The unamortized cost and estimated market value of debt and equity
securities follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED FAIR
SECURITIES COST GAINS LOSSES(1) FAIR VALUE COST GAINS LOSSES VALUE
- ---------- ---- ----- --------- ---------- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity securities $ 6,075 $ 2,825 $ (737) $ 8,163 $ 3,045 $ 1,609 $ -- $ 4,654
Debt securities 1,637 -- (94) 1,543 1,782 2 (19) 1,765
------- ------- ------- ------- ------- ------- ------- -------
Total $ 7,712 $ 2,825 $ (831) $ 9,706 $ 4,827 $ 1,611 $ (19) $ 6,419
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- -----------
(1) Gross unrealized losses on equity securities represent the fair market
value of the Collars, which have a zero cost basis.
Investments in debt and equity securities are classified as available
for sale and are carried at market value. Debt and equity securities primarily
represent Vodafone ADRs and preferred stock during 1999, and AirTouch preferred
and common securities during 1998. The AirTouch shares were received in April
1998 as a result of the sale of the Company's domestic wireless businesses to
AirTouch. Net unrealized gains and losses on marketable securities are included
in comprehensive income as a component of equity. The market value of these
securities is based on quoted market prices where available or, if not
available, is based on discounting future cash flows using current interest
rates.
As of December 31, 1999, contractual maturities of investments in debt
securities held by MediaOne Group were as follows: $72 less than one year, $66
from one to 5 years, and $1,405 greater than 5 years
77
<PAGE> 35
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
through 2026. Investments in debt securities may not be held to their
contractual maturities as the Company may sell these securities in response to
liquidity needs and changes in interest rates.
NOTE 12: LEASING ARRANGEMENTS
The Company has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $43, $56 and
$74 in 1999, 1998 and 1997, respectively. Future minimum lease payments as of
December 31, 1999, under noncancelable operating leases follow:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2000 $ 35
2001 25
2002 22
2003 19
2004 18
Thereafter 40
----
Total $159
====
</TABLE>
NOTE 13: MINORITY INTEREST IN CENTAUR FUNDING
On December 15, 1998, Centaur Funding Corporation ("Centaur"), a
special purpose entity consolidated by MediaOne Group, issued three series of
preferred shares to external investors (the "Preference Shares") as well as $25
of common securities. The Company owns all of the outstanding common securities,
representing a 9.9 percent voting interest in Centaur. Centaur was formed for
the principal purpose of raising capital through the issuance of the Preference
Shares. The net proceeds from the issuance of the Preference Shares were loaned
to MediaOne SPC II, LLC ("MediaOne SPC II"), a subsidiary of MediaOne Group (the
"MediaOne SPC II Notes"). Principal and interest payments on the MediaOne SPC II
Notes are expected to be Centaur's principal source of funds to make dividend
and redemption payments on the Preference Shares. In addition, the dividend
payments and certain redemption payments on the Preference Shares will be
determined by reference to the dividend and redemption activity of the ATI
Shares. See Note 4 - Investment in Vodafone Group/AirTouch Communications - to
the Consolidated Financial Statements. The ATI Shares are owned by MediaOne SPC
II. Payments on the Preference Shares are neither guaranteed nor secured by
MediaOne Group. The sole assets of Centaur are the MediaOne SPC II Notes and the
proceeds from the sale of the common securities, which may be invested in
certain eligible investments as outlined in Centaur's articles of incorporation.
The ATI Shares, 75 percent of the outstanding common stock of MediaOne
International Holdings, Inc., (the "International Stock"), and a certain
intercompany note receivable from MediaOne of Colorado, a wholly owned
subsidiary of the Company, to MediaOne SPC II and certain other assets are
properties of MediaOne SPC II and are not available to pay creditors of any
member of the Company, other than creditors of MediaOne SPC II. The
International Stock owned by MediaOne SPC II may be transferred or dividended by
MediaOne SPC II to another member of MediaOne Group if such transfer or dividend
is in compliance with certain covenants and limitations. MediaOne SPC II is a
limited liability company, the membership interest of which is owned by MediaOne
SPC I LLC ("MediaOne SPC I"), a wholly owned subsidiary of the Company. That
membership interest is the property of MediaOne SPC I
78
<PAGE> 36
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: MINORITY INTEREST IN CENTAUR FUNDING (CONTINUED)
and is not available to pay creditors of any member of MediaOne Group, other
than creditors of MediaOne SPC I.
The three series of Centaur Preference Shares are as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C TOTAL
<S> <C> <C> <C> <C>
Dividend Rate Variable 9.08% None
Maturity Date None 4/21/2020(1) 4/21/2020(1)
Shares Outstanding 400 934,500 715,500
Book Value $ 98 $ 910 $ 105 $ 1,113
======== ======== ======== ========
Liquidation Value $ 100 $ 934 $ 716 $ 1,750
======== ======== ======== ========
Voting Interest in Centaur 11.1% 49.0% 30.0%
</TABLE>
- -----------
(1) Maturity dates of the Series B and Series C Preference Shares are
referenced to the ATI Shares.
The Auction Market Preference Shares, Series A (the "Series A
Preference Shares") have a liquidation value of two hundred and fifty thousand
dollars per share, and were recorded at their liquidation value less issuance
costs of $3. Dividends on the Series A Preference Shares are payable quarterly
as and when declared by Centaur's Board of Directors out of funds legally
available.
The 9.08 percent Cumulative Preference Shares, Series B (the "Series B
Preference Shares") have a liquidation value of one thousand dollars per share,
and were recorded at their liquidation value less issuance costs of $25.
Dividends on the Series B Preference Shares are payable quarterly in arrears
when declared by Centaur's Board of Directors out of funds legally available. In
addition, dividends may be declared and paid only to the extent that dividends
have been declared and paid on the ATI Shares.
The Preference Shares, Series C (the "Series C Preference Shares") have
a liquidation value of one thousand dollars per share at maturity, and were
recorded at their fair value of $96 less issuance costs of $3. The value of the
Series C Preference Shares will be accreted to reach its liquidation value upon
maturity.
Certain redemption payments on the Series B and Series C Preference
Shares will be determined by reference to the redemption of the ATI Shares. On
May 13, 1999, as a result of the Vodafone merger, Centaur mailed notices to the
holders of the Series B and Series C Preference Shares that described the manner
in which the terms of the Series B and Series C Preference Shares would be
deemed modified to reflect the changes to the ATI Shares, pursuant to the
Articles of Association of Centaur, without any action of the holders of such
shares. The revised redemption schedule was modified so that the maturity date
on the Class E ATI Shares is now April 1, 2020. The Class E ATI Shares represent
50 percent of the ATI Shares. Consequently, if Vodafone redeems all of the Class
E ATI Shares, Centaur must redeem 50 percent of the outstanding Series B and
Series C Preference Shares. In addition, all of the Class D ATI Shares mature on
April 21, 2020. If Vodafone redeems all of the Class D ATI Shares, then Centaur
would be obligated to redeem the same percentage of the Series B and Series C
Preference Shares. See Note 4 - Investment in Vodafone Group/AirTouch
Communications - to the Consolidated Financial Statements.
79
<PAGE> 37
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: MINORITY INTEREST IN CENTAUR FUNDING (CONTINUED)
The $21 extraordinary dividend payment on the Class E ATI Shares was
allocated to the Series B and Series C Preference Shares on a pro-rata basis
based on the liquidation value of the Series B Preference Shares and on the
accreted value of the Series C Preference Shares as of June 30, 1999, and is
reflected as "minority interest expense in Centaur Funding" in the Consolidated
Statements of Operations. The amount allocated to the Series B Preference Shares
was reflected as a one-time extraordinary dividend and was paid to the holders
in August 1999 following the payment in August 1999 on the Class E ATI Shares.
