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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-8611
MediaOne Group, Inc.
A Delaware Corporation IRS Employer No. 84-0926774
188 Inverness Drive West, Englewood, Colorado 80112
Telephone Number 303-858-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X_ No __
The number of shares of MediaOne Group, Inc. common stock outstanding (net of
shares held in treasury), at July 31, 1999, was 606,535,428 shares.
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MediaOne Group, Inc.
Form 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Item Page
1. MediaOne Group, Inc. Financial Information
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
2. MediaOne Group, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Consolidated Results of Operations 24
Liquidity and Capital Resources 35
Risk Management 38
Selected Proportionate Data 44
3. MediaOne Group, Inc. Quantitative and Qualitative Disclosures
About Market Risk 47
</TABLE>
PART II - OTHER INFORMATION
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1. Legal Proceedings 48
6. Exhibits and Reports on Form 8-K 48
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-2-
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Statements of Operations
(Unaudited)
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- ------------------------------------------------------------- ----------------------------- -----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
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Dollars in millions 1999 1998 1999 1998
- ------------------------------------------------------------- ------------- --------------- -------------- --------------
Sales and other revenues:
Cable and broadband $ 665 $ 613 $ 1,326 $ 1,237
Corporate (3) 8 1 15
Wireless communications - 20 - 361
------------- --------------- -------------- --------------
Total sales and other revenues 662 641 1,327 1,613
------------- --------------- -------------- --------------
Operating expenses:
Cost of sales and other revenues 265 241 534 558
Selling, general and administrative expenses 179 195 364 502
Depreciation and amortization 328 258 578 606
------------- --------------- -------------- --------------
Total operating expenses 772 694 1,476 1,666
------------- --------------- -------------- --------------
Loss from operations (110) (53) (149) (53)
Interest expense (103) (143) (199) (293)
Equity losses in unconsolidated ventures (87) (69) (202) (205)
Gains (losses) on investments:
Sale and redemption of domestic investments 22 22 92 39
Sale and exit costs of international investments - net 8 - 132 -
Exchange of AirTouch investment 2,482 - 2,482 -
Sale of domestic wireless investment - 3,869 - 3,869
PrimeStar investment - - (65) -
Minority interest expense in Centaur Funding (46) - (71) -
Guaranteed minority interest expense (23) (20) (47) (42)
Merger costs (1,507) - (1,522) -
Other income - net 31 110 68 73
------------- --------------- -------------- --------------
Income from continuing operations before income taxes
667 3,716 519 3,388
Provision for income taxes (843) (1,542) (806) (1,436)
------------- --------------- -------------- --------------
Income (loss) from continuing operations (176) 2,174 (287) 1,952
Income from discontinued operations - net of tax
Results of operations (Note 12) - 313 - 747
Gain on separation - 24,461 - 24,461
------------- --------------- -------------- --------------
Income (loss) before extraordinary item (176) 26,948 (287) 27,160
Extraordinary item:
Gain (loss) on extinguishment of debt - net of tax 17 (333) 17 (333)
============= =============== ============== ==============
NET INCOME (LOSS) $ (159) $ 26,615 $ (270) $ 26,827
============= =============== ============== ==============
Preferred stock dividends and accretion (14) (13) (28) (26)
Loss on redemption of Preferred Securities - (53) - (53)
------------- --------------- -------------- --------------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK
$ (173) $ 26,549 $ (298) $ 26,748
- ------------------------------------------------------------- ============= =============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
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In thousands, except per share amounts 1999 (1) 1998 (1) 1999 1998
- ----------------------------------------------------------- -------------- --------------- -------------- --------------
MEDIAONE GROUP STOCK (2)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.31) $ 3.46 $ (0.52) $ 3.08
Income from discontinued operations (3) - 0.12 - 0.26
Gain on separation - 40.16 - 40.19
Extraordinary item - early extinguishment of debt
0.03 (0.55) 0.03 (0.55)
============== =============== ============== ==============
Basic earnings (loss) per common share $ (0.29) $ 43.19 $ (0.49) $ 42.98
============== =============== ============== ==============
BASIC AVERAGE COMMON SHARES OUTSTANDING
605,726 609,098 604,775 608,699
============== =============== ============== ==============
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.31) $ 3.24 $ (0.52) $ 2.91
Income from discontinued operations (3) - 0.11 - 0.24
Gain on separation - 37.42 - 37.48
Extraordinary item - early extinguishment of debt
0.03 (0.51) 0.03 (0.51)
============== =============== ============== ==============
Diluted earnings (loss) per common share $ (0.29) $ 40.27 $ (0.49) $ 40.12
============== =============== ============== ==============
DILUTED AVERAGE COMMON SHARES OUTSTANDING
605,726 653,611 604,775 652,601
- ----------------------------------------------------------- ============== =============== ============== ==============
</TABLE>
(1) Column does not add due to rounding of individual components.
(2) For 1998 earnings per share information of Communications Stock see
Note 10 - Earnings Per Share - to the Consolidated Financial Statements.
(3) Amounts represent the operations of U S WEST Dex, Inc., the domestic
directory business, which were discontinued as of June 12, 1998.
See Notes to Consolidated Financial Statements.
-4-
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Balance Sheets
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- -------------------------------------------------------------------------------- ------------------- ---------------------
June 30, December 31,
Dollars in millions 1999 1998
- -------------------------------------------------------------------------------- ------------------- ---------------------
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,032 $ 415
Accounts and notes receivable - net 409 255
Income tax receivable 546 375
Current portion of deferred tax asset 67 74
Prepaid and other 21 33
Marketable securities 56 48
------------------- ---------------------
Total current assets 2,131 1,200
------------------- ---------------------
Property, plant and equipment - net 4,501 4,069
Investment in Vodafone Group /AirTouch Communications 7,310 5,919
Investment in Time Warner Entertainment 2,479 2,442
Net investment in international ventures held for sale 643 -
Net investment in international ventures - 1,344
Intangible assets - net 11,371 11,647
Other assets 2,076 1,571
------------------- ---------------------
Total assets $ 30,511 $ 28,192
- -------------------------------------------------------------------------------- =================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
-5-
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Balance Sheets
(Continued)
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- -------------------------------------------------------------------------------- ------------------- --------------------
June 30, December 31,
Dollars in millions 1999 1998
- -------------------------------------------------------------------------------- ------------------- --------------------
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(Unaudited)
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 1,718 $ 569
Accounts payable 301 332
Employee compensation 98 80
Deferred revenues and customer deposits 168 87
Other 618 546
------------------- --------------------
Total current liabilities 2,903 1,614
------------------- --------------------
Long-term debt 6,245 4,853
Deferred income taxes 6,954 6,035
Deferred credits and other 142 641
Commitments and contingencies
Minority interest in Centaur Funding 1,107 1,099
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely Company-guaranteed debentures
1,060 1,061
Preferred stock subject to mandatory redemption 100 100
Shareowners' equity:
Preferred stock 929 927
Common shares 10,409 10,324
Retained earnings 371 669
Accumulated other comprehensive income 291 869
------------------- --------------------
Total shareowners' equity 12,000 12,789
------------------- --------------------
Total liabilities and shareowners' equity $ 30,511 $ 28,192
- -------------------------------------------------------------------------------- =================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
-6-
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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- ----------------------------------------------------------------------------------- --------------- ---------------
Six Months Ended June 30, 1999 1998
- ----------------------------------------------------------------------------------- --------------- ---------------
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OPERATING ACTIVITIES Dollars in millions
Net income (loss) $ (270) $ 26,827
Adjustments to net income (loss):
Discontinued operations - (747)
Gain on Separation - (24,461)
Extraordinary (gain) loss on debt extinguishment (17) 333
Depreciation and amortization 578 606
Equity losses in unconsolidated ventures 202 205
Merger costs 1,522 -
Gains on investments - net (2,641) (3,908)
Deferred income taxes 1,298 1,557
Distribution from unconsolidated ventures - 28
Separation costs paid - (97)
Changes in operating assets and liabilities:
Accounts and notes receivable (147) 56
Prepaid and other current assets (12) (46)
Accounts payable and accrued liabilities 92 (286)
Other - net (127) 91
--------------- ---------------
Cash provided by operating activities 478 158
--------------- ---------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (900) (725)
Investment in international ventures (73) (13)
Investment in domestic ventures (91) (79)
Purchase of miscellaneous assets - (35)
Proceeds from sales of investments 397 187
Proceeds on exchange of investment in AirTouch 534 -
Cash to net investment in assets held for sale - (101)
Other - net 25 6
--------------- ---------------
Cash used for investing activities (108) (760)
--------------- ---------------
FINANCING ACTIVITIES
Net (repayments of) proceeds from short-term debt (112) 2,405
Net proceeds from issuance of long-term debt 702 -
Repayments of long-term debt (332) (5,447)
Repayments of Preferred Securities - (582)
Proceeds from issuance of common stock 61 104
Dividends paid on common stock - (519)
Dividends paid on preferred stock (26) (27)
Purchases of treasury stock (46) (85)
--------------- ---------------
Cash provided by (used for) financing activities 247 (4,151)
--------------- ---------------
Cash provided by discontinued operations - 4,953
--------------- ---------------
CASH AND CASH EQUIVALENTS
Increase 617 200
Beginning balance 415 184
=============== ===============
Ending balance $ 1,032 $ 384
- ------------------------------------------------------------------------------------- =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
-7-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
For the Three and Six Months Ended June 30, 1999
(Dollars in millions, except per share amounts)
(Unaudited)
NOTE 1: AT&T MERGER
On May 6, 1999, MediaOne Group, Inc. ("MediaOne Group" or the "Company") entered
into an agreement with AT&T Corp. ("AT&T") to merge its operations with those of
AT&T, and terminated the merger agreement previously entered into with Comcast
Corporation ("Comcast"). Under the terms of the AT&T definitive merger
agreement, MediaOne Group shareowners will have the right to receive, for each
share of MediaOne Group common stock ("MediaOne Group Stock"), (i) 1.4912 shares
of AT&T common stock, (ii) $85.00 in cash, or (iii) .95 of a share of AT&T
common stock and cash of $30.85. Since AT&T has agreed to pay a set amount of
cash and AT&T common stock in the merger, MediaOne Group shareowners who elect
to receive all AT&T common stock or all cash may be subject to proration in the
event that the respective category elected is oversubscribed. With respect to
MediaOne Group shareowners who receive AT&T common stock, if the volume-weighted
average sale price of the AT&T common stock for the 20 trading days ending three
trading days prior to the effective date of the merger (the "AT&T Price") is
between $51.30 and $57.00 per share, an additional amount in cash will be paid
so that the total value of the AT&T common stock (based on the AT&T Price) and
cash received per share of MediaOne Group Stock will be $85.00. If the AT&T
Price is less than $51.30 per share, the additional cash payment will be made
based on an assumed AT&T Price of $51.30 per share, and the total value of cash
and AT&T common stock (based on the AT&T Price) received per share of MediaOne
Group Stock will be less than $85.00. If the AT&T Price is above $57.00 per
share, the total value of cash and AT&T common stock (based on the AT&T Price)
received per share of MediaOne Group Stock will be more than $85.00. If a
shareowner chooses the AT&T stock plus cash election, the maximum additional
cash payment would be $5.42 per share of MediaOne Group Stock. If a shareowner
chooses the AT&T stock election, the maximum additional cash payment would be
$8.50 per share of MediaOne Group Stock. The transaction is expected to close
in the first quarter of 2000, subject to legal and regulatory approvals, as
well as the approval of MediaOne Group shareowners.
In anticipation of the merger with AT&T, MediaOne Group has agreed to redeem
the Company's Series C Cumulative Redeemable Preferred Stock (the "Series C
Preferred Stock") and the 4.5 percent Series D Convertible Preferred Stock (the
"Series D Preferred Stock") as promptly as possible under the terms of each
series of preferred stock. The Company has the right commencing September 2,
1999 to redeem the Series C Preferred Stock for one thousand dollars per share
plus unpaid dividends and a redemption premium. Prior to any redemption,
holders of Series C Preferred Stock may exercise options to receive common
shares of Financial Security Assurance Holdings Ltd. ("FSA"). The Company will
redeem the Series C Preferred Stock in connection with any exercise of the
options.
-8-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Beginning on November 15, 1999, the Company has the option to exchange the
Series D Preferred Stock at par, or fifty dollars per share, for shares of
MediaOne Group Stock. The Series D Preferred Stock is convertible at any time at
the option of the holder into 1.98052 shares of MediaOne Group Stock per share
of Series D Preferred Stock.