The amount allocated to the Series C Preference Shares was reflected as an
increase in Centaur's obligation upon maturity.
The Series A, Series B and Series C Preference Shares are recorded as
"Minority interest in Centaur Funding" on the Consolidated Balance Sheets of the
Company. The Series B Preference Shares rank equally with the Series C
Preference Shares as to redemption payments and upon liquidation, and the Series
B and Series C Preference Shares rank senior to the Series A Preference Shares
and the common shares of Centaur as to redemption payments and upon liquidation.
The Series B Preference Shares rank senior to the Series A Preference
Shares and the common shares with respect to dividend payments. Centaur may only
pay a dividend to its common shareholder when its assets, including the MediaOne
SPC II Notes, exceed the liquidation preference and accumulated and unpaid
dividends on the Series B and Series C Preference Shares by $28 after paying the
common dividends, and when it has a cash balance, including qualified
investments, in excess of $28 after paying the common dividend.
At December 31, 1999 and 1998, Centaur held $27 and $26, respectively,
in cash for its exclusive use. Since Centaur's cash management options are
limited to non-affiliated, risk-free investments, and it is restricted from
loaning up to $28 in cash to MediaOne Group and its subsidiaries, Centaur's cash
balance is not included in the Company's cash and cash equivalents balance.
Instead, Centaur's cash balance has been classified in the Consolidated Balance
Sheets of the Company as a component of "Other Assets."
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY - GUARANTEED SUBORDINATED
DEBENTURES
The following table summarizes the Preferred Securities outstanding as
of December 31, 1999:
<TABLE>
<CAPTION>
PREFERRED SECURITIES 7.96% 8.25% 9.30% 9.50% 9.04% TOTAL
- -------------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Subsidiary Financing I Financing II Finance I Finance II Finance III
Maturity Date Sept. 30, 2025 Oct. 29, 2036 Sept. 30, 2025 Oct. 29, 2036 Dec. 31, 2038
Shares Outstanding 1,312,910 1,185,618 10,658,108 8,520,289 20,000,000
Book Value $33 $30 $274 $223 $500 $1,060
=== === ==== ==== ==== ======
Liquidation Value $33 $30 $266 $213 $500 $1,042
=== === ==== ==== ==== ======
Value at Issuance $33 $30 $274 $224 $500
Common Securities 19 15 9 7 15
--- --- ---- ---- ----
Subordinated Debt Securities. $52 $45 $283 $231 $515
=== === ==== ==== ====
</TABLE>
80
<PAGE> 38
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY - GUARANTEED SUBORDINATED
DEBENTURES (CONTINUED)
The Exchange Offer
On June 12, 1998, MediaOne Group tendered for cash or exchange all of
the outstanding Preferred Securities (the "Exchange Offer"). At that time, the
Company had outstanding $600 face value of 7.96 percent Preferred Securities of
Old U S WEST Financing I ("Financing I"), a subsidiary of Old U S WEST, and $480
face value of 8.25 percent Preferred Securities of Old U S WEST Financing II
("Financing II"), a subsidiary of Old U S WEST. Of the total outstanding, $301
face value of 7.96 percent Preferred Securities and $237 face value of 8.25
percent Preferred Securities were redeemed for cash. The cash redemption amount
of $570 was financed by issuing commercial paper at a weighted average interest
rate of 5.85 percent, which was subsequently repaid with net proceeds from the
1998 Exchangeable Notes issuance. See Note 10 - Debt - to the Consolidated
Financial Statements.
In addition, $266 face value of 7.96 percent Preferred Securities of
Financing I were exchanged for $274 fair value of 9.30 percent Preferred
Securities issued by MediaOne Finance Trust I ("Finance I"), a subsidiary of
MediaOne Group, and $213 face value of 8.25 percent Preferred Securities of
Financing II were exchanged for $224 fair value of 9.50 percent Preferred
Securities issued by MediaOne Finance Trust II ("Finance II"), a subsidiary of
MediaOne Group. The Preferred Securities of Finance I and Finance II were
recorded upon issuance at fair value of $25.75 and $26.30 per security,
respectively. Finance I and Finance II also issued $9 and $7, respectively, of
common securities which are held by MediaOne Group. With the exception of the
dividend rates, the terms and maturity of the Finance I and Finance II Preferred
Securities are substantially the same as those of the Financing I and Financing
II Preferred Securities.
The Preferred Securities of Financing I and Financing II which were
neither redeemed for cash nor exchanged for new Preferred Securities remain
outstanding and their respective common securities were retained by MediaOne
Group.
As a result of the Exchange Offer, MediaOne Group recorded a charge to
equity of $53, (net of tax benefits of $28). Such charge represented redemption
costs, including the difference between the face and market value of the
securities, and a charge for unamortized issuance costs. Also included was a
charge of $19 related to market value premiums on the exchanged securities.
On October 23, 1998, MediaOne Finance Trust III ("Finance III"), a
subsidiary of MediaOne Group, issued $500 of 9.04 percent Preferred Securities
and $15 of common securities. The common securities are held by MediaOne Group.
Total proceeds from the issuance of the Preferred Securities and the
common securities of Financing I and Financing II (the "Old Trusts"), and
Finance I, Finance II and Finance III, (the "New Trusts", and collectively with
the Old Trusts, "the Trusts"), were used to purchase Subordinated Deferrable
Interest Notes (the "Subordinated Debt Securities") from MediaOne Group Funding,
Inc. ("MediaOne Funding"), a wholly owned subsidiary of MediaOne Group, the
obligations under which are fully and unconditionally guaranteed by MediaOne
Group (the "Debt Guarantees"). The Subordinated Debt Securities have the same
interest rate and maturity date as the Preferred Securities to which they
relate. The sole assets of the Trusts are and will be the Subordinated Debt
Securities and the Debt Guarantees. In the Exchange Offer, the Subordinated Debt
Securities that relate to the remaining outstanding Preferred Securities of the
Old Trusts were assumed by MediaOne Group and the related Debt Guarantees were
extinguished.
81
<PAGE> 39
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY - GUARANTEED SUBORDINATED
DEBENTURES (CONTINUED)
MediaOne Group has guaranteed the payment of interest and redemption
amounts to holders of the Preferred Securities when the Trusts have funds
available for such payments (the "Payment Guarantee") as well as the Company's
and MediaOne Funding's undertaking to pay all of the costs, expenses and other
obligations (the "Expense Undertaking") of the Old Trusts and the New Trusts,
respectively. The Payment Guarantee and the Expense Undertaking, including
MediaOne Group's guarantee with respect thereto, considered together with
MediaOne Funding's obligations under the indenture and Subordinated Debt
Securities and MediaOne Group's obligations under the indenture, declaration and
Debt Guarantees, constitute a full and unconditional guarantee by MediaOne Group
of the Trusts' obligations under the Preferred Securities. The interest and
other payment dates on the Subordinated Debt Securities are the same as the
distribution and other payment dates on the Preferred Securities. Under certain
circumstances, the Subordinated Debt Securities may be distributed to the
holders of Preferred Securities and common securities in liquidation of the
Trusts.
All of the Subordinated Debt Securities are redeemable by the Company
or MediaOne Funding at a redemption price of $25.00 per security, plus accrued
and unpaid interest. If the Company or MediaOne Funding redeems the Subordinated
Debt Securities, the Trusts are required to concurrently redeem their respective
Preferred Securities at $25.00 per share plus accrued and unpaid distributions.
The 9.30 percent and the 7.96 percent Subordinated Debt Securities are
redeemable in whole or in part at any time on or after September 11, 2000. The
9.50 percent and the 8.25 percent Subordinated Debt Securities are redeemable in
whole or in part at any time on or after October 29, 2001. The 9.04 percent
Subordinated Debt Securities are redeemable in whole or in part at any time on
or after October 28, 2003.