As a result of the termination of the Comcast merger, the Company paid Comcast
a termination fee of $1.5 billion as outlined in the Comcast merger agreement.
The termination fee was funded by AT&T in exchange for a note payable from
MediaOne Group. The AT&T note bears interest at 3-month LIBOR plus 0.15 percent
and matures on December 31, 2000. The note is due on demand at any time
following consummation of the merger between the Company and AT&T, and was
therefore recorded on MediaOne Group's Consolidated Balance Sheet as short-term
debt.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The Consolidated Financial Statements have been prepared
by the Company pursuant to the interim reporting rules and regulations of the
Securities and Exchange Commission ("SEC") and include the accounts of MediaOne
Group and its consolidated subsidiaries. Certain information and footnote
disclosures normally accompanying financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted pursuant to such SEC rules and regulations.
In the opinion of MediaOne Group's management, the Consolidated Financial
Statements include all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial information set forth therein. It is
suggested that these Consolidated Financial Statements be read in conjunction
with the 1998 MediaOne Group Consolidated Financial Statements and notes
thereto included in MediaOne Group's proxy statement mailed to all shareowners
on April 5, 1999.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
New Accounting Standards. In June 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement No.
133," which deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. As a result, the Company will adopt SFAS No. 133
in the year 2001.
-9-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 3: DOMESTIC ACQUISITIONS, DISPOSITIONS AND OTHER
Cable System Trades. Effective on June 1, 1999, due to the proposed merger of
MediaOne Group with AT&T, the companies deferred closing on the trade of certain
MediaOne Group cable systems in Illinois and Michigan for certain cable systems
in South Florida and California now owned by AT&T, and formerly owned by
Tele-Communications, Inc. (the "TCI trade"). The TCI trade will be deferred
until the merger with AT&T is completed. If the merger with AT&T does not occur,
the TCI trade will take place as planned. In the meantime, the Company's cable
systems in Illinois and Michigan will continue to be owned by MediaOne Group,
but will be managed by AT&T, and the AT&T cable systems in South Florida and
California will remain under both the ownership and management of AT&T.
As a result of the deferral of the TCI trade, the Company recorded a one-time
depreciation and amortization charge during the second quarter of 1999 to
catch-up for $25 of depreciation and amortization expense not recorded in each
of the fourth quarter of 1998 and the first quarter of 1999. Depreciation and
amortization expense had been suspended on these properties while they were
held for sale.
PrimeStar Investment. On March 31, 1999, certain PrimeStar, Inc. ("PrimeStar")
shareholders, including MediaOne Group, signed a separate funding agreement to
cover various operating and transition costs of the PrimeStar direct broadcast
services ("DBS") medium-power business. On April 28, 1999, PrimeStar received
required consents from lenders and closed the DBS medium-powered business sale.
MediaOne Group funded $54 to PrimeStar during April and June 1999 related to
the funding agreement, which had been accrued in the first quarter of 1999. As
a result of these transactions, MediaOne Group was released as guarantor on a
$75 letter of credit for PrimeStar. The Company remains a guarantor for
PrimeStar on a $25 letter of credit.
NOTE 4: OPERATING SEGMENTS
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," the following table presents selected information for
MediaOne Group's operating segments for the three and six month periods ended
June 30, 1999 and 1998. "Sales and Other Revenues" and earnings before interest,
taxes, depreciation, amortization and other ("EBITDA") for each segment are
presented on a proportionate basis. Proportionate results reflect the relative
weight of MediaOne Group's ownership in each of its respective domestic and
international equity ventures together with the consolidated results of its
subsidiaries. The computation of EBITDA also excludes gains on asset sales,
equity losses, guaranteed minority interest expense and minority interest
expense in Centaur Funding. Adjustments made to Sales and Other Revenues and
EBITDA to arrive at proportionate results are reversed in the column labeled
"Eliminations and Adjustments," in conformity with SFAS No. 131, so that in
total, Sales and Other Revenues and EBITDA reflect consolidated results.
-10-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Operating Results:
---------------------------
Domestic Cable & Broadband
---------------------------
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Eliminations
MediaOne of Multimedia &
Delaware (1) Ventures (2) International Other Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1999
Sales and other revenues $ 665 $ 781 $ 456 $ 3 $ (1,243) $ 662
EBITDA (3) 248 393 98 (19) (502) 218
Net income (loss) (4) (78) 16 (104) 7 - (159)
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1998
Sales and other revenues $ 607 $ 728 $ 341 $ 45 $ (1,080) $ 641
EBITDA (3) 239 206 51 (11) (280) 205
Net income (loss) (5) (111) (2) (70) 26,798 - 26,615
- ----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1999
Sales and other revenues $ 1,319 $ 1,529 $ 896 $ 7 $ (2,424) $ 1,327
EBITDA (3) 489 636 199 (38) (857) 429
Net income (loss) (4) (152) 20 (118) (20) - (270)
- ----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1998
Sales and other revenues $ 1,226 $ 1,470 $ 659 $ 396 $ (2,138) $ 1,613
EBITDA (3) 479 394 68 84 (472) 553
Net income (loss) (5) (236) (8) (149) 27,220 - 26,827
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) MediaOne of Delaware represents the operations of the Company's domestic
cable and broadband subsidiary.
(2) Multimedia Ventures includes MediaOne Group's 25.51 percent equity interest
in Time Warner Entertainment Company, L.P. ("TWE"), as well as related
overheads. The reported TWE results are prepared in accordance with GAAP
and have not been adjusted to report TWE's investments accounted for under
the equity method on a proportionate basis.
(3) The Company believes EBITDA is an important indicator of the operating
performance of its businesses and should not be considered an alternative
to operating or net income as an indicator of the performance of MediaOne
Group's businesses, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance
with GAAP.
(4) MediaOne of Delaware net income during 1999 includes an extraordinary gain
of $17 on the early extinguishment of debt.
(5) Other net income during 1998 includes a gain of $24,461 on the separation
of the telecommunications businesses and the domestic directory business
from the Company, a gain of $2,257 on the sale of the domestic wireless
businesses, and an extraordinary loss of $333 on the early extinguishment
of debt in conjunction with the separation discussed above. Other net
income during the three and six month periods ended June 30, 1998 includes
$313 and $747, respectively, related to discontinued operations.
-11-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
The following table presents a geographic breakout for proportionate revenues
and EBITDA and a reconciliation to consolidated
amounts:
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- -------------------------------------
----------------------------------- -------------------------------------
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1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------------
Proportionate Revenue:
United States (1) $ 1,441 $ 1,360 $ 2,844 $ 3,061
United Kingdom 282 196 557 385
Central Europe 152 121 295 227
Asia and other 30 44 55 78
---------------------------------- ------------------------------
Proportionate revenue 1,905 1,721 3,751 3,751
Less: Proportionate adjustment (1,243) (1,080) (2,424) (2,138)
================================== ==============================
Consolidated revenues $ 662 $ 641 $ 1,327 $ 1,613
========================================================================
Proportionate EBITDA:
United States (1) $ 621 $ 429 $ 1,089 $ 952
United Kingdom 59 27 123 31
Central Europe 46 40 89 68
Asia and other (6) (11) (15) (26)
---------------------------------- --------------------------------
Proportionate EBITDA 720 485 1,286 1,025
Less: Proportionate adjustment (502) (280) (857) (472)
================================== ================================
Consolidated EBITDA $ 218 $ 205 $ 429 $ 553
--------------------------------------------==========================================================================
</TABLE>
(1) Amounts include proportionate revenue of $19 and $354, and proportionate
EBITDA of $6 and $114 for the domestic wireless operations during the
three and six month periods ended June 30, 1998, respectively. These
operations were sold in April 1998.
Total Assets:
Total assets are those assets and investments that are used in, or pertain to,
each segment's operations, as follows:
----------------------------------------------------------------------------
Domestic Cable & Broadband
------------------------------
------------------------------
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MediaOne of Multimedia
Delaware (1) Ventures (2) International Other Consolidated
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-------------------------------------- ------------ ------------ ------------- ---------- -------------
Total assets as of:
June 30, 1999 $16,445 $2,984 $1,538 $9,544 $30,511
December 31, 1998 16,003 2,551 2,308 7,330 28,192
</TABLE>
- -------------------------------------------------------------------------------
(1) MediaOne of Delaware represents the operations of the Company's domestic
cable and broadband subsidiary.
(2) Multimedia Ventures includes MediaOne Group's 25.51 percent equity interest
in TWE.
-12-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
International assets decreased $770, or 33.4 percent, during 1999 primarily due
to the reclassification of international investment assets and liabilities to a
net investment in international assets held for sale, and to the sale of the
Company's investment in Optus shares. The "Other" column includes primarily
cash; debt and equity securities; investments in domestic interactive services;
and other corporate assets. The increase in Other total assets of $2,214, or
30.2 percent, during 1999 is due primarily to the marking to market of the
Company's investments in marketable equity securities, including AirTouch
Communications, Inc. ("AirTouch") stock which was exchanged into Vodafone ADRs.
See Note 5 - Investment in Vodafone Group / AirTouch Communications - to the
Consolidated Financial Statements.
NOTE 5: INVESTMENT IN VODAFONE GROUP / AIRTOUCH COMMUNICATIONS
Vodafone / AirTouch Merger. Effective on June 30, 1999, AirTouch merged its
operations into a subsidiary of Vodafone Group Public Limited Company
("Vodafone"). Prior to the merger, MediaOne Group held 59,314,000 shares of
AirTouch common stock and 825,000 shares each of AirTouch 5.143 percent Class D
Cumulative Preferred Stock, Series 1998, (the "Class D ATI Shares") and 5.143
percent Class E Cumulative Preferred Stock, Series 1998, (the Class E ATI
Shares" and together with the Class D ATI Shares, the "ATI Shares"). Under the
terms of the Vodafone merger, each share of AirTouch common stock was converted
into $9.00 in cash plus 1/2 of a Vodafone American Depository Receipt ("ADR"),
and as a result, MediaOne Group now holds 29,657,000 Vodafone ADRs. The ATI
Shares remain outstanding as preferred shares of AirTouch, a subsidiary of
Vodafone, with the following modifications: (a) the early redemption option on
the Class D ATI Shares was eliminated, (b) the maturity date on the Class E ATI
Shares was extended to April 1, 2020, and (c) an extraordinary dividend of
$25.00 per share, or a total of $21, will be paid for each Class E ATI Share on
August 16, 1999.
MediaOne Group recognized a net pretax gain of $2,482 ($1,530 after tax) on the
exchange and modification of its AirTouch common and preferred shares into
Vodafone ADRs and preferred shares, and received $534 in cash related to its
investment in AirTouch common stock. The net pretax gain was the result of the
difference between the cost basis and fair market value of the investment in
AirTouch as of the effective date. The investment in Vodafone is being
accounted for under the cost method of accounting as available for sale
securities.
-13-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
AirTouch Collar. During May 1999, the Company contributed 11,662,000 shares of
AirTouch common stock to MediaOne SPC IV ("SPC IV"), a wholly-owned subsidiary
of MediaOne Group. SPC IV subsequently entered into a series of purchased and
written options (the "Collar") on its AirTouch common shares and issued $1,128
in debt. See Note 7 - Debt - to the Consolidated Financial Statements. Upon the
Vodafone merger, the Collar was automatically transferred to Vodafone ADRs and
the put and call price were adjusted accordingly. SPC IV now holds 5,831,000
Vodafone ADRs.
The Collar has been designated and is effective as a hedge of the market risk
associated with the Company's investment in Vodafone ADRs. The Collar is
therefore carried at market value with gains or losses recorded in equity as a
component of other comprehensive income together with any change in the fair
value of the Vodafone ADRs. No gain or loss was recognized on the Collar as of
June 30, 1999.
At expiration of the Collar, the Company will receive cash if the market value
of a Vodafone ADR is less than approximately $169.00 per share, effectively
eliminating downside risk on the stock below $169.00. Conversely, if the market
value of a Vodafone ADR is greater than approximately $244.00 per share, the
Company will be required to pay cash which will be offset by the corresponding
increase in the value of the Vodafone ADRs. MediaOne Group intends to use
proceeds from the sale of Vodafone ADRs to fund any cash obligations related to
the Collar. The Collar expires quarterly, in equal installments, starting in
the second quarter of 2003 and ending in the second quarter of 2005.