NOTE 15: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Series E Preferred Stock. On June 30, 1997, Old U S WEST acquired cable
systems serving approximately 40,000 subscribers in Michigan for cash of $25 and
the issuance of 996,562 shares of Old U S WEST Series E Preferred Stock (the
"Series E Preferred Stock") with a fair value of $50. Dividends are payable
quarterly at the annual rate of 6.34 percent. The Series E Preferred Stock was
recorded at fair value of $50.00 per share at June 30, 1997, which was equal to
its liquidation value. Effective with the Separation, the Old U S WEST Series E
Preferred Stock remains outstanding and represents shares of MediaOne Group
Series E Preferred Stock. Upon redemption, the preferred stockholders may elect
to receive cash or convert their Series E Preferred Stock into MediaOne Group
Stock. Cash redemption is equal to the Series E Preferred Stock's liquidation
value of $50.00 per share, plus accrued dividends. The number of shares of
MediaOne Group Stock to be received upon conversion is based on a formula of
$47.50 per share divided by the then current market price of MediaOne Group
Stock. The conversion rate is subject to adjustment by the Company under certain
circumstances. The Series E Preferred Stock ranks senior to MediaOne Group's
common stock, and is subordinated to any senior debt and the Preferred
Securities.
The Series E Preferred Stock is redeemable as follows: (a) the Company
may call for redemption all or any part of the Series E Preferred Stock
beginning on June 30, 2002; (b) on a yearly basis beginning August 1, 2007, and
continuing through August 1, 2016, the Company will redeem 49,704 shares of
Series E Preferred Stock, and on June 30, 2017, all of the remaining outstanding
shares of Series E Preferred Stock; or (c) all of the outstanding Series E
Preferred Stock shall be redeemed upon the occurrence of certain
82
<PAGE> 40
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION (CONTINUED)
events, including the dissolution or sale of all or substantially all of
MediaOne Group. Pursuant to the AT&T merger agreement, each share of the
Company's Series E Preferred Stock will be converted into one share of a newly
created AT&T series E preferred stock with substantially the same rights as the
MediaOne Group Series E Preferred Stock.
Series C Preferred Stock. On September 2, 1994, Old U S WEST issued to
Fund American Enterprises Holdings Inc. 50,000 shares of a class of 7 percent
Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock")
for a total of $50. Beginning on September 2, 1999, MediaOne Group had the
option to redeem the Series C Preferred Stock for one thousand dollars per share
plus unpaid dividends and a redemption premium. On September 2, 1999, holders of
the Series C Preferred Stock exercised options to receive common shares of
Financial Security Assurance Holdings Ltd. ("FSA") held by the Company with a
fair market value of $96. As a result of the exercise of the FSA options, the
Series C Preferred Stock was effectively redeemed, resulting in an after tax
charge to equity of $28 (net of tax benefits of $18). The Company also
recognized a pretax gain in income of $50 ($31 after tax) based upon the
difference in the fair market value and carrying value of the FSA shares
surrendered. The Company did not have to pay a redemption premium since the
Series C Preferred Stock holders exercised the option to receive FSA shares.
NOTE 16: SHAREOWNERS' EQUITY
Series D Preferred Stock. On October 1, 1999, MediaOne Group issued
redemption notices to its 4.5 percent, 20 year, Series D Preferred Stock (the
"Series D Preferred Stock") holders indicating that, effective on November 15,
1999, Series D Preferred Stock holders would receive .744 of a share of MediaOne
Group Stock per share of Series D Preferred Stock. The redemption formula was
based on the Series D Preferred Stock liquidation value of $50.00 per share,
divided by 95 percent of the average of the daily closing price of MediaOne
Group Stock for the ten consecutive trading days ending on November 10, 1999.
The Series D Preferred Stock holders also had the option to convert their shares
prior to November 15, 1999 at a ratio of 1.98052 shares of MediaOne Group Stock
per share of Series D Preferred Stock, which a majority did. A total of
39,576,000 shares of MediaOne Group Stock were issued in exchange for the
Company's Series D Preferred Stock. The 19,999,478 shares of Series D Preferred
Stock were originally issued on November 15, 1996, to shareowners of Continental
as partial consideration for the purchase of Continental.
Common Stock. Other activity for 1999 represents $121 of tax benefits on stock
option exercises, an $11 gain on the exercise of a call option on MediaOne Group
Stock, and $10 of miscellaneous costs. For 1998, other activity includes $44 of
tax benefits on stock option exercises, a $39 gain related to the acquisition of
General Cable by Telewest, a $39 gain on the exercise of a call option on shares
of the Company's stock, and miscellaneous activity of $25.
Share Repurchase. On August 7, 1998, the Board of Directors of MediaOne Group
authorized the repurchase of up to 25 million shares of the Company's common
stock over the next three years, dependent on market and financial conditions.
During 1999, MediaOne Group purchased and placed into treasury 830,000 shares of
MediaOne Group Stock at an average purchase price of $56.06 per share, or a
total cost basis of $46. In addition, MediaOne Group issued 6,483,000 common
shares out of treasury to execute the conversion of Series D Preferred Stock
into common stock. The treasury shares had an average cost of $41.80 per share,
for a total cost basis of $271. During 1998 and 1997, MediaOne Group purchased
83
<PAGE> 41
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: SHAREOWNERS' EQUITY (CONTINUED)
and placed into treasury approximately 8,682,000 and 2,838,000 shares of
MediaOne Group Stock at an average purchase price per share of $40.51 and
$18.71, for a total cost basis of $352 and $53, respectively. Prior to the
Separation, Old U S WEST purchased and placed into treasury $31 of
Communications Stock. All outstanding shares of Communications Stock held as
treasury stock by Old U S WEST were canceled as of the Separation date.
Other. As a result of the Separation the distribution of New U S WEST
was accounted for at fair value, resulting in a reduction in 1998 of $24,924 to
retained earnings and $421 to common stock, representing the fair value of the
businesses comprising New U S WEST previously held by Old U S WEST.
Following is a roll-forward of share activity during the three years
ended December 31, 1999:
<TABLE>
<CAPTION>
COMMON SHARES
-------------
MEDIAONE GROUP COMMUNICATIONS
STOCK STOCK
----- -----
(IN THOUSANDS)
--------------
<S> <C> <C>
BALANCE DECEMBER 31, 1996 608,863 480,457
Issuance of Communications Stock 4,058
Issuance of MediaOne Group Stock 1,783
Purchase of treasury stock (2,838)
------- -------
BALANCE DECEMBER 31, 1997 607,808 484,515
Issuance of Communications Stock 1,101
Distribution of New U S WEST (485,042)
Issuance of MediaOne Group Stock 4,350
Purchase of treasury stock (8,682) (574)
------- -------
BALANCE DECEMBER 31, 1998 603,476 -
=======
Issuance of MediaOne Group Stock 5,139
Issuance for Series D Preferred Stock 33,093
Issuance of treasury stock for Series D 6,483
Purchase of treasury stock (830)
-------
BALANCE DECEMBER 31, 1999 647,361
=======
</TABLE>
Comprehensive Income. MediaOne Group discloses comprehensive income in
accordance with the provisions of SFAS No. 130, "Reporting Comprehensive
Income." Comprehensive income includes net income and other non-owner changes to
equity not included in net income, such as foreign currency translation and
unrealized gains or losses on debt and equity securities.
The majority of the unrealized gains on debt and equity securities
during 1999 relate to the Company's investment in Vodafone ADRs and preferred
stock, totaling $852 (net of deferred taxes of $542), as well as $466 (net of
deferred taxes of $251) in unrealized gains on its investment in TW Telecom
which offered its shares in an initial public offering in May 1999. In addition,
prior to the exchange of AirTouch shares into Vodafone shares during June 1999,
MediaOne Group had recorded gains of $1,302 (net of deferred taxes of $817) on
its investment in AirTouch. Of the total reclassifications in 1999, $1,302 (net
of deferred taxes of $817) relate to gains realized upon the exchange and
modification of AirTouch
84
<PAGE> 42
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: SHAREOWNERS' EQUITY (CONTINUED)
common and preferred stock for Vodafone ADRs and preferred stock, and $26 (net
of deferred taxes of $16) relate to foreign currency translation adjustments on
the sale of various international investments during the year.
Of the total net unrealized gains on debt and equity securities during
1998, $826 (net of deferred taxes of $530), relate to the Company's investment
in AirTouch common and preferred stock. During 1998, MediaOne Group recorded an
unrealized gain of $147 related to its investment in AirTouch preferred stock.
This unrealized gain was fully offset by a loss on an interest rate swap
agreement which was designed to minimize the Company's exposure to fluctuations
in the fair value of the AirTouch preferred stock as a result of interest rate
changes.
The following table presents the components of other comprehensive
income and their related tax impacts. It also presents reclassification
adjustments related to gains realized on the sale of debt and equity securities,
and international investments.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------
PRE- AFTER- PRE- AFTER-
TAX TAX TAX TAX TAX TAX
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain on debt
and equity securities
and Exchangeable Notes $ 2,802 $(1,080) $ 1,722 $ 1,556 $ (601) $ 955
Less: Reclassification
for gains realized in
net income (2,258) 865 (1,393) (20) 8 (12)
------- ------- ------- ------- ------- -------
Net unrealized gain 544 (215) 329 1,536 (593) 943
------- ------- ------- ------- ------- -------
Foreign currency
translation loss (44) 15 (29) (6) 2 (4)
Less: Reclassification
for losses realized in
net income 42 (16) 26 -- -- --
------- ------- ------- ------- ------- -------
Net foreign currency
translation loss (2) (1) (3) (6) 2 (4)
------- ------- ------- ------- ------- -------
Other comprehensive
income (loss) $ 542 $ (216) $ 326 $ 1,530 $ (591) $ 939
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997
---------------------------------------
PRE- AFTER-
TAX TAX TAX
--- --- ---
<S> <C> <C> <C>
Unrealized gain on debt
and equity securities
and Exchangeable Notes $ 271 $ (109) $ 162
Less: Reclassification
for gains realized in
net income (231) 93 (138)
------- ------- -------
Net unrealized gain 40 (16) 24
------- ------- -------
Foreign currency
translation loss (92) 36 (56)
Less: Reclassification
for losses realized in
net income -- -- --
------- ------- -------
Net foreign currency
translation loss (92) 36 (56)
------- ------- -------
Other comprehensive
income (loss) $ (52) $ 20 $ (32)
======= ======= =======
</TABLE>
Employee Stock Ownership Plan. MediaOne Group sponsors a defined
contribution savings plan for substantially all employees of MediaOne Group,
except for foreign national employees. The Company matches a percentage of
eligible employee contributions with shares of MediaOne Group Stock.
Participants are fully vested in the Company match contribution. The Company
recognizes expense based on the cash payments method. During 1999, 1998 and
1997, MediaOne Group's contributions to the plan were $20, $8 and $9,
respectively.
During 1998 and 1997, MediaOne Group maintained a Leveraged Employee
Stock Ownership Plan ("LESOP"). Shares in the LESOP were used to fund Company
match contributions as principal and interest were paid on the debt. Borrowings
associated with the LESOP, which were unconditionally guaranteed by Old U S
WEST, were included in the Consolidated Balance Sheets of the Company and
corresponding amounts were recorded as reductions to shareowners' equity. The
borrowings were repaid in May 1998, in connection with the Separation. At
December 31, 1998, there were no remaining shares of MediaOne Group Stock to be
allocated.
85
<PAGE> 43
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: SHAREOWNERS' EQUITY (CONTINUED)
Shareholder Rights Plan. The Board of Directors has adopted a
shareholder rights plan which, in the event of a takeover attempt, would entitle
existing shareowners to certain preferential rights. The rights expire on April
6, 2009, and are redeemable by MediaOne Group at any time prior to the date they
would become effective.
NOTE 17: EARNINGS PER SHARE
The following table reflects the computation of basic and diluted
earnings (loss) per share for MediaOne Group Stock, in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." Earnings per share information
is also reflected for Communications Stock during 1998 and 1997 since the stock
was outstanding at that time. Dilutive securities represent the incremental
weighted average shares from potential share issuances associated with MediaOne
Group stock options in 1999 and 1998, and Communications Group stock options in
1998, as well as the pro rated conversion in 1999 and the assumed conversion in
1998 of the convertible Series D Preferred Stock for MediaOne Group Stock.
Diluted earnings (loss) and related per share amounts for 1997 do not include
potential share issuances associated with stock options and the convertible
Series D Preferred Stock since the effect would have been antidilutive on the
loss from continuing operations. The calculation of diluted shares for 1999 did
not include stock options for approximately 3,310,000 potential share issuances
since the effect would have been antidilutive.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
(SHARES IN THOUSANDS)
MEDIAONE GROUP STOCK:
<S> <C> <C> <C>
Income (loss) from continuing operations $ 3,514 $ 1,430 $ (827)
Preferred stock dividends and accretion (49) (55) (52)
Loss on redemption of preferred securities (28) (53) --
-------- -------- --------
Income (loss) from continuing operations available to MediaOne
Group Stock shareowners used for basic earnings (loss) per share 3,437 1,322 (879)
Preferred stock dividends and accretion on assumed conversion 44 49 --
-------- -------- --------
Income (loss) from continuing operations available to MediaOne
Group Stock shareowners used for diluted earnings (loss) per share $ 3,481 $ 1,371 $ (879)
======== ======== ========
Income from discontinued operations used for basic and diluted earnings per share:
Results of operations(1) -- $ 158 $ 347
======== ======== ========
Gain on Separation -- $ 24,461 --
======== ======== ========
Extraordinary item - early extinguishment of debt - net of tax $ 17 $ (333) $ --
======== ======== ========
</TABLE>
- -----------
(1) Represents the operations of Dex, which were discontinued on June 12, 1998.
86
<PAGE> 44
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
(SHARES IN THOUSANDS)
MEDIAONE GROUP STOCK:
<S> <C> <C> <C>
Weighted average number of shares used for basic earnings (loss) per share 611,623 607,648 606,749
Effect of dilutive securities:
Stock options 8,683 6,368 --
Series D Preferred Stock 34,605 38,939 --
-------- -------- --------
Weighted average number of shares used for diluted earnings (loss) per share 654,911 652,955 606,749
======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations $ 5.62 $ 2.18 $ (1.45)
======== ======== ========
Discontinued operations-results of operations(1) -- $ 0.26 $ 0.57
======== ======== ========
Discontinued operations-gain on Separation -- $ 40.25 --
======== ======== ========
Extraordinary item-early extinguishment of debt-net of tax $ 0.03 $ (0.55) --
======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations $ 5.32 $ 2.10 $ (1.45)
======== ======== ========
Discontinued operations-results of operations(1) -- $ 0.24 $ 0.57
======== ======== ========
Discontinued operations-gain on Separation -- $ 37.46 --
======== ======== ========
Extraordinary item-early extinguishment of debt-net of tax $ 0.03 $ (0.51) --
======== ======== ========
COMMUNICATIONS STOCK:(2)
Income from discontinued operations used for basic and diluted earnings per share(3) $ 589 $ 1,177
======== ========
Weighted average number of shares used for basic earnings per share 484,972 482,751
Effect of dilutive securities - Stock options 4,097 --
-------- --------
Weighted average number of shares used for diluted earnings per share 489,069 482,751
======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Basic earnings per share from discontinued operations(3) $ 1.21 $ 2.43
======== ========
Diluted earnings per share from discontinued operations(3) $ 1.20 $ 2.43
======== ========
</TABLE>
- -----------
(1) Represents the operations of Dex, which were discontinued on June 12,
1998.