NOTE 6: INVESTMENT IN INTERNATIONAL VENTURES
As a result of the anticipated merger with AT&T, MediaOne Group formalized a
plan during the second quarter of 1999 to sell all of its international
broadband and wireless investments, including its international consolidated
entities, Cable Plus a.s. ("Cable Plus"), a cable operator in the Czech
Republic, and Russian Telecommunications Development Corporation ("RTDC"), a
Russian venture which holds various wireless investments. The carrying value of
the net investments in international ventures, as well as the net assets of
Cable Plus and RTDC, are reflected as "net investment in international ventures
held for sale" in the June 30, 1999 Consolidated Balance Sheet. In addition,
effective April 1999, the results of operations of Cable Plus and RTDC are no
longer consolidated with MediaOne Group's results but are rather reflected as
part of "equity losses in unconsolidated ventures" in the Consolidated
Statements of Operations. Of the total equity losses in unconsolidated ventures,
international operations contributed losses of $(111) and $(67) for the three
month periods ended June 30, 1999 and 1998, respectively, and $(218) and $(162)
for the six month periods ended June 30, 1999 and 1998, respectively.
-14-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
As a result of the decision to exit its international businesses, the Company
recorded a $43 charge ($28 after tax) during the second quarter of 1999. The
exit charge includes employee severance costs of $33 for 122 people, and lease
termination, relocation and other costs of $10. The charge is reflected as a
component of "gains on investments - sale and exit costs of international
investments - net" in the Consolidated Statement of Operations. The Company
continues to negotiate the sale of its remaining international investments and
anticipates that the majority of the employee relocation and severance, and the
related office closures will be completed by year-end 1999.
Optus Shares. During the second quarter of 1999, MediaOne Group sold its
remaining investment in Optus shares, resulting in net proceeds and a pretax
gain of $31.
Listel. On June 2, 1999, the Company sold its interest in Listel, an
international directories operation located in South America, for proceeds of
$55 and a pretax gain of $20.
Cable Plus and A2000. On June 24,1999, United Pan-Europe Communications N.V.
agreed to purchase MediaOne Group's interests in Cable Plus and A2000, a cable
operator located in the Netherlands, for approximately $380. The sale of Cable
Plus is contingent upon regulatory approval. Both sales are expected to close
later this year.
Telewest. Shortly after the Company entered into its definitive merger agreement
with AT&T, AT&T and Microsoft Corporation ("Microsoft") announced that they had
entered into a series of agreements, which, among other things, involved the
sale of the Company's interest in Telewest Communications plc ("Telewest") to
Microsoft. The terms and conditions of any such sale will be subject to certain
approvals, including the approval of the Company's Board of Directors if the
sale is to occur prior to the merger of the Company's operations with those of
AT&T.
Ariawest. On May 13, 1999, PT Ariawest International, ("Ariawest"), the
Company's investment in Indonesia, reached an agreement to restructure its debt
into a non-recourse debt facility. MediaOne Group is evaluating its probable
funding commitments related to its investment in Ariawest as a result of the
non-recourse facility.
Telenet. On June 30, 1999, MediaOne Group entered into an agreement giving the
other shareholders of Telenet an option to purchase the Company's interest in
Telenet for approximately the cost of capital contributions plus 7 percent.
This option expires on December 31, 1999. In exchange, the Company received the
right to sell its interest to the current shareholders at the cost of capital
contributions less 25 percent through January 31, 2000. If neither option is
exercised, MediaOne Group may sell its interest to a third party. In
conjunction with this agreement, the Company entered into a put option to lock
in the floor price of 93 million Euros, or $100, which expires on January 31,
2000.
-15-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Titus and Chofu. On June 30, 1999, the Company increased its ownership in TITUS
Communication Corporation ("Titus"), a broadband network operation in Japan,
and Chofu Cable Television ("Chofu"), a cable operation in Japan. As part of
the acquisition, MediaOne Group assumed outstanding debt guarantees totaling
approximately $50. MediaOne Group now holds a 50 percent investment in Titus
and a 33 percent investment in Chofu.
NOTE 7: DEBT
Debt Issuance. On June 3, 1999, SPC IV issued $1,128 of floating rate debt at
3-month LIBOR plus 0.5 percent and paid $321 to fix and pre-fund interest
payments on $1.1 billion notional amount of the debt through an interest rate
swap agreement (the "Zero Coupon Swap"). The debt and Zero Coupon Swap mature
in equal quarterly installments starting in the second quarter of 2003 and
ending with the second quarter of 2005. The index, maturity and notional amount
of the Zero Coupon Swap match the terms of the floating rate debt issued by SPC
IV. The Company has therefore deferred the $321 cost of the Zero Coupon Swap
and will amortize the cost as an adjustment of interest expense associated with
the floating rate debt. As a result of the amortization and payments received
under the Zero Coupon Swap, the Company expects the floating rate debt of SPC
IV to have a fixed effective interest rate of approximately 6.945 percent.
As a result of the Vodafone merger, SPC IV will redeem approximately $105 of
the debt in August 1999 and will terminate a corresponding portion of the Zero
Coupon Swap with a cost of approximately $30. Funding for the redemption of the
debt will come from the $9.00 per share cash proceeds received on the exchange
of the AirTouch common stock into Vodafone ADRs.
The assets of SPC IV, which are primarily the 5,831,000 Vodafone ADRs, are not
available to pay the creditors of any member of the Company except the
creditors of SPC IV.
Debt Extinguishment. On June 1, 1999, the Company redeemed the 11.0 percent
senior subordinated debentures of MediaOne of Delaware, Inc., the domestic
cable and broadband subsidiary of the Company, with a carrying value of $345.
The debt extinguishment resulted in an after tax gain of $17 (net of income tax
expense of $11) primarily related to the write-off of excess debt premiums. The
gain is reflected as an extraordinary item in the Consolidated Statements of
Operations. MediaOne Group also redeemed a third-party note for its carrying
value of $12. MediaOne Group financed the redemptions with cash on hand.
Debt Maturity. On May 15, 1999, $254 of debt exchangeable into common stock
("DECS") matured. The DECS were redeemed for FSA shares held by MediaOne Group,
resulting in a pretax gain of $21 ($14 after tax).
-16-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Exchangeable Notes. As a result of the Vodafone merger, the terms of the 6.25
percent Exchangeable Notes (the "Exchangeable Notes") issued in late 1998 have
been modified so that upon maturity, they are mandatorily redeemable into
Vodafone ADRs and/or cash, rather than AirTouch common stock and/or cash. The
redemption formula was also modified so that the redemption value of each
Exchangeable Note is equivalent to $9.00 in cash plus 1/2 of the fair market
value of a Vodafone ADR (the "Maturity Price"), as follows:
(a) If the Maturity Price is greater than or equal to $71.75, each
Exchangeable Note is equivalent to .8101 of the Maturity Price;
(b) If the Maturity Price is less than or equal to $58.125, each Exchangeable
Note is equivalent to the Maturity Price; or
(c) If the Maturity Price is greater than $58.125 but less than $71.75, each
Exchangeable Note is equivalent to $58.125.
In all three scenarios above, a minimum of $7.29 of the $9.00 cash
consideration will be funded in cash.
NOTE 8: MINORITY INTEREST IN CENTAUR FUNDING
On December 15, 1998, Centaur Funding Corporation ("Centaur"), a special
purpose entity consolidated by MediaOne Group, issued three series of preferred
shares (the "Preference Shares"), including Cumulative Preference Shares,
Series B (the "Series B Preference Shares") and Preference Shares, Series C
(the "Series C Preference Shares"). Dividend payments on the Series B
Preference Shares and certain redemption payments on the Series B and Series C
Preference Shares are to be determined by reference to the dividend and
redemption activity of the ATI Shares.
As a result of the Vodafone merger, on May 13, 1999, Centaur mailed notices to
the holders of the Series B and Series C Preference Shares that described the
manner in which the terms of the Series B and Series C Preference Shares would
be deemed modified to reflect the changes to the ATI Shares, pursuant to the
Articles of Association of Centaur, without any action of the holders of such
shares. See Note 5 - Investment in Vodafone Group / AirTouch Communications -
to the Consolidated Financial Statements for a description of the changes to the
ATI Shares.
-17-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
The $21 extraordinary dividend payment on the Class E ATI Shares was allocated
to the Series B and Series C Preference Shares on a pro-rata basis based on the
liquidation value of the Series B Preference Shares and on the accreted value
of the Series C Preference Shares as of June 30, 1999, and is reflected as
"minority interest expense in Centaur Funding" in the Consolidated Statements
of Operations. The amount allocated to the Series B Preference Shares was
reflected as a one-time extraordinary dividend and will be paid with the first
regularly scheduled dividend following the payment in August 1999 on the Class
E ATI Shares. Since the Series C Preference Shares do not pay dividends, the
amount allocated to these shares will be invested by Centaur, in accordance
with its Articles of Association, and will be added to the redemption value of
the Series C Preference Shares at maturity.
NOTE 9: SHAREOWNERS' EQUITY
Following is a rollforward of shareowners' equity since the end of 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------------------------------------- ------------ ------------- ------------ -------------------
Accumulated Other
Comprehensive
Preferred Common Retained Income
Stock Shares Earnings
- --------------------------------------------------------- ------------ ------------- ------------ -------------------
Balance at December 31, 1998 $ 927 $ 10,324 $ 669 $ 869
Net loss (270)
Issuance of MediaOne Group common stock 64
Purchase of treasury stock (46)
Preferred stock dividends (28)
Market value adjustments for debt and
equity securities, and Exchangeable Notes,
net of income taxes (560)
Foreign currency translation, net of income taxes (18)
Other 2 67
============ ============= ============ ===================
Balance at June 30, 1999 $ 929 $ 10,409 $ 371 $ 291
- --------------------------------------------------------- ============ ============= ============ ===================
</TABLE>
Common Stock. Other activity during 1999 primarily represents tax benefits on
stock option exercises.
Series D Preferred Stock. During the six month period ended June 30, 1999,
8,350 shares of Series D Preferred Stock were converted into 16,537 shares of
MediaOne Group Stock. In addition, 1,953 shares of Series D Preferred Stock
were cancelled during the period. As of June 30, 1999, MediaOne Group had
19,989,175 shares of Series D Preferred Stock outstanding.
-18-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
Comprehensive Income. Total comprehensive income and the components of
comprehensive income follow:
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------- ----------------------------- --------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- --------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1999 1998 1999 1998
- ------------------------------------------------------------------- -------------- -------------- ------------- ------------
Net income (loss) $ (159) $ 26,615 $ (270) $ 26,827
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment 36 (8) (34) 9
Unrealized gains on debt and equity securities, and
Exchangeable Notes 447 571 1,345 690
Reclassification for gains realized in net income (loss)
(2,153) (11) (2,252) (11)
Income tax provision (benefit) related to items of other
comprehensive income (loss) 644 (219) 363 (271)
-------------- -------------- ------------- ------------
Total other comprehensive income (loss), net of tax (1,026) 333 (578) 417
============== ============== ============= ============
Total comprehensive income (loss) $ (1,185) $ 26,948 $ (848) $ 27,244
- ------------------------------------------------------------------- ============== ============== ============= ============
</TABLE>
The majority of the unrealized gains on debt and equity securities during the
three month period of 1999 relate to the Company's investment in Time Warner
Telecom LLC, a competitive local exchange business, which offered its shares in
an initial public offering in May 1999. The majority of the unrealized gains on
debt and equity securities during the six month period of 1999 relate to the
Company's investment in AirTouch common and preferred stock, which were
subsequently exchanged for Vodafone ADRs and preferred stock, and the
Company's investment in Time Warner Telecom LLC. The reclassification in 1999
for gains realized in net loss is due to gains realized in the Company's
results of operations upon the exchange of AirTouch common and preferred stock
into Vodafone ADRs and preferred stock.
NOTE 10: EARNINGS PER SHARE
The following table reflects the computation of basic and diluted earnings
(loss) per share in accordance with SFAS No. 128, "Earnings Per Share." The
1999 diluted loss per share and related share amounts do not include potential
share issuances associated with stock options and the Series D Preferred Stock
since the effect would have been antidilutive on the loss from continuing
operations. The 1998 dilutive securities represent the incremental weighted
average shares from potential share issuances associated with stock options of
MediaOne Group Stock and Communications Stock, and the conversion of the
Series D Preferred Stock into MediaOne Group Stock.