(2) The Communications Stock was canceled on June 12, 1998, effective with
the Separation.
(3) Represents the operations of the Communications Group, which were
discontinued on June 12, 1998, and included with New U S WEST.
87
<PAGE> 45
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18: STOCK INCENTIVE PLANS
MediaOne Group maintains stock incentive plans for executives, other
employees and nonemployees, primarily members of the Board of Directors. The
Amended MediaOne Group 1994 Stock Plan (the "Plan") is administered by the Human
Resources Committee of the Board of Directors with respect to officers,
executive officers and outside directors, and by a special committee with
respect to all other eligible employees and eligible nonemployees.
As of December 31, 1999, the maximum aggregate number of shares of
MediaOne Group Stock that could have been granted in any calendar year for all
purposes under the Plan was one percent of the shares outstanding (excluding
shares held in treasury) on the first day of such calendar year. In the event
that fewer than the full aggregate number of shares available for issuance in
any calendar year were issued in any such year, the shares not issued may be
added to the shares available for issuance in any subsequent year or years.
Options granted vest over periods up to three years and may be exercised no
later than 10 years after the grant date.
The compensation cost that has been included in income in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees," was $12,
$26 and zero in 1999, 1998 and 1997, respectively, all of which related to
modifications of stock option terms.
MediaOne Group has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but continues to account for the Plan
under APB Opinion No. 25. Had compensation cost for the Plan been determined
consistent with the fair value based accounting method under SFAS No. 123, the
pro forma net income and earnings per share for both the MediaOne Group Stock
and Communications Stock would have been the following.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------
BASIC
BASIC NET EARNINGS
NET BASIC EARNINGS NET EARNINGS INCOME (LOSS)
INCOME PER SHARE INCOME PER SHARE (LOSS) PER SHARE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
MEDIAONE GROUP STOCK:
As reported ........................ $ 3,531 $ 5.65 $25,716 $42.14 $ (480) $(0.88)
Pro forma .......................... 3,453 5.52 25,681 42.08 (501) (0.91)
COMMUNICATIONS STOCK:
As reported ........................ -- -- -- -- 1,177 2.43
Pro forma .......................... -- -- -- -- 1,164 2.41
</TABLE>
The fair value based method of accounting for stock-based compensation
plans under SFAS No. 123 recognizes the value of options granted as compensation
cost over the options' vesting period and has not been applied to options
granted prior to January 1, 1995.
88
<PAGE> 46
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: STOCK INCENTIVE PLANS (Continued)
Following are the weighted-average assumptions used in connection with
the Black-Scholes option-pricing model to estimate the fair value of options
granted during 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
MEDIAONE GROUP STOCK:
Risk-free interest rate ....................................... 4.86% 5.53% 6.40%
Expected life ................................................. 4.0 years 4.5 years 5.0 years
Expected volatility ........................................... 30.0% 30.0% 30.0%
Weighted average grant date fair value ........................ $15.49 $12.53 $ 7.81
COMMUNICATIONS STOCK:
Risk-free interest rate ....................................... -- -- 6.40%
Expected dividend yield ....................................... -- -- 5.80%
Expected life ................................................. -- -- 4.0 years
Expected volatility ........................................... -- -- 25.0%
Weighted average grant date fair value ........................ -- -- $ 5.70
</TABLE>
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
MEDIAONE GROUP STOCK COMMUNICATIONS STOCK
------------------------------- ------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Outstanding December 31, 1996 .................. 14,114,094 $17.49 11,412,915 $26.67
---------- ------ ---------- ------
Granted ..................................... 8,733,782 20.33 9,491,642 34.87
Exercised ................................... (1,371,529) 16.30 (2,648,569) 25.41
Canceled or expired ......................... (1,027,388) 18.35 (637,411) 27.54
---------- ------ ---------- ------
Outstanding December 31, 1997 .................. 20,448,959 $18.74 17,618,577 $31.23
---------- ------ ---------- ------
Granted ..................................... 6,088,849 36.40
Dex Adjustment .............................. 827,038 0.90
Separation .................................. -- -- (17,618,577) --
Exercised ................................... (4,391,697) 17.46
Canceled or expired ......................... (1,239,154) 21.84
---------- ------ ---------- ------
Outstanding December 31, 1998 .................. 21,733,995 $23.13 -- --
---------- ------ ========== ======
Granted - market value ...................... 9,766,947 58.30
Granted - above market value ................ 3,309,800 70.03
Exercised ................................... (5,250,732) 19.84
Canceled or expired ......................... (1,175,523) 44.25
---------- ------
Outstanding December 31, 1999 .................. 28,384,487 $40.57
========== ======
</TABLE>
89
<PAGE> 47
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: STOCK INCENTIVE PLANS (Continued)
The number of exercisable options under the Plan and the
weighted-average exercise prices follow:
<TABLE>
<CAPTION>
MEDIAONE GROUP STOCK COMMUNICATIONS STOCK
------------------------------------ --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISABLE OPTIONS AT: OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
- ----------------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
December 31, 1997 .......................... 7,235,685 $16.54 5,299,955 $25.72
December 31, 1998 .......................... 9,742,450 18.30 -- --
December 31, 1999 .......................... 17,346,718 32.94 -- --
</TABLE>
The following table summarizes the status of outstanding and
exercisable options under the Plan at December 31, 1999. The total options
outstanding represent 4.6 percent of the MediaOne Group common shares
outstanding.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- --------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------ ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
MEDIAONE GROUP STOCK
$13.17 - $16.95 ......... 3,664,423 4.78 $ 15.42 3,661,995 $ 15.42
$17.06 - $19.03 ......... 3,029,850 6.37 18.13 2,780,745 18.14
$19.10 - $21.27 ......... 3,228,041 6.80 20.48 2,643,616 20.31
$21.45 - $36.75 ......... 3,391,128 7.72 30.15 2,786,687 29.96
$37.00 - $44.38 ......... 2,348,938 8.28 39.12 614,417 37.84
$45.25 - $46.69 ......... 5,577,272 8.94 46.68 1,183,240 46.68
$46.81 - $69.88 ......... 720,839 8.59 50.60 398,692 48.16
$70.03 - $70.03 ......... 3,271,100 9.01 70.03 3,271,100 70.03
$70.06 - $79.69 ......... 877,703 9.38 77.76 6,133 75.21
$81.63 - $81.63 ......... 2,275,193 9.33 81.63 93 81.63
---------- ---- --------- ---------- ---------
28,384,487 7.73 $ 40.57 17,346,718 $ 32.94
========== ==== ========= ========== =========
</TABLE>
A total of 13,076,747, 6,088,849 and 8,733,782 MediaOne Group Stock
options were granted in 1999, 1998 and 1997, respectively. A total of 9,491,642
Communications Stock options were granted in 1997. The modified MediaOne Group
Stock options were not significant in 1999 and 1998, and the Communications
Stock options were not significant in 1997. The exercise price for the majority
of the MediaOne Group Stock options granted in 1999, as well as all of the 1998
and 1997 MediaOne Group and Communications Stock grants, excluding modified
options, equals the market price on the grant date.
Approximately 8,213,000 and 4,046,000 shares of MediaOne Group Stock
were available for grant under the plans in effect at December 31, 1999 and
1998, respectively. Approximately 36,598,000 shares of MediaOne Group Stock were
authorized but unissued under the Plan at December 31, 1999.
90
<PAGE> 48
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19: EMPLOYEE BENEFITS
MEDIAONE GROUP PLANS
The MediaOne Group defined benefit pension plan covers substantially
all of its employees, except for foreign national employees. Management benefits
are based on a final pay formula. MediaOne Group uses the projected unit credit
method for the determination of pension cost for financial reporting and funding
purposes. MediaOne Group's policy is to fund amounts required under the Employee
Retirement Income Security Act of 1974; no funding was required in 1999, 1998
nor 1997.
MediaOne Group also sponsors a nonqualified pension plan which pays
supplemental pension benefits to key executives in addition to amounts received
under the MediaOne Group pension plan. The obligation and annual expense for
this plan are included in the 1999 and 1998 pension detail below.
MediaOne Group provides certain health care and life insurance benefits
to retired employees. MediaOne Group uses the projected unit credit method for
the determination of postretirement medical and life costs for financial
reporting purposes.
Net periodic benefit costs for pension benefits were $9 in 1999 and $3
in 1998, and $2 in each of 1999 and 1998 for other postretirement benefits.
Below is a reconciliation of the change in the fair value of the plan
assets for the pension and postretirement plans for 1999 and 1998:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
DECEMBER 31, DECEMBER 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of year $ 218 $-- $ 5 $--
Actual return on plan assets .............. 34 10 -- --
Contributions for non-qualified plan ...... 4 4 -- --
Assets transferred from Old U S WEST ...... -- 194 -- 4
Assets due (to) from Old U S WEST ......... (11) 19 -- 1
Rollovers ................................. 1 -- -- --
Benefits paid ............................. (29) (9) -- --
----- ----- ----- -----
Fair value of plan assets at end of year(1) .. $ 217 $ 218 $ 5 $ 5
===== ===== ===== =====
</TABLE>
- -----------
(1) Pension assets include MediaOne Group stock of $1 for 1998.
91
<PAGE> 49
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19: EMPLOYEE BENEFITS (Continued)
Below is a reconciliation of the change in the benefit obligation for
the pension and postretirement plans for 1999 and 1998:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
DECEMBER 31, DECEMBER 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net benefit obligation at beginning of year $ 200 $-- $ 25 $--
Service cost ........................... 16 8 1 1
Interest cost .......................... 14 6 2 --
Liability transferred from Old U S WEST -- 190 -- 23
Rollover ............................... 1 -- -- --
Actuarial (gain) loss .................. (16) 5 (8) 1
Benefits paid .......................... (29) (9) -- --
----- ----- ----- -----
Net benefit obligation at end of year ..... $ 186 $ 200 $ 20 $ 25
===== ===== ===== =====
</TABLE>
The following table represents the funded status of the pension and
postretirement plans at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
DECEMBER 31, DECEMBER 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funded status at end of year ........ $ 31 $ 18 $(15) $(20)
Unrecognized actuarial (gain) loss (64) (47) (2) 5
Unrecognized prior service cost .. 17 20 1 1
Unrecognized net transition asset (6) (7) -- --
---- ---- ---- ----
Net accrued liability at end of year $(22) $(16) $(16) $(14)
==== ==== ==== ====
</TABLE>
The actuarial assumptions used to account for the plans are as follows:
<TABLE>
<CAPTION>
PENSION
BENEFITS OTHER POSTRETIREMENT BENEFITS
------------- -------------------------------
WEIGHTED AVERAGE ASSUMPTION AS OF DECEMBER 31, 1999 1998 1999 1998
- ---------------------------------------------- ---- ---- ----------------- ------------------
<S> <C> <C> <C> <C>
Discount rate.................................................... 7.5% 6.75% 7.5% 6.75%
Expected return on assets........................................ 8.75% 8.75% 8.75% 8.75%
Rate of compensation increase.................................... 4.00% 4.00% N/A N/A
Health care cost trend on covered charges........................ N/A N/A 8% decreasing to 8% decreasing to
an ultimate trend an ultimate trend
of 5% in 2011 of 5% in 2011
</TABLE>
A one percent change in the assumed healthcare cost trend rate would
have increased the accumulated postretirement benefit obligation by $3 in 1999
and by $4 in 1998, and decreased it by $3 in each of 1999 and 1998. The impact
on service and interest cost components would not have been material.
92
<PAGE> 50
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19: EMPLOYEE BENEFITS (Continued)
OLD U S WEST PLANS
Prior to the Separation, MediaOne Group participated in the employee
benefits plans sponsored by Old U S WEST. Since both MediaOne Group and New U S
WEST belonged to a single pension and postretirement plan, assets were not
segregated until Separation. Pension and postretirement benefit costs were
allocated to MediaOne Group based on the ratio of MediaOne Group's service cost
to total service cost. MediaOne Group's share of the net pension credit for 1997
was $(3). MediaOne Group's share of the net postretirement costs for 1997 was
$4.
NOTE 20: INCOME TAXES
The components of the provision (benefit) for income taxes follow:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
FEDERAL:
Current ......................... $ 1,460 $ (372) $ (210)
Deferred ........................ 1,195 1,358 (137)
------- ------- -------
2,655 986 (347)
------- ------- -------
STATE AND LOCAL:
Current ......................... 215 (14) (20)
Deferred ........................ 271 203 (26)
------- ------- -------
486 189 (46)
------- ------- -------
FOREIGN:
Current ......................... 33 15 (1)
Deferred ........................ 43 18 14
------- ------- -------
76 33 13
------- ------- -------
Provision (benefit) for income taxes $ 3,217 $ 1,208 $ (380)
======= ======= =======
</TABLE>
The Company received $365 for income taxes in 1999, and paid $24 and
$636 for income taxes in 1998 and 1997, respectively, inclusive of the
discontinued operations of New U S WEST and the capital assets segment. Income
taxes paid for the discontinued operations of New U S WEST, through the
Separation date of June 12, 1998, were $379 and $906 in 1998 and 1997,
respectively.
93
<PAGE> 51
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 20: INCOME TAXES (Continued)
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998 1997
---- ---- ----
(IN PERCENT)
<S> <C> <C> <C>
Federal statutory tax rate ..................................... 35.0 35.0 35.0
State income taxes - net of federal effect ..................... 3.7 3.5 2.5
Foreign taxes - net of federal effect .......................... 0.3 (1.8) (0.7)
Goodwill amortization .......................................... 0.7 (4.5) (4.7)
Other .......................................................... (0.7) 0.6 (0.6)
---- ---- ----
Subtotal without gain on sale of domestic wireless and AT&T Note 39.0 32.8 31.5
Gain on sale of domestic wireless .............................. -- 13.0 --
AT&T Note ...................................................... 8.8 -- --
---- ---- ----
Effective tax rate ............................................. 47.8 45.8 31.5
==== ==== ====
</TABLE>
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Intangible assets .................................... $ 2,592 $ 2,685
Property, plant and equipment ........................ 340 284
State deferred tax liability - net of federal effect . 1,035 867
Leases ............................................... 540 557
Investment in Vodafone Group / AirTouch Communications 2,477 1,978
Investments .......................................... 466 --
AT&T Note ............................................ 525 --
Other ................................................ 2 95
------- -------
Deferred tax liabilities .......................... 7,977 6,466
------- -------
Merger related costs ................................. 90 --
State deferred tax asset - net of federal effect ..... 73 87
Other accrued liabilities ............................ 206 189
Investments .......................................... -- 203
Net operating loss and tax credit carryforwards ...... 118 127
Valuation allowance .................................. (269) (279)
Foreign currency translation adjustment .............. -- 57
Other ................................................ 117 121
------- -------
Deferred tax assets ............................... 335 505
------- -------
Net deferred tax liability ........................... $ 7,642 $ 5,961
======= =======
</TABLE>
In connection with the acquisition of Continental in November 1996, the
Company acquired operating loss carryforwards of approximately $217 for federal
income tax purposes, expiring in various years through 2011. The Company also
acquired investment tax credit carryforwards of approximately $41, expiring in
various years through 2005. Due to potential use limitations, a valuation
allowance of $269 has been
94
<PAGE> 52
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 20: INCOME TAXES (Continued)
established for the carryforwards and for a deferred tax asset associated with
an investment. If the realization of the carryforwards or deferred tax asset
becomes more likely than not in future periods, any reduction in the valuation
allowance will be allocated to reduce goodwill and acquired intangible assets.