-19-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
In 1998, the Company had outstanding two separate classes of common stock which
reflected the performance of its two groups: the MediaOne Group Stock and the
Communications Stock. The MediaOne Group Stock reflected the performance of the
multimedia businesses of the Company, as well as the domestic directory
business. The Communications Stock reflected the performance of the Company's
telecommunications businesses. Effective on June 12, 1998, the
telecommunications businesses and the domestic directory business were
separated from MediaOne Group and became an independent public company. The
Communications Stock was cancelled as of the effective date of the separation.
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------- ----------------------------- -----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
- ---------------------------------------------------------------- --------------- ------------- ------------- ---------------
MEDIAONE GROUP STOCK :
Income (loss) from continuing operations $ (176) $ 2,174 $ (287) $ 1,952
Preferred stock dividends and accretion (14) (13) (28) (26)
Loss on redemption of Preferred Securities (1) - (53) - (53)
--------------- ------------- ------------- ---------------
Income (loss) from continuing operations available to MediaOne
Group Stock shareowners used for basic earnings (loss) per
share $ (190) $ 2,108 $ (315) $ 1,873
Preferred stock dividends and accretion on assumed conversion - 12 - 24
=============== ============= ============= ===============
Income (loss) from continuing operations available to MediaOne
Group Stock shareowners used for diluted earnings (loss)
per share $ (190) $ 2,120 $ (315) $ 1,897
=============== ============= ============= ===============
Income from discontinued operations (2)
Results of operations - $ 71 - $ 158
=============== ============= ============= ===============
Gain on separation - $ 24,461 - $ 24,461
=============== ============= ============= ===============
Extraordinary item - early extinguishment of debt $ 17 $ (333) $ 17 $ (333)
- ---------------------------------------------------------------- =============== ============= ============= ===============
</TABLE>
(1) Represents the after tax charge to equity related to the tender or
exchange of certain Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely Company-guaranteed
debentures ("Preferred Securities") on June 12, 1998, in conjunction with
the separation of the telecommunications businesses and the domestic
directory business from the Company.
(2) Represents the operations of the domestic directory business, which were
discontinued effective June 12, 1998.
-20-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------ ----------------------------- -------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------ --------------- ------------- ------------ ------------
MEDIAONE GROUP STOCK :
Weighted average number of shares used for basic earnings (loss)
per share 605,726 609,098 604,775 608,699
Effect of dilutive securities:
Stock options - 6,112 - 5,651
Series D Preferred Stock - 38,401 - 38,251
=============== ============= ============ ============
Weighted average number of shares used for diluted earnings
(loss) per share 605,726 653,611 604,775 652,601
=============== ============= ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.31) $ 3.46 $ (0.52) $ 3.08
=============== ============= ============ ============
Income from discontinued operations (1) - $ 0.12 - $ 0.26
=============== ============= ============ ============
Gain on separation - $ 40.16 - $ 40.19
=============== ============= ============ ============
Extraordinary item - early extinguishment of debt $ 0.03 $ (0.55) $ 0.03 $ (0.55)
=============== ============= ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.31) $ 3.24 $ (0.52) $ 2.91
=============== ============= ============ ============
Income from discontinued operations (1) - $ 0.11 - $ 0.24
=============== ============= ============ ============
Gain on separation - $ 37.42 - $ 37.48
=============== ============= ============ ============
Extraordinary item - early extinguishment of debt $ 0.03 $ (0.51) $ 0.03 $ (0.51)
=============== ============= ============ ============
COMMUNICATIONS STOCK:
Income from discontinued operations used for basic and diluted
earnings per share (2) - $ 242 - $ 589
=============== ============= ============ ============
Weighted average number of shares used for basic earnings per
share - 484,982 - 484,972
Effect of dilutive securities - stock options - 4,075 - 4,097
Weighted average number of shares used for diluted earnings per =============== ============ ============ ============
share - 489,057 - 489,069
=============== ============= ============ ============
BASIC AND DILUTED EARNINGS PER SHARE:
Basic earnings per share from discontinued operations (2)
- $ 0.50 - $ 1.21
=============== ============= ============ ============
Diluted earnings per share from discontinued operations
- $ 0.49 - $ 1.20
- ------------------------------------------------------------------ =============== ============= ============ ============
</TABLE>
(1) Represents the operations of the domestic directory business, which were
discontinued effective June 12, 1998.
(2) Represents the operations of the telecommunications businesses which were
discontinued effective June 12, 1998.
-21-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 11: SUBSEQUENT EVENTS
International Investment Sales. On July 16, 1999, MediaOne Group sold Watchmark,
a wholly owned wireless network management software operation, to Lucent
Technologies for net proceeds of $5.
On August 6, 1999, MediaOne Group agreed to sell its 50 percent ownership in
Mercury Personal Communications ("One 2 One"), a wireless operation in the
United Kingdom, to Deutsche Telekom for approximately $5.5 billion, which
includes approximately $190 for the repayment of shareholder loans owed to the
Company. The sale is expected to close later this year. In connection with the
sale, the Company entered into put options to lock in a floor price of
approximately $5.5 billion. The put options expire at the end of third quarter
1999.
Cable System Trades. Effective July 31, 1999, MediaOne Group and Time Warner
Cable, a division of Time Warner, Inc. ("Time Warner") and TWE, completed a
trade of certain cable systems. MediaOne Group traded cable systems in Ohio and
Maine serving approximately 280,000 subscribers, while Time Warner Cable traded
cable systems in Massachusetts and New Hampshire serving approximately 240,000
subscribers plus approximately $40 in cash. The definitive agreement entered
into by the companies in February 1999 also included properties in California
and Georgia. That portion of the trade is also expected to occur in the third
quarter of 1999.
Investment in TWE. MediaOne Group currently holds a 25.51 percent interest in
TWE. The remaining interest in TWE is owned by Time Warner. In order to avoid
disputes as to whether the AT&T merger would violate the non-competition
provisions of the TWE partnership agreement, on August 3, 1999, MediaOne Group
sent a notice of termination to TWE which will terminate these non-competition
provisions as to MediaOne Group. The non-competition provisions will continue
to apply to Time Warner. Delivery of the notice of termination permitted TWE to
terminate most of MediaOne Group's management rights in TWE, which it did on
August 4, 1999. Most of these rights would have terminated in any event upon
the change of control of MediaOne Group in the merger. The delivery of the
termination notice and the resulting termination of management rights is
irrevocable, however, even if the merger does not occur. The loss of these
management rights may have a material adverse effect on the value of MediaOne
Group's interest in TWE. Notwithstanding the notice of termination, MediaOne
Group retains certain rights under the partnership agreement, including the
right to approve such matters as the merger of TWE, TWE's entrance into new
lines of business and the issuance of new partnership interests.
-22-
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
In addition, Time Warner has expressed its view that, absent Time Warner's
consent, completion of the AT&T merger will violate the TWE partnership
agreement unless AT&T and MediaOne Group delay completion of the merger at
least until August 3, 2000, one year following delivery of the termination
notice. While AT&T and MediaOne Group disagree with this view, if Time Warner's
view prevails and if Time Warner does not consent to an earlier closing, AT&T
and MediaOne Group may have to delay completing the merger to August 3, 2000.
Any such delay could delay our ability to realize the expected financial and
operating benefits of the merger.
NOTE 12: DISCONTINUED OPERATIONS
In accordance with Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the Consolidated Financial Statements reflect the
telecommunications businesses and the domestic directory business as
discontinued operations since these businesses were separated from the Company
effective on June 12, 1998. The revenues and expenses, and the cash flows of the
discontinued operations have been separately classified in the Consolidated
Statements of Operations and Cash Flows. Summarized operating results for the
discontinued operations for the three and six month periods of 1998 were as
follows: Revenues were $2,445 and $5,454; operating income was $597 and $1,412;
income before income taxes was $494 and $1,187; income tax expense was $(181)
and $(440); and net income from discontinued operations was $313 and $747,
respectively.
-23-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the cable, and wireless
communications markets, (ii) changes in demand for the Company's products and
services, (iii) regulatory changes affecting the cable and telecommunications
industries, (iv) changes in economic conditions in the various markets served
by MediaOne Group operations, including international markets, that could
adversely affect the level of demand for cable, wireless, or other services
offered by the Company, (v) greater than anticipated competitive activity
requiring new pricing for services, (vi) higher than anticipated start-up costs
associated with new business opportunities, (vii) higher than anticipated
employee levels, capital expenditures, and operating expenses (such as costs
associated with Year 2000 remediation), (viii) consumer acceptance of broadband
services, including telephony and data services, and wireless services, (ix)
increases in fraudulent activity with respect to broadband and wireless
services, or (x) delays in the development of anticipated technologies, or the
failure of such technologies to perform according to expectations.
Results of Operations - Continuing Operations - Three and Six Months Ended
June 30, 1999 Compared with 1998
MediaOne Group Income (Loss) from Continuing Operations
- -------------------------------------------------------------------------------
Normalized Income (Loss) from Continuing Operations:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, Change June 30, Change
--------------------- ------------------- --------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 $ % 1999 1998 $ %
- ----------------------------------- ---------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations $ (176) $ 2,174 $ (2,350) - $ (287) $ 1,952 $ (2,239) -
Adjustments to reported income (loss)
from continuing operations:
Gain (loss) on investments:
Domestic (14) (14) - - (57) (24) (33) -
International - net 3 - 3 - (73) - (73) -
Exchange of AirTouch (1,530) - (1,530) - (1,530) - (1,530) -
PrimeStar - - - - 40 - 40 -
Domestic wireless (1) - (2,257) 2,257 - - (2,257) 2,257 -
Merger costs 1,497 - 1,497 - 1,512 - 1,512 -
Minority interest - Centaur 13 - 13 - 13 - 13 -
Domestic wireless operations(1) - (5) 5 - - (20) 20 -
Separation costs - (35) 35 - - - -
========== ========== ========== ======== ========== ========== ========== ==========
Normalized loss from continuing
operations $ (207) $ (137) $ (70) 51.1 $ (382) $ (349) $ (33) 9.4
- ----------------------------------- ========== ========== ========== ======== ========== ========== ========== ==========
</TABLE>
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98.
-24-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share From Continuing Operations Available for
MediaOne Group Stock:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, Change June 30, Change
--------------------- ------------------ --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 $ % 1999 1998 $ %
- ---------------------------------------- ---------- ---------- --------- -------- ---------- ---------- ---------- -----
Earnings (loss) from continuing
operations available for common stock $ (0.31) $ 3.46 $ (3.77) - $ (0.52) $ 3.08 $ (3.60) -
Adjustments to reported earnings
(loss) from continuing operations:
Gain (loss) on investments:
Domestic (0.02) (0.02) - - (0.09) (0.04) (0.05) -
International - net - - - - (0.13) - (0.13) -
Exchange of AirTouch (2.52) - (2.52) - (2.52) - (2.52) -
PrimeStar - - - - 0.07 - 0.07 -
Domestic wireless (1) - (3.71) 3.71 - - (3.71) 3.71 -
Merger costs 2.47 - 2.47 - 2.50 - 2.50 -
Minority interest - Centaur 0.02 - 0.02 - 0.02 - 0.02 -
Domestic wireless operations (1) - (0.01) 0.01 - - (0.04) 0.04
Separation costs - (0.06) 0.06 - - - - -
Loss on redemption of Preferred
Securities - 0.09 (0.09) - - 0.09 (0.09) -
========== ========== ========= ======== ========== ========== ========== =====
Normalized loss from continuing
operations available for common $ (0.36) $ (0.25) $ (0.11) 44.0 $ (0.67) $ (0.62) $ ( 0.05) 8.1
stock
- ---------------------------------------- ========== ========== ========= ======== ========== ========== ========== =====
</TABLE>
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98.
The increase in normalized loss from continuing operations during the three and
six month periods ended June 30, 1999 was primarily a result of a one-time
charge to depreciation and amortization expense for the deferral of the TCI
trade, partially offset by decreased interest expense as a result of lower debt
levels at MediaOne Group. The table above normalizes for significant one-time
items and aids in the comparability of the Company's performance period over
period. Routine acquisitions and dispositions are normalized within the
discussion of revenues and operating loss which follows.
Sales and Other Revenues
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------- ----------------------- -------------------- ------------------------- --------------------
Three Months Ended Six Months Ended
June 30, Change June 30, Change
----------------------- -------------------- ------------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 $ % 1999 1998 $ %
- ----------------------------- ----------- ----------- --------- ---------- ------------ ------------ --------- ----------
Cable and broadband:
Domestic $ 665 $ 607 $ 58 9.6 $ 1,319 $ 1,226 $ 93 7.6
International - 6 (6) - 7 11 (4) (36.4)
--------------------------------------------------------------------------------------------
665 613 52 8.5 1,326 1,237 89 7.2
Corporate (3) 7 (10) - 1 14 (13) (92.9)
Other - 1 (1) - - 1 (1) -
--------------------------------------------------------------------------------------------
Current operations 662 621 41 6.6 1,327 1,252 75 6.0
Domestic wireless(1) - 20 (20) - - 361 (361) -
============================================================================================
Total $ 662 $ 641 $ 21 3.3 $ 1,327 $ 1,613 $ (286) (17.7)
- -----------------------------============================================================================================
</TABLE>
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98.
-25-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
MediaOne Group sales and other revenues increased during the three month period
ended June 30, 1999, primarily as a result of growth in domestic cable and
broadband revenues. Sales and other revenues decreased during the six month
period ended June 30, 1999 primarily as a result of the sale of the domestic
wireless businesses in April 1998, partially offset by growth in domestic cable
and broadband revenues. Normalized for acquisitions and dispositions, total
revenues for the three and six month periods of 1999 increased $50, or 8.2
percent, and $114, or 9.5 percent, respectively, compared with total revenues
of $612 and $1,206, for the same periods in 1998, respectively. The normalized
increases were due primarily to growth in domestic cable and broadband revenues.
Cable and Broadband -Domestic
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -------------------------- ----------------------- ---------------------- ---------------------- ---------------------
Three Months Ended Six Months Ended
June 30, Change June 30, Change
----------------------- ---------------------- ---------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES 1999 1998 $ % 1999 1998 $ %
- -------------------------- ---------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Domestic
Basic Cable $ 446 $ 420 $ 26 6.2 $ 885 $ 832 $ 53 6.4
Premium 82 80 2 2.5 164 159 5 3.1
Pay-per-view 15 11 4 36.4 37 24 13 54.2
Advertising 51 40 11 27.5 93 71 22 31.0
Equipt. & Install. 46 44 2 4.5 92 84 8 9.5
Other 1 1 - - 2 1 1 -
---------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Video 641 596 45 7.6 1,273 1,171 102 8.7
New Products 24 11 13 - 46 21 25 -
PrimeStar - - - - - 34 (34) -
========== ============ ========== =========== ========== =========== ========== ==========
Total revenues $ 665 $ 607 $ 58 9.6 $ 1,319 $ 1,226 $ 93 7.6
- -------------------------- ========== ============ ========== =========== ========== =========== ========== ==========
</TABLE>
Domestic cable and broadband revenues increased during the three and six month
periods ended June 30, 1999 due primarily to greater basic cable, advertising
and new products revenues. The increase during the six month period was
partially offset by the lack of PrimeStar DBS revenues in 1999. Normalized for
the one-time effects of cable system acquisitions and dispositions, total
domestic cable and broadband revenues for the three and six month periods of
1999 increased 10.1 percent and 10.7 percent, respectively.
Basic Cable. Basic cable services revenues increased during the three and six
month periods of 1999 due primarily to an approximate five percent increase in
revenue per average cable subscriber and increased basic subscribers. At June
30, 1999, basic cable subscribers were 4,994,000, an increase of 1.2 percent
compared with the same period in 1998, normalized for the effects of cable
system acquisitions and dispositions. The increase in revenue per average cable
subscriber is primarily the result of increased rates.
-26-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Premium. Premium service revenues increased during 1999 due primarily to
improved premium service customer growth as a result of the launch of "NexTV"
in late 1998. NexTV is a repackaging of the Company's premium services into
related premium channels. At June 30, 1999, premium units were 4,232,000, an
increase of 4.7 percent compared with the same period in 1998, normalized for
the effects of cable system acquisitions and dispositions.
During June 1999, the Company launched digital service in Atlanta, Georgia;
Richmond, Virginia; and Cleveland, Ohio, bringing the Company to four digital
markets launched. At June 30, 1999, digital subscribers were 13,800 and digital
market-ready homes were 323,900. Advanced analog subscribers totaled 1,100,000
at June 30, 1999, with 5,400,000 advanced analog market-ready homes.
Pay-per-view. Pay-per-view revenues increased during the three month period
ended June 30, 1999 as a result of greater movie and other product purchases by
subscribers, due in part to growth in advanced analog and digital subscribers.
In addition, pay-per-view revenues increased during the six month period ended
June 30, 1999 due to the offering of three major sporting events during the
period compared with no comparable events in 1998.
Advertising. Advertising revenues increased during 1999 primarily as a result
of growth in local and national advertising sales as compared with the same
period in 1998.
Equipment and Installation. Equipment and installation revenues increased in
1999 due primarily to subscribers upgrading converter boxes, slightly offset by
free installation programs offered during the second quarter of 1999.
Other. Other revenues include franchise fee payments, revenues received for
guides and miscellaneous revenues.
Video. Video revenue per average cable subscriber was $42.85 per month for the
three month period ended June 30, 1999, an increase of 6.4 percent compared
with $40.28 for the same period in 1998. For the six month period ended June 30,
1999, video revenue per average cable subscriber was $42.65 per month, an
increase of 7.3 percent compared with $39.73 for the same period in 1998.
Adjusted for the one-time effects of cable system acquisitions and dispositions,
video revenue per average cable subscriber increased 6.3 percent and 7.3 percent
during the three and six month periods of 1999, respectively. Video revenue per
average cable subscriber has increased as a result of increased rates and
expanded channel offerings, as well as growth in advertising and pay-per-view
revenues.
-27-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Video revenues increased 7.6 percent and 8.5 percent during the three and six
month periods of 1999, respectively, normalized for the one-time effects of
cable system acquisitions and dispositions.
New Products. New products revenues increased during 1999 due primarily to
customer growth in high speed data Internet access services, as well as the
launch of residential telephone services during 1998 and 1999. Normalized for
dispositions, new products revenues increased $16, or 200.0 percent, and $28,
or 155.6 percent, during the three and six month periods of 1999, respectively,
compared with new products revenues of $8 and $18 for the same periods in 1998.
In April 1999, MediaOne Group launched residential telephone service in Detroit,
Michigan, its seventh telephone metro area. At June 30, 1999, MediaOne Group
had approximately 26,100 residential telephone customers with 35,700 telephone
lines. Residential telephone services were available to 1,041,000 market-ready
homes as of June 30, 1999, compared to 131,500 as of the same period in 1998.
During the three month period of 1999, the Company completed the transition of
its high speed data Internet customers to the "Road Runner" brand name. In
addition, the responsibility for the maintenance of the Internet network, the
development of national content and the provisioning of technical customer
support will now be provided by the high speed data joint venture entered into
in June 1998 with TWE, Time Warner and Time Warner Entertainment/Newhouse
Partnership. At June 30, 1999, MediaOne Group had approximately 140,300 high
speed data Internet customers compared with 39,000 high speed data Internet
customers for the same period in 1998. High speed data Internet services were
available to 4,381,000 market-ready homes at June 30, 1999, compared to
2,045,000 as of the same period in 1998.
PrimeStar. Subsequent to April 1, 1998, MediaOne Group no longer reflects
PrimeStar DBS services revenues as it contributed its PrimeStar subscribers and
certain related assets (the "PrimeStar Contribution") to PrimeStar.
Cable and Broadband - International. International cable and broadband revenues
represent the consolidated operations of Cable Plus, a cable operator in the
Czech Republic. Effective April 1, 1999, MediaOne Group no longer consolidates
the results of Cable Plus as the entity is held for sale. See Note 6 -
Investment in International Ventures - to the Consolidated Financial Statements.
Corporate. Corporate revenues during the three and six month periods of 1999
decreased due to adjustments associated with the discontinuance of insurance
policies on cellular phones.
Domestic Wireless. On April 6, 1998, MediaOne Group sold its domestic wireless
businesses to AirTouch in the AirTouch Transaction.
-28-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Operating Loss
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ----------------------------- ----------------------- -------------------- ------------------------- --------------------
Three Months Ended Six Months Ended
June 30, Change June 30, Change
----------------------- -------------------- ------------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 $ % 1999 1998 $ %
- ----------------------------- ----------- ----------- --------- ---------- ------------ ------------ --------- ----------
Cable and broadband:
Domestic $ (77) $ (10) $ (67) - $ (80) $ (58) $ (22) 37.9
International - (2) 2 - (1) (4) 3 (75.0)
--------------------------------------------------------------------------------------------
(77) (12) (65) - (81) (62) (19) 30.6
International wireless - (2) 2 - (2) (5) 3 (60.0)
Corporate (32) (42) 10 (23.8) (65) (73) 8 (11.0)
Other (1) (3) 2 (66.7) (1) (6) 5 (83.3)
--------------------------------------------------------------------------------------------
Current operations (110) (59) (51) 86.4 (149) (146) (3) 2.1
Domestic wireless(1) - 6 (6) - - 93 (93) -
============================================================================================
Total $ (110) $ (53) $ (57) - $ (149) $ (53) $ (96) -
- -----------------------------============================================================================================
</TABLE>
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98.
During the three and six month periods ended June 30, 1999, MediaOne Group's
operating loss increased due primarily to depreciation and amortization charges
on the continuing upgrade of the Company's cable network, partially offset by
decreased international overhead costs during 1999. The operating loss for the
six month period of 1999 also increased as a result of selling the domestic
wireless businesses in April, 1998.
MediaOne Group's EBITDA was $218 and $429 for the three and six month periods
ended June 30, 1999, respectively, and $205 and $553 for the three and six month
periods ended June 30, 1998, respectively. Excluding the effect of the domestic
wireless operations, EBITDA would have been $195 and $405 for the three and six
month periods in 1998, respectively. MediaOne Group considers EBITDA an
important indicator of the operational strength and performance of its
businesses. EBITDA, however, 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.
Cable and Broadband - Domestic. Domestic cable and broadband operating losses
increased during the three month period ended June 30, 1999 due primarily to a
one-time $50 depreciation and amortization charge related to the deferral of
the TCI trade, as well as increased depreciation expense on the continuing
upgrade of the Company's cable networks. Depreciation and amortization expense
on the TCI trade properties had been suspended during 1998 and the first
quarter of 1999 pending the trade of these properties. Partially offsetting the
increase in operating loss was the suspension of $17 in depreciation and
amortization expense for cable systems held for sale in 1999.
-29-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Domestic cable and broadband operating losses increased during the six month
period ended June 30, 1999 due primarily to a one-time $25 depreciation and
amortization charge related to the deferral of the TCI trade, as well as
increased depreciation expense on the continuing upgrade of the Company's cable
networks. Partially offsetting the increase in operating loss was the suspension
of $30 in depreciation and amortization expense for cable systems held for sale
in 1999, and a one-time charge of $28 in the first quarter of 1998 for
depreciation and amortization expense related to the termination of the sale of
cable systems in Minnesota. Depreciation and amortization expense had been
suspended on these systems in 1997 while they were held for sale.
During the three month period of 1999, EBITDA for domestic cable and broadband
operations was $248, an increase of $9, or 3.8 percent, compared with $239 for
the same period in 1998. Revenue increases of $58, or 9.6 percent, were
partially offset by increased programming costs of $20, or 14.2 percent, and
increased operating, general and administrative costs of $29, or 12.8 percent.
Normalized for the one-time effects of cable system acquisitions and
dispositions, domestic cable and broadband EBITDA increased $12, or 5.1 percent.
During the six month period of 1999, EBITDA for domestic cable and broadband
operations was $489, an increase of $10, or 2.1 percent, compared with $479 for
the same period in 1998. Revenue increases of $93, or 7.6 percent, were
partially offset by increased programming costs of $30, or 10.3 percent, and
increased operating, general and administrative costs of $53, or 11.6 percent.
Of those amounts, the PrimeStar Contribution provided revenue decreases of $34
and cost decreases of $30, including $14 of programming costs, to total
domestic cable and broadband EBITDA for the period. Normalized for the one-time
effects of cable system acquisitions and dispositions, domestic cable and
broadband EBITDA increased $13, or 2.7 percent.
Video EBITDA was $259, an increase of $6, or 2.4 percent, for the three month
period of 1999, compared with $253 for the same period in 1998. For the six
month period of 1999, video EBITDA was $519, an increase of $20, or 4.0 percent,
compared with $499 for the same period in 1998. Normalizing for acquisitions
and dispositions, video EBITDA increased $8, or 3.2 percent, for the three
month period of 1999, compared with video EBITDA of $251 for the same period in
1998, and increased $18, or 3.6 percent, for the six month period of 1999
compared with video EBITDA of $501 for the same period in 1998.