The current portion of the deferred tax asset was $69 and $74 at
December 31, 1999 and 1998, respectively, resulting primarily from
compensation-related items and other accrued expenses. Foreign operations
contributed pretax income of $6,284 during 1999, and pretax losses of $336 and
$604 during 1998 and 1997, respectively.
NOTE 21: CAPITAL ASSETS
The accounts of the capital assets segment are reflected in the
Company's Consolidated Balance Sheets for 1999 and 1998, and in the Consolidated
Statements of Operations for 1999. Prior to this time, the capital assets
segment was considered a discontinued operation and, in accordance with GAAP,
was accounted for as a "net investment in assets held for sale." See Note 24 -
Net Investment in Assets Held for Sale - to the Consolidated Financial
Statements.
The remaining assets of the capital assets segment primarily represent
long term lease finance receivables which will be run-off. These receivables are
reflected in "Other Assets" in the Consolidated Balance Sheets.
Finance receivables primarily consist of contractual obligations under
long-term leases with maturity dates ranging from 2000 to 2016 that MediaOne
Group intends to run off. Certain leases contain renewal options and buyout
provisions. These long-term leases consist mostly of leveraged leases related to
aircraft and power plants. For leveraged leases, the cost of the assets leased
is financed primarily through nonrecourse debt which is netted against the
related lease receivable. The components of finance receivables follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Receivables ............................ $ 636 $ 671
Unguaranteed estimated residual values . 394 431
------ ------
1,030 1,102
Less: Unearned income .................. 327 338
Credit loss and other allowances(1) 139 138
------ ------
Finance receivables - net .............. $ 564 $ 626
====== ======
</TABLE>
- -----------
(1) Includes allowance for credit losses of $13 in each of 1999 and 1998.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK - FINANCIAL GUARANTEES
MediaOne Group retained certain risks in asset-backed obligations
related to the commercial real estate portfolio. As of December 31, 1999, the
principal amounts insured on asset-backed obligations was $267 for maturity
terms up to five years. As of December 31, 1998, the principal amounts insured
on asset-backed obligations were $146 that mature within five years and $138 for
maturity terms ranging from 5 to 10 years, for a total principal amount insured
of $284.
95
<PAGE> 53
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21: CAPITAL ASSETS (Continued)
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
TYPE OF COLLATERAL 1999 1998
- ------------------ ---- ----
<S> <C> <C>
Commercial mortgages:
Commercial real estate $ 28 $ 37
Corporate secured .... 239 247
---- ----
Total ................... $267 $284
==== ====
</TABLE>
ADDITIONAL FINANCIAL INFORMATION
Information for Financial Services, a member of the capital assets
segment, follows:
<TABLE>
<CAPTION>
YEAR ENDED OR AS OF
DECEMBER 31,
------------------------------
SUMMARIZED FINANCIAL INFORMATION 1999 1998 1997
- -------------------------------- ------ ------ ------
<S> <C> <C> <C>
Revenue ........................ $ 11 $ 17 $ 23
Net finance receivables ........ 564 625 824
Total assets ................... 826 858 1,208
Total debt ..................... 151 199 363
Total liabilities .............. 785 846 1,121
Equity ......................... 41 12 87
</TABLE>
NOTE 22: COMMITMENTS AND CONTINGENCIES
MediaOne Group's commitments and debt guarantees totaled approximately
$330 for its international investments and $180 for its domestic investments as
of December 31, 1999.
During 1999, certain cable subsidiaries of the Company in Florida,
Michigan, and Ohio were named as defendants in various class action lawsuits
challenging such subsidiaries' policies for charging late payment fees when
customers fail to pay for subscriber services in a timely manner. The Company
anticipates that these lawsuits will not have a material impact on its results
of operations.
NOTE 23: SUBSEQUENT EVENTS
On January 28, 2000, MediaOne Group signed an agreement to sell its
Japanese cable and telephony investments for $225 plus the repayment of capital
contributions made to the Japanese ventures after June 30, 1999. At December 31,
1999, the Company had made capital contributions of $41 that would be subject to
repayment at the closing of the sale. MediaOne Group will also be released from
guarantees given to support debt at certain of the Japanese ventures. At
December 31, 1999, the amount of these debt guarantees totaled $132.
On February 7, 2000, the Company signed a definitive agreement to sell
its equity interest in the Trip.com, an online travel services company, to
Galileo International, Inc., for cash and stock valued at approximately $70.
This sale is subject to regulatory approvals.
96
<PAGE> 54
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 23: SUBSEQUENT EVENTS (Continued)
On February 15, 2000, MediaOne Group sold its 25 percent interest in
Singapore Cablevision ("Singapore") to Singapore Technologies for $218. As a
result of the sale, MediaOne Group's commitments disclosed in Note 22
Commitments and Contingencies - to the Consolidated Financial Statements were
reduced by $47.
NOTE 24: NET INVESTMENT IN ASSETS HELD FOR SALE
As of December 31, 1998, the disposal of assets held for sale of the
capital assets segment was substantially completed. Therefore, the accounts of
the capital assets segment are reflected in the Company's Consolidated Balance
Sheets for 1999 and 1998, and in the Consolidated Statements of Operations for
1999. See Note 21 - Capital Assets - to the Consolidated Financial Statements
for the continuing operations. Prior to this time, the capital assets segment
had been accounted for in accordance with SAB No. 93, issued by the SEC, which
required discontinued operations not disposed of within one year of the
measurement date to be accounted for prospectively in continuing operations as a
"net investment in assets held for sale." The remaining assets of the capital
assets segment primarily represent long term lease finance receivables.
MediaOne Real Estate, Inc. ("Real Estate") sold various assets during
1998, and 1997 for proceeds of $182, and $88, respectively. The sales proceeds
were in line with estimates. Proceeds from sales were primarily used to repay
related debt. As of December 31, 1998, the Company had substantially completed
the liquidation of this portfolio.
Building sales and operating revenues of the capital assets segment
were $208 and $116 in 1998 and 1997, respectively. During 1998 and 1997, income
or losses from the capital assets segment were deferred and included within the
reserve for assets held for sale.
NOTE 25: DISCONTINUED OPERATIONS
In accordance with APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the
Consolidated Financial Statements for 1998 and 1997 reflect New U S WEST as a
discontinued operation. Revenues and expenses, and the cash flows of New U S
WEST have been separately classified in the Consolidated Statements of
Operations and Statements of Cash Flows.