-30-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
New products EBITDA was a loss of $(11) for the three month period of 1999, a
decrease in losses of $3, or 21.4 percent, compared with EBITDA losses of $(14)
in the same period of 1998. New products revenue increases of $13, or 118.2
percent, were partially offset by new products cost increases of $10, or 40.0
percent, during the period, primarily for the offering of residential telephone
services. For the six month period of 1999, new products EBITDA was a loss of
$(30), an increase in losses of $(6), or 25.0 percent. New products revenue
increases of $25, or 119.0 percent, were offset by new products cost increases
of $31, or 68.9 percent, during the six month period, primarily for the
offering of residential telephone services. Normalizing for dispositions, new
products EBITDA loss for the three month period of 1999 decreased $4, or 26.7
percent, compared with new products EBITDA loss of $(15) for the same period in
1998, and for the six month period of 1999, new products EBITDA loss increased
$(5), or 20.0 percent, compared with new products EBITDA loss of $(25) for the
same period in 1998.
Programming costs were $161 for the three month period in 1999, an increase of
$20, or 14.2 percent, over the same period in 1998. For the six month period of
1999, programming costs were $320, an increase of $30, or 10.3 percent, over
the same period in 1998. Excluding programming costs related to PrimeStar DBS
services, programming costs increased $44, or 15.9 percent during the six month
period of 1999. The normalized increase was primarily a result of programmer
rate increases, expanded channel offerings and growth in subscribers, as well
as programming costs in 1999 related to the Company's high speed data Internet
services.
Operating, general and administrative costs were $256 during the three month
period of 1999, an increase of $29, or 12.8 percent, over the same period in
1998. During the six month period of 1999, operating, general and
administrative costs were $510, an increase of $53, or 11.6 percent, over the
same period in 1998, partially offset by decreased costs of $16 related to the
PrimeStar Contribution. Increases in operating, general and administrative
costs were primarily a function of increases in: (a) employee costs due to
improvements in customer service; (b) marketing and advertising costs
associated with the deployment of new products, such as high speed data and
residential telephone services, the launch of NexTV and an emphasis on driving
subscriber growth; and (c) spending on initiatives to improve the operations of
the Company. During the three and six month periods of 1999, MediaOne Group
incurred initiatives costs of $12 and $23, respectively, to improve reporting
and billing systems and to create customer databases to serve customers more
effectively, and incurred incremental costs of $5 and $12, respectively, for
Year 2000 remediation, for a total of $17 and $35, respectively. Initiatives
spending and incremental Year 2000 costs in the three and six month periods of
1999 have increased a total of $13 and $27, respectively, compared with the
same periods in 1998.
Corporate. Corporate costs for the three and six month periods of 1999 have
decreased due primarily to a reduction in corporate overhead costs associated
with the international operations.
-31-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Other. Costs incurred for the development of domestic Internet content services
have decreased during 1999 primarily as a result of aligning certain of these
operations within the domestic cable and broadband operations.
Interest Expense and Other
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------ ----------------------- ------------------ ------------------------- ------------------
Three Months Ended Six Months Ended
June 30, Change June 30, Change
----------------------- ------------------ ------------------------- ------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 $ % 1999 1998 $ %
- ------------------------------ ----------- ----------- --------- -------- ------------ ------------ --------- --------
Interest expense $ (103) $ (143) $ 40 (28.0) $ (199) $ (293) $ 94 (32.1)
Equity losses in
unconsolidated ventures (87) (69) (18) 26.1 (202) (205) 3 (1.5)
Gains (losses) on investments:
Domestic sale and
redemption 22 22 - - 92 39 53 -
International sale and
exit costs - net 8 - 8 - 132 - 132 -
Exchange of AirTouch 2,482 - 2,482 - 2,482 - 2,482 -
Domestic wireless sale - 3,869 (3,869) - - 3,869 (3,869) -
PrimeStar - - (65) - (65) -
Minority interest expense in
Centaur Funding (46) - (46) - (71) - (71) -
Guaranteed minority interest
expense (23) (20) (3) 15.0 (47) (42) (5) 11.9
Merger costs (1,507) - (1,507) - (1,522) - (1,522) -
Other income - net 31 110 (79) (71.8) 68 73 (5) (6.8)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest Expense. Interest expense during the three and six month periods of
1999 decreased due primarily to the refinancing of debt in connection with the
June 12, 1998 separation of the Company's businesses into two separate
companies, as well as the assumption of $1.35 billion in debt by AirTouch in
the AirTouch Transaction. The reduction in interest expense was partially
offset by the issuance in the latter part of 1998 of $1.7 billion of
Exchangeable Notes, as well as the issuance in May 1999 of a $1.5 billion note
payable to AT&T for the termination fee paid to Comcast on behalf of MediaOne
Group.
Equity Losses in Unconsolidated Ventures. Equity losses during the three month
period of 1999 increased due primarily to greater losses of $(44) from
international ventures, partially offset by increased equity earnings of $26
from domestic ventures. For the six month period of 1999, equity losses from
international ventures have increased $(56), more than offset by increased
equity earnings from domestic ventures of $59. Effective April 1, 1999, equity
losses from international ventures include the results of operations of Czech
Cable and RTDC as these investments are no longer consolidated with the
Company's results of operations. See Note 6 - Investments in International
Ventures - to the Consolidated Financial Statements.
-32-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Equity losses from international ventures have increased due primarily to its
cable and broadband ventures, partially offset by improved results from the
wireless ventures. Equity earnings from domestic ventures have increased due to
a one-time gain recognized by TWE during the three month period of 1999, and
the absence of losses from the investment in PrimeCo Personal Communications,
L.P. ("PrimeCo") during the six month period of 1999 as it was sold to AirTouch
in April 1998. In addition, as of April 1, 1999, the Company suspended
recording equity losses for its high speed data joint venture with Time Warner,
TWE and Time Warner Entertainment/Newhouse Partnership as its investment had
been reduced to zero and the Company has no future funding commitments to the
joint venture.
Gains (Losses) on Investments
Sale and Redemption of Domestic Investments. During the three month period of
1999, DECS matured and were redeemed for shares of FSA resulting in a pretax
gain of $21 ($14 after tax). In addition, during the six month period of 1999
MediaOne Group sold: (a) investments in two providers of business telephony
services resulting in a pretax gain of $44 ($27 after tax), (b) various cable
systems resulting in a pretax gain of $15 ($9 after tax), and (c) miscellaneous
assets from its capital assets group resulting in a pretax gain of $12 ($7
after tax). During the three month period of 1998, MediaOne Group sold various
investments, resulting in a pretax gain of $22 ($14 after tax). In addition,
during the six month period of 1998, MediaOne Group sold a cable programming
investment resulting in a pretax gain of $17 ($10 after tax).
Sale and Exit Costs of International Investments - net. During the three month
period of 1999, MediaOne Group sold shares of Optus resulting in a pretax gain
of $31 ($19 after tax) and sold its investment in Listel resulting in a pretax
gain of $20 ($6 after tax). As a result of these sales, the Company has
liquidated its investment in Optus and no longer holds investments in the
international directories business. In addition, during the three month period
of 1999, the Company recorded a charge of $43 ($28 after tax) related to its
international exit plan. See Note 6 - Investments in International Ventures- to
the Consolidated Financial Statements. For the six month period of 1999, total
pretax gains on Optus shares sales were $155 ($95 after tax).
Exchange of AirTouch Investment. Effective on June 30, 1999, MediaOne Group
exchanged and modified its investment in AirTouch resulting in a net pretax
gain of $2,482 ($1,530 after tax). See Note 5 - Investment in Vodafone
Group/AirTouch Communications - to the Consolidated Financial Statements.
Sale of Domestic Wireless Investment. On April 6, 1998, MediaOne Group sold its
domestic wireless businesses to AirTouch, resulting in a pretax gain of $3,869
($2,257 after tax).
PrimeStar Investment. During the first quarter of 1999, MediaOne Group recorded
a pretax loss of $65 ($40 after tax) for probable obligations related to its
investment in PrimeStar, of which $54 was funded in April and June 1999.
-33-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Minority Interest Expense in Centaur Funding. Minority interest expense in
Centaur Funding for the three and six month periods of 1999 represents
dividends and accretion on the $1.1 billion of Preference Shares issued by
Centaur in December 1998. Since the Preference Shares are referenced to the
AirTouch preferred shares, Centaur accrued a $21 extraordinary dividend payable
to the Preference Shares Series B and Series C holders to mirror the
extraordinary dividend declared by AirTouch as a result of the Vodafone merger.
This dividend amount is reflected as minority interest expense in Centaur
Funding for the three and six month periods of 1999. See Note 8 - Minority
Interest in Centaur Funding - to the Consolidated Financial Statements.
Guaranteed Minority Interest Expense. Guaranteed minority interest expense has
increased slightly during the three and six month periods of 1999, due
primarily to the exchange of MediaOne Group's 7.96 and 8.25 percent Preferred
Securities for 9.30 and 9.50 percent Preferred Securities in mid-June 1998, and
the issuance in October 1998 of 9.04 percent Preferred Securities. The exchange
of the Preferred Securities was a result of the separation of the Company's
businesses into two separate companies effective on June 12, 1998.
Merger Costs. Merger costs during the three month period of 1999 include a
charge of $1,500 to terminate the Company's merger agreement with Comcast, as
well as miscellaneous legal and advisory fees of $7, resulting in total pretax
merger costs of $1,507 ($1,497 after tax) for the period. In addition to the
Comcast termination fee, merger costs for the six month period of 1999 include
$22 of legal and advisory fees related to merger activity of the Company,
resulting in total pretax merger costs of $1,522 ($1,512 after tax).
Other Income - Net. During the three month period of 1999, other income
decreased due primarily to the reclass of separation and other costs of $53,
accrued in the first quarter of 1998, to the gain realized upon the
distribution of the Company's telecommunications businesses and the domestic
directory business to the Communications Stock shareowners. Increased foreign
exchange transaction losses associated with loans to international ventures
contributed to the decrease in other income for the period. For the six month
period ended June 30, 1999, other income decreased primarily due to increased
foreign exchange transactions losses associated with loans to international
ventures, partially offset by dividend income from the Company's investment in
AirTouch preferred stock. During the six month period of 1999, MediaOne Group
also recorded $15 of income for a fee paid by Optus to the Company as a result
of having met certain performance measures.
-34-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
Provision for Income Taxes for Continuing Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------ ----------------------- ----------------- ------------------------ ------------------
Three Months Ended Six Months Ended
June 30, Change June 30, Change
----------------------- ----------------- ------------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 $ % 1999 1998 $ %
- ------------------------------ ----------- ----------- -------- -------- ------------- ---------- --------- --------
Provision for income taxes $ (843) $ (1,542) $ 699 (45.3) $ (806) $ (1,436) $ 630 (43.9)
Effective tax rate 126.4% 41.5% 155.2% 42.4%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in the 1999 effective tax rate is primarily a result of merger
costs, gains on the sales of investments and the loss on the PrimeStar
investment. Excluding these unusual transactions, the effective tax rate would
have been 32.5 percent for both the three and six month periods of 1999. The
increase in the 1998 effective tax rate is primarily a result of the gain on
the sale of the domestic wireless businesses. Excluding the gain on the sale of
the domestic wireless businesses, the domestic wireless operations and gains on
the sales of investments, the effective tax rate would have been 40.8 percent
and 36.2 percent during the three and six month periods of 1998, respectively.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities during the six month period ended June 30,
1999 increased $320 to $478 as compared with the same period in 1998. The
increase was due to the receipt of $377 of net income tax benefits, due
primarily to the carryback of the 1998 taxable loss to the 1996 consolidated
tax return. Cash provided during 1998 from operating activities of the domestic
wireless operations was offset during the period by increased interest payments
on long-term debt outstanding during the period, as well as costs paid for the
separation. The Company also received $28 in dividends during 1998, primarily
from Westel 450 and Westel 900, the Company's European wireless investments in
Hungary.
MediaOne Group expects that cash from operations will not be adequate to fund
future expected cash requirements. Additional funding will come from cash on
hand, asset sales and new debt financing, including the monetization of
Vodafone ADRs.
Investing Activities
Capital expenditures at MediaOne Group, on a cash basis, were $900 and $725
during the six month periods ended June 30, 1999 and 1998, respectively. The
majority of the capital expenditures were devoted to upgrading the domestic
cable network and continuing the provision of new and enhanced services.
-35-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
For the six months ended June 30, 1999 and 1998, MediaOne Group invested $73
and $13, respectively, in international ventures, net of a $45 repayment in
1998 from a wireless investment in the United Kingdom. The investments were
primarily capital contributions to cable investments in Belgium, the
Netherlands, Japan and Singapore, as well as a wireless venture in India.
Domestically, MediaOne Group invested $91 and $79 during the six month periods
ended June 30, 1999 and 1998, respectively, including $54 funded in 1999
related to the Company's funding obligations of PrimeStar. The remaining
investments in 1999 primarily represent ventures for the development of
Internet content services. During 1998, the Company funded $64 related to its
investment in PrimeCo which was sold to AirTouch in April 1998.
During 1999, MediaOne Group sold various investments resulting in net proceeds
of $397, comprised of the following: (a) shares of Optus for net cash proceeds
of $164, (b) two investments in providers of business telephony services for
net proceeds of $82, (c) miscellaneous assets of the capital assets group for
net proceeds of $64, (d) its investment in Listel for proceeds of $55, and (e)
various cable television systems for net proceeds of $32. In addition, MediaOne
Group received cash proceeds of $534 upon the exchange of its investment in
AirTouch common stock for Vodafone ADRs. During the six month period ended
June 30, 1998, the Company sold various investments resulting in net proceeds
of $187, comprised of the following: (a) an equity investment in PrimeStar
Partners, L.P. for net proceeds of $77, (b) a cable programming investment for
net proceeds of $38, (c) various cable systems for net proceeds of $33, and (d)
miscellaneous assets for net proceeds of $39. The Company also purchased
various cable television systems during 1998 totaling $35.
In addition, during 1999, MediaOne Group received $25 from various asset
transactions, including $16 in cash on the call of an option for FSA shares
held by the Company.
Financing Activities
Debt Activity. Total debt at June 30, 1999 was $7,963, an increase of $2,541
compared with December 31, 1998. The increase in debt outstanding was due
primarily to debt issuances during the period, including the $1.5 billion note
payable to AT&T for the funding of the Comcast merger termination fee, and
increases in the fair value of the Exchangeable Notes. The value of the
Exchangeable Notes as of June 30, 1999 reflected the corresponding changes in
the fair value of Vodafone ADRs as a result of the merger of AirTouch with
Vodafone. Debt increases during the period were partially offset by the
maturity of the DECS, the early extinguishment of long-term debt, and the
de-consolidation of debt related to Czech Cable and RTDC. The remaining change
in debt outstanding was due primarily to the repayment of commercial paper
using the income tax refund received and proceeds generated by asset sales.
-36-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
On June 3, 1999, SPC IV issued $1,128 of floating rate debt at 3-month LIBOR
plus 0.5 percent and paid $321 for a Zero Coupon Swap to fix and pre-fund
interest payments on the debt. Proceeds from the debt offering were used for
general corporate purposes. As a result of the Vodafone merger, $105 of the
debt issued by SPC IV will be repaid in August using the cash proceeds from the
exchange of AirTouch common stock into Vodafone ADRs.
On June 1, 1999, MediaOne Group redeemed 11.0 percent senior subordinated
debentures with a carrying value of $345, including a debt premium of $45. The
debt extinguishment resulted in a net gain of $17 (net of income tax expense of
$11). In addition, the Company redeemed a third-party note for its carrying
value of $12. MediaOne Group financed the redemptions with cash on hand.
On May 15, 1999, DECS originally issued in 1996 matured and were redeemed for
FSA shares held by the Company. The redemption resulted in a pretax gain of $21
($14 after tax).
On June 12, 1998, MediaOne Group tendered $4.9 billion notional amount of
long-term debt. Also on June 12, 1998, MediaOne Group tendered for cash $301
face value of the 7.96 percent Preferred Securities and $237 face value of the
8.25 percent Preferred Securities originally issued in 1995 and 1996,
respectively. The cash redemption amount of $5.5 billion for the long-term debt
and $582 for the Preferred Securities was financed with floating-rate commercial
paper with a weighted average interest rate of 5.85 percent. In addition, in
accordance with the terms of the separation agreement, the newly created entity
upon the distribution of the telecommunications businesses of the Company
funded to MediaOne Group $3.9 billion related to the transfer of U S WEST Dex,
the domestic directory business previously owned by MediaOne Group. Such funds
were used to repay a portion of the commercial paper issued to tender the debt
discussed above.
Dividends. During 1998, the Company paid $519 of common dividends on the
Communications Stock. Effective June 12, 1998, MediaOne Group no longer pays
dividends on the Communications Stock.
Cash from Discontinued Operations. Cash from discontinued operations during 1998
consisted primarily of fundings to MediaOne Group for common dividends paid to
Communications Stock shareowners, dividends paid by the domestic directory
business to MediaOne Group, proceeds from the issuance of Communications Stock,
and debt fundings and repayments between MediaOne Group and the discontinued
operations of the telecommunications businesses and the domestic directory
business.
-37-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Other Financing Activities
Commitments. During April 1999, the sale of PrimeStar's medium-powered business
was closed. As a result, 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 the second quarter of 1999, MediaOne Group increased its ownership in
Titus and Chofu. As part of the acquisition, MediaOne Group assumed outstanding
debt guarantees of approximately $50.
Risk Management
MediaOne Group is exposed to market risks arising from changes in interest
rates, foreign exchange rates and equity prices. Derivative financial
instruments are used to selectively manage these risks. MediaOne Group does not
use derivative financial instruments for trading purposes.
Equity-Price Risk Management. MediaOne Group is exposed to market risks
associated with equity security prices related to its investments in marketable
equity securities and associated options to purchase marketable equity
securities. In 1999, the Company's exposure to equity price risk has changed
due to initial public offerings by various companies in which MediaOne Group
has an investment, the AirTouch/Vodafone Merger and the Collar established on
some Vodafone shares.
The table below presents the impact of hypothetical movements in the equity
security prices related to MediaOne Group's combined position in marketable
equity securities and derivative contracts:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------- ------------------------------ ------------------- ----------------
Hypothetical Change in
6/30/99 Stock Price Increase in Decrease in
------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fair Market Value Fair Market
Investment Increase Decrease Value
- -------------------------------------------------- -------------- --------------- ------------------- ----------------
Vodafone common stock, including Exchangeable
Notes 10% 10% $ 353 $ 353
Internet related investments 50% 50% 77 74
All other investments 10% 10% 74 74
=================== ================
Total $ 504 $ 501
- -------------------------------------------------- -------------- --------------- =================== ================
</TABLE>
The changes in the equity security prices are based on hypothetical movements
in future market rates and are not necessarily indicative of actual results
that may occur.
-38-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Competitive and Regulatory Environment
Cable and Broadband - Domestic. In May 1999, the Federal Communications
Commission (the "FCC") issued an interpretation of the rules issued in June
1998 providing for the retail sale of set-top television boxes and requiring
cable television companies to offer security modules segregated from the
set-top box. The revised rules clarified that the segregation requirements
apply to digital and hybrid digital/analog boxes only.
In June 1999, a Petition for Declaratory Ruling was filed with the FCC
requesting that cable television companies be required to lease channel
capacity to third parties to provide Internet access service under provisions
of the federal Cable Act. The Company believes that the leased access
provisions of the federal Cable Act apply only to traditional video programming.
In July 1999, county commissioners in Broward County, Florida passed an
ordinance which required MediaOne Group and other cable providers to allow any
and all unaffiliated Internet service providers to connect to the cable network
for the purpose of transmitting information between the Internet service
providers' customers and the Internet. The Company and AT&T have filed suit
against Broward County to have the ordinance declared invalid. The Company
believes that the ordinance is in violation of and pre-empted by the 1996
Telecommunications Act, the United States Constitution and the Florida
Constitution, and in breach of the franchise agreement between MediaOne Group
and the county.
MediaOne Group believes that local governments, including franchising
authorities, lack authority to force cable companies to provide network access
to other Internet service providers and will vigorously defend against any such
forced access mandates.
Year 2000 Readiness
The statements made herein relating to the Year 2000 are designated as Year 2000
Readiness Disclosures for purposes of the Year 2000 Information and Readiness
Act. MediaOne Group uses software and related technologies throughout its
business that may be affected by the date change in the year 2000. MediaOne
Group established a corporate-wide Year 2000 program in 1997, which in relation
to other business projects and objectives has been assigned a high priority. The
inability of systems to appropriately recognize the year 2000 could result in a
disruption of Company operations. More specifically, such a failure could result
in material operational impacts on various of the Company's business operations,
as identified in more detail in the chart below.
-39-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
MediaOne Group continues its progress through a comprehensive program to
evaluate, monitor and address the impact of the Year 2000 on its operations.
MediaOne Group is utilizing both internal and external resources in
implementing the program. The program consists of the following phases:
Phase
(I) Assessment - Structured evaluation, including a detailed inventory
outlining the impact that the Year 2000 may have on current
operations.
(II) Detailed Plan - Establishment of priorities, development of specific
action steps and allocation of resources to address the issues as
outlined in Phase I.
(III)Conversion - Implementation of the necessary changes, (i.e., repair,
replacement or retirement) as outlined in Phase II.
(IV) Testing - Verification that the conversions implemented in Phase III
will be successful in resolving the Year 2000 problem so that
inventory items used by the critical business processes will function
properly.
(V) Implementation - The final roll-out of selected and verified Year
2000 solutions into an operational unit.
MediaOne Group identified three primary risk assessment levels for various
inventory items relative to its Year 2000 program. These levels are high,
medium and low, with high risk items being those that may have such an impact
on the business, that if the risk is not appropriately managed and/or
mitigated, the occurrence of the risk could have an adverse impact on the
operations of the business, its customers and its employees. Medium risks are
those that if they are not appropriately managed and/or mitigated, the
occurrence of the risk may cause major difficulties in managing the day-to-day
operations of the business, and/or have a significant impact on the ability to
deliver acceptable service to customers. Low risks are those that if they are
not appropriately managed and/or mitigated, the occurrence of the risk may
cause difficulties in managing the business, however, should not severely
impact service delivery, cash flow, or critical management activities.
MediaOne Group has identified and prioritized four critical business functions
across its business operations in order to manage its Year 2000 program. The
critical business functions are (i) customer service, which includes service
delivery, service disruption, network management and workforce management; (ii)
customer care and billing, which includes bill issuance and access to
functioning call centers; (iii) cash flow, which includes payment processing,
general ledger, accounts payable and accounts receivable; and (iv) employees,
health and safety, which includes payroll processing, pension fund issues, and
building operations and security.
MediaOne Group has identified two business areas that are subject to Year 2000
disclosures. These are Domestic Cable and Broadband, and Investments in
Unconsolidated Subsidiaries.
-40-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Domestic Cable and Broadband
The Company continues to progress through its program to address the Year 2000
issues related to its Domestic Cable and Broadband operations. As of June 30,
1999, all four critical business functions managed by the program were
approximately 90 percent complete relative to the high and medium priority
projects.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------ ----------------------------- -------------------------- ------------------- ---------------
Estimated
Date of
Business Functions Current Areas of Focus Operational Impact Current Status Completion
- ------------------------ ----------------------------- -------------------------- ------------------- ---------------
Customer Service Head End Controller Inability to provide Phase V Q3 1999
Digital Transmission video, telephony &
Equipment data service to
Switches customers
Ad Insertion
Network Surveillance
Customer Care & Billing Subscriber Billings Loss of revenues Phase V Q3 1999
Ad Sales Billings Loss of customer
Call Center Operations provisioning and
Data Communications repair support
Desktop Computing
Cash Flow Financial Systems Interruption to cash Complete* Q2 1999
receipts &
disbursements cycle
Employees, Health & Payroll & Benefit Systems Loss of support systems Complete* Q2 1999
Safety Facilities Functions and employee disruption
- ------------------------ ----------------------------- -------------------------- ------------------- ---------------
</TABLE>
* Areas noted as "complete" are subject to continued monitoring of Year 2000
compliant operations for change control purposes.
Investment in Unconsolidated Subsidiaries
MediaOne Group has significant investments in both domestic and international
operations. The Company's Year 2000 program includes plans to monitor the
progress of these ventures in addressing the Year 2000 issues. The Company
believes, based upon information provided by the ventures, that these ventures
are progressing in their efforts to address the Year 2000 issues and continue
to be in the conversion and/or testing phase of their programs. The Company
continues to believe that the costs of addressing the Year 2000 issues by the
ventures will not have a material adverse impact on MediaOne Group's financial
position.