The Company has accounted for the distribution of New U S WEST common
stock to the holders of Communications Stock, and to the holders of MediaOne
Group Stock for the Dex Alignment as a discontinuance of the businesses
comprising New U S WEST. The measurement date for discontinued operations
accounting purposes is June 4, 1998, the date upon which Old U S WEST's
shareowners approved the Separation. Because the distribution was non pro-rata,
as compared with the businesses previously attributed to Old U S WEST's two
classes of shareowners, it was accounted for at fair value. The distribution
resulted in a gain of $24,461, net of $114 of Separation costs (net of tax
benefits of $37). Separation costs included cash payments under severance
agreements of $45 and financial advisory, legal,
97
<PAGE> 55
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 25: DISCONTINUED OPERATIONS (Continued)
registration fee, printing and mailing costs. Separation costs also included a
one-time payment to terminate the sale of the Minnesota cable systems.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
SUMMARIZED OPERATING RESULTS 1998 1997
- ---------------------------- -------- --------
<S> <C> <C>
Revenues ............................................ $ 5,454 $ 11,479
Operating income .................................... 1,412 2,776
Income before income taxes .......................... 1,187 2,429
Income tax expense .................................. (440) (902)
-------- --------
Income before extraordinary item .................... 747 1,527
Extraordinary item - debt extinguishment - net of tax -- (3)
-------- --------
Net income of discontinued operations ............... $ 747 $ 1,524
======== ========
</TABLE>
NOTE 26: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
Sales and other revenues ................................... $ 665 $ 662 $ 675 $ 693
Income (loss) from continuing operations before income taxes (148) 667 275 5,937
Income (loss) from continuing operations ................... (111) (176) 148 3,653
Net income (loss) .......................................... (111) (159) 148 3,653
MEDIAONE GROUP STOCK Basic earnings (loss) per common share:
Income (loss) from continuing operations ................ $ (0.21) $ (0.31) $ 0.18 $ 5.79
Total basic earnings (loss) per common share ............ (0.21) (0.29) 0.18 5.79
Diluted earnings (loss) per common shares:
Income (loss) from continuing operations ................ $ (0.21) $ (0.31) $ 0.18 $ 5.55
Total diluted earnings (loss) per common share .......... (0.21) (0.29) 0.18 5.55
1998
Sales and other revenues(1) ................................ $ 972 $ 641 $ 626 $ 643
Income (loss) from continuing operations before income taxes (328) 3,716 (244) (506)
Income (loss) from continuing operations ................... (222) 2,174 (184) (338)
Income from discontinued operations - net of tax(2) ........ 434 24,774 -- --
Net income (loss)(2) ....................................... 212 26,615 (184) (338)
</TABLE>
- -----------
(1) Sales and other revenues include revenues related to the domestic
wireless operations of $341 and $20 for the first and second quarters
of 1998, respectively. The domestic wireless operations were sold on
April 6, 1998.
(2) Income from discontinued operations includes $87 and $72 related to
Dex, and $347 and $241 related to the Communications Group for the
first and second quarters of 1998, respectively.
98
<PAGE> 56
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 26: QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
1998
MEDIAONE GROUP STOCK:
Basic earnings (loss) per common share:
Income (loss) from continuing operations ........... $(0.38) $ 3.46 $(0.32) $(0.58)
Income from discontinued operations per common share 0.14 40.28 -- --
Total basic earnings (loss) per common share ....... (0.24) 43.19 (0.32) (0.58)
Diluted earnings (loss) per common shares
Income (loss) from continuing operations ........... $(0.38) $ 3.24 $(0.32) $(0.58)
Income from discontinued operations per common share 0.14 37.53 -- --
Total diluted earnings (loss) per common share ..... (0.24) 40.27 (0.32) (0.58)
COMMUNICATIONS STOCK:
Earnings from discontinued operations per common share:
Basic earnings ..................................... $ 0.72 $ 0.50 $ -- $ --
Diluted earnings ................................... 0.72 0.49 -- --
</TABLE>
First-quarter 1999 net loss includes a gain of $76 ($0.13 per share of
MediaOne Group Stock) related to the sale of Optus shares, a gain of $43 ($0.07
per share of MediaOne Group Stock) related to the sale of domestic cable systems
and investments, a charge of $40 ($0.07 per share of MediaOne Group Stock)
related to the Company's investment in PrimeStar, and a charge of $15 ($0.03 per
share of MediaOne Group Stock) for merger costs incurred by the Company.
Second-quarter 1999 net loss includes a gain of $1,530 ($2.52 per share of
MediaOne Group Stock) related to the exchange of the Company's investment in
AirTouch stock, a net gain of $14 ($0.02 per share of MediaOne Group Stock)
related to the sale of domestic investments, a charge of $3 (no per share
impact) on the sale and exit costs of international investments, a charge of
$1,497 ($2.47 per share of MediaOne Group Stock) for the Comcast termination fee
and other merger related costs incurred by the Company, and a charge of $13
($0.02 per share of MediaOne Group Stock) for an extraordinary dividend paid to
the Centaur Preference Shares holders as a result of the Vodafone/AirTouch
merger. Third-quarter 1999 net income includes a gain of $257 ($0.42 per share
of MediaOne Group Stock) related to the sale of domestic cable systems and
investments, a net gain of $102 ($0.17 per share of MediaOne Group Stock)
related to the sale of international investments, and a charge of $9 ($0.01 per
share of MediaOne Group Stock) for other merger related costs. Fourth-quarter
1999 net income includes a gain of $3,909 ($6.20 per share of MediaOne Group
Stock) related to the sale of international investments, a net charge of $167
($0.26 per share of MediaOne Group Stock) for merger related activity, and
income of $10 ($0.02 per share of MediaOne Group Stock) related to the Company's
investment in PrimeStar.
First-quarter 1998 net income includes net income of $15 ($0.03 per
share of MediaOne Group Stock) related to the domestic wireless businesses and a
gain of $10 ($0.02 per share of MediaOne Group Stock) related to the sale of a
domestic cable programming investment. Second-quarter 1998 net income includes a
gain of $24,461 ($40.16 per share of MediaOne Group Stock) related to the
Separation, a gain of $2,257 ($3.71 per share of MediaOne Group Stock) related
to the sale of MediaOne Group's domestic wireless businesses, gains of $14
($0.02 per share of MediaOne Group Stock) related to various domestic investment
sales, net income of $5 ($0.01 per share of MediaOne Group Stock) related to the
domestic
99
<PAGE> 57
MEDIAONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 26: QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
wireless businesses, and a charge of $333 ($0.55 per share of MediaOne Group
Stock) for the early extinguishment of debt. Third-quarter 1998 net income
includes gains of $2 (no per share impact) on sales of miscellaneous domestic
cable systems and a charge of $25 ($0.04 per share of MediaOne Group Stock)
related to an interest rate swap agreement which did not qualify for deferral
accounting. Fourth-quarter 1998 net income includes gains of $8 ($0.01 per share
of MediaOne Group Stock) related to sales of various domestic investments, gains
of $10 ($0.02 per share of MediaOne Group Stock) related to sales of various
international investments, a charge of $100 ($0.16 per share of MediaOne Group
Stock) related to a write-down to zero of the Company's investment in PrimeStar,
and a charge of $18 ($0.03 per share of MediaOne Group Stock) related to the
termination of an interest rate swap agreement and the purchase of an interest
rate option.
<TABLE>
<CAPTION>
MARKET PRICE
(WHOLE DOLLARS)
-----------------------------------------
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- ---------------------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1999
MEDIAONE GROUP STOCK
First quarter .................. $ 70.0000 $ 46.1250 $ 63.4375 $ --
Second quarter ................. 81.8125 60.0000 74.3750 --
Third quarter .................. 78.9375 64.0000 68.3125 --
Fourth quarter ................. 83.0000 66.3750 76.8125 --
1998
MEDIAONE GROUP STOCK
First quarter .................. $ 37.1875 $ 27.0000 $ 34.7500 $ --
Second quarter ................. 44.2500 34.1875 43.9375 --
Third quarter .................. 50.1250 40.0000 44.4375 --
Fourth quarter ................. 47.0000 33.4375 47.0000 --
COMMUNICATIONS STOCK
First quarter .................. $ 56.7500 $ 43.3750 $ 54.6250 $ 0.5350
Second quarter (thru 6/12/98)(1) 58.0000 49.5625 50.5000 --
</TABLE>
- -----------
(1) The Communications Stock was canceled on June 12, 1998, effective with the
Separation.
100