-41-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Third Party Relationships
MediaOne Group has significant relationships and dependencies with regard to
systems and technology provided and supported by third party vendors and service
providers. As part of its Year 2000 program, MediaOne Group established a vendor
compliance group to obtain formal Year 2000 compliance representation from
vendors who provide products and services to MediaOne Group. The scope of this
group's focus includes vendors who provide information technologies, network
switching and elements, infrastructure, electronic trading partners and other
third party suppliers. The vendor compliance process is being performed
concurrently with the regional/business unit Year 2000 remediation activities.
In addition, the MediaOne Group Year 2000 legal team has established in parallel
a vendor contract analysis program.
Business Continuity
Business continuity teams will be in place by the end of the third quarter of
1999 for the Year 2000 program and include business contingency and response and
recovery management. Operational response and recovery plans used by these teams
are being refined and are expected to be in place by third quarter 1999. These
contingency plans are designed by the Company to quickly assess and respond to
service interruptions which may occur during the millennium rollover.
Costs of Year 2000 Program
MediaOne Group has incurred approximately $40 of costs to implement its Year
2000 compliance program through the second quarter of 1999 and currently expects
to incur between $60 to $70 of costs in aggregate, of which $10 to $15 represent
capitalized expenditures. Of the total costs being incurred, approximately $45
to $55 are incremental to MediaOne Group. The funding of these costs will be
managed by the Company through its liquidity and capital resources plan.
Risks Associated with Year 2000 Issues
Due to the complexity of the issues presented by the Year 2000 and the proposed
solutions, and the interdependence of MediaOne Group on a global list of third
party suppliers, it is impossible to assess with any degree of accuracy the
impact of a failure in any one aspect or combination of aspects of the Company's
Year 2000 program in relation to the Company's critical business function areas.
MediaOne Group cannot provide assurance that actual results will not differ from
management's estimates due to the complexity of correcting the systems and
related technologies surrounding the Year 2000 issue.
-42-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
Failure by MediaOne Group to complete its Year 2000 project in a timely or
complete manner, within its estimate of projected costs, or failure by third
parties, such as financial institutions and related networks, software
providers, local telephone companies, long distance providers, power providers,
etc., to correct their systems, with which MediaOne Group's systems
interconnect, could have a material impact on future results of operations and
financial position. Other factors which might cause a material difference from
management's estimate would include, but not be limited to, the availability and
cost of personnel with appropriate skills and abilities to locate and correct
all relevant computer code and similar uncertainties, as well as the collateral
effects on MediaOne Group of the Year 2000 problem on the economy in general, or
on MediaOne Group's business partners and customers in particular. However,
MediaOne Group believes that the Year 2000 issue can be mitigated through its
planned repair, replacement, or retirement of the relevant systems and related
technologies, that are within MediaOne Group's reasonable control.
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 FASB Statement No.
133," which deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. As a result, the Company will adopt SFAS No. 133
in the year 2001.
* * * * * * * * *
MediaOne Group from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of the
Company. There is no assurance that any such discussions will result in the
consummation of any such transaction.
-43-
Form 10-Q - Part I
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions)
SELECTED PROPORTIONATE DATA
Proportionate Results of Operations - Six Months Ended June 30, 1999 Compared
With 1998
The following table and discussion is not required by GAAP or intended to
replace the Consolidated Financial Statements prepared in accordance with GAAP.
It is presented supplementally because MediaOne Group believes that
proportionate financial and operating data facilitate the understanding and
assessment of its Consolidated Financial Statements. The financial information
included below departs materially from GAAP because it aggregates a portion of
the revenues and operating income of entities not controlled by MediaOne Group
with those of the consolidated operations of MediaOne Group.
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------- -------- ------------------------ ------------------------
Change
------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Six Months Ended June 30, 1999 1998 $ %
- ----------------------------------------------------------- ------------ ----------- ----------- ------------
Proportionate Revenues
Cable and broadband:
Domestic (1) $ 2,848 $ 2,696 $ 152 5.6
International 248 150 98 65.3
------------ ----------- ----------- ------------
3,096 2,846 250 8.8
International wireless 648 509 139 27.3
Corporate (4) 10 (14) -
Other (2) 11 32 (21) (65.6)
============ =========== =========== ============
Total proportionate revenues (3) $ 3,751 $ 3,397 $ 354 10.4
=========================================================== ============ =========== =========== ============
Proportionate EBITDA (4)
Cable and broadband:
Domestic (1) $ 1,125 $ 873 $ 252 28.9
International 38 3 35 -
------------ ----------- ----------- ------------
1,163 876 287 32.8
International wireless 161 65 96 -
Corporate (35) (30) (5) 16.7
Other (2) (3) - (3) -
------------ ----------- ----------- ------------
Total proportionate EBITDA (3) $ 1,286 $ 911 $ 375 41.2
=========================================================== ============ =========== =========== ============
</TABLE>
(1) The proportionate results are based on MediaOne Group's 25.51 percent
pro rata priority and residual equity interests in reported TWE
results. TWE's results are as reported and have not been adjusted to
report TWE investments accounted for under the equity method on a
proportionate basis.
(2) Primarily includes international directories which were sold in June
1999.
(3) For the six month period ended June 30, 1998, amounts exclude
proportionate revenues of $354 and proportionate EBITDA of $114 for
the domestic wireless operations which were sold in April 1998.
(4) Proportionate EBITDA represents MediaOne Group's equity interest in
the entities multiplied by the entities' EBITDA. As such,
proportionate EBITDA does not represent cash available to MediaOne
Group.
-44-
Form 10-Q - Part I
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
SELECTED PROPORTIONATE DATA (Continued)
Proportionate Statistic (in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------- ------------------------ ------------------------
Change
------------------------ ------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Six Months Ended June 30, 1999 1998 Amount %
- ----------------------------------------------------------- ------------ ----------- ----------- ------------
Cable and broadband:
Domestic video subscribers (1) 7,853 7,452 401 5.4
Domestic homes passed (1) 13,175 12,455 720 5.8
Domestic high speed data subscribers (1, 2) 187 52 135 -
Domestic telephone lines 36 2 34 -
International video subscribers 1,031 903 128 14.2
International homes passed 2,821 2,151 670 31.1
International telephone lines 533 309 224 72.5
International wireless:
Subscribers 2,333 1,268 1,065 84.0
POPs 76,254 72,754 3,500 4.8
=========================================================== ============ =========== =========== ============
</TABLE>
(1) The proportionate results are based on MediaOne Group's 25.51 percent
pro rata priority and residual equity interests in reported TWE
results. TWE's results are as reported and have not been adjusted to
report TWE investments accounted for under the equity method on a
proportionate basis.
(2) High speed data subscribers for 1998 have been restated to conform
with the current year presentation.
Normalized for the one-time effects of acquisitions, dispositions and other
asset transactions, proportionate revenues increased $407, or 12.2 percent, and
EBITDA increased $153, or 17.3 percent.
Cable and Broadband - Domestic. Normalized for the one-time effects of cable
system acquisitions and dispositions, proportionate revenues related to MediaOne
of Delaware increased $128, or 10.7 percent during 1999. This is a result of
increases in subscribers and revenue per subscriber mainly due to expanded
channel offerings, repackaging of services and increased rates. Normalized for
the one-time effects of cable system acquisitions and dispositions,
proportionate EBITDA for MediaOne of Delaware increased $13, or 2.7 percent.
This increase is primarily a result of higher revenues, partially offset by
higher programming fees, increased personnel costs related to customer service
initiatives and costs associated with the deployment of high speed data and
residential telephone services. Proportionate EBITDA related to TWE operations
increased 61.4 percent. TWE's results benefited from improved cable, programming
and filmed entertainment operations, and one-time gains in 1999 on cable system
sales and swaps, and the early termination of a distribution agreement with a
third party.
-45-
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
SELECTED PROPORTIONATE DATA (Continued)
Cable and Broadband - International. Normalized for the one-time effects of
acquisitions, international cable and broadband proportionate revenues increased
$43, or 21.0 percent, during 1999 due primarily to customer growth at Telewest.
During the same period, normalized proportionate EBITDA increased $21 more than
doubling to $38, due primarily to reduced MediaOne Group international staff
costs.
Proportionate international cable subscribers totaled 1,031,000 at June 30,
1999, an 8.8 percent increase over last year on a comparable basis. Telewest's
cable television subscribers increased 15.2 percent over last year on a
comparable basis.
International Wireless. During 1999, proportionate revenues and EBITDA for the
international wireless operations increased due to the 83.9 percent increase in
the proportionate international wireless subscriber base to 2,333,000, on a
comparable basis. One 2 One added 646,000 proportionate customers, a 95.1
percent increase from a year ago.
Corporate. During 1999, proportionate revenues for corporate operations
decreased $14, to $(4), primarily due to adjustments associated with the
discontinuance of insurance policies on cellular phones. EBITDA losses increased
$5, or 16.7 percent, to $(35), primarily due to a reduction in the amount of
headquarter costs being allocated to the subsidiaries, partially offset by
decreased employee costs due to a reduction in headcount.
Other. Other reflects the results of the international directories operations
located in South America and costs related to development activities, primarily
for the development of Internet content services. During 1999, proportionate
revenues decreased $21, to $11, and proportionate EBITDA losses increased $3, to
$(3), primarily due to the sale of the international directories operations in
June 1999. As a result of this sale, the Company no longer reflects
international directories operations in the proportionate results.
-46-
Form 10-Q - Part I
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to the information set forth on page 38.
-47-
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
MediaOne Group, Inc. and its subsidiaries are subject to claims and proceedings
arising in the ordinary course of business. While complete assurance cannot be
given as to the outcome of any contingent liabilities, in the opinion of
MediaOne Group, any financial impact to which MediaOne Group and its
subsidiaries are subject is not expected to be material in amount to MediaOne
Group's operating results or its financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Exhibits identified in parentheses below are on file with the
Securities and Exchange Commission and are incorporated herein by
reference. All other exhibits are provided as part of this electronic
submission.
Exhibit
Number
12 Statement regarding computation of earnings to fixed charges
ratio of MediaOne Group, Inc.
(10) Agreement and Plan of Merger, dated as of May 6, 1999, by and
among AT&T Corp., Meteor Acquisition Inc. and MediaOne Group,
Inc. (Exhibit 2 to Current report on Form 8-K dated May
6, 1999, File No. 1-8611)
(b) Reports on Form 8-K filed during the Second Quarter of 1999
(i) Form 8-K Current Report dated April 28, 1999, concerning a Press
Release by the Company announcing its first quarter 1999
earnings results.
(ii) Form 8-K Current Report dated May 6, 1999, concerning a Press
Release by the Company announcing an Agreement and Plan of Merger
by and among AT&T Corp., Meteor Acquisition, Inc. and MediaOne
Group, Inc.
-48-
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.
/s/ Richard A. Post
---------------------------------------
August 12, 1999 MediaOne Group, Inc.
Richard A. Post
Executive Vice President and
Chief Financial Officer
-49-
Exhibit 12
MediaOne Group, Inc.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
Quarter Ended
<TABLE>
<CAPTION>
<S> <C> <C>
6/30/1999 6/30/1998
--------- ---------
Income from continuing operations
before income taxes $ 667 $ 3,716
Interest expense (net of amounts
capitalized) 103 143
Interest factor on rentals (1/3) 1 (1)
Equity losses in unconsolidated
ventures (less than 50% owned) 39 63
Minority interest expense 69 20
--------- ---------
Earnings $ 879 $ 3,941
========= =========
Interest expense $ 104 $ 158
Interest factor on rentals (1/3) 1 (1)
Minority interest expense 69 20
Preferred stock dividends (pre-tax
equivalent) 23 22
--------- ---------
Fixed charges $ 197 $ 199
========= =========
Ratio of earnings to combined fixed
charges and preferred
stock dividends 4.46 A 19.80 B
</TABLE>
--------- ---------
A) Earnings for the quarter ended June 30, 1999 include a $2,482 gain from the
exchange of Airtouch shares for Vodafone shares, partially offset by merger
costs of $1,507. Without the net gain of $975, earnings would be
insufficient to cover fixed charges by $293.
B) Earnings for the quarter ended June 30, 1998 include a $3,869 gain from the
sale of domestic wireless operations. Without the gain, earnings would be
insufficient to cover fixed charges by $127.
MediaOne Group, Inc.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
Year-to-Date
6/30/1999 6/30/1998
--------- ---------
Income from continuing operations
before income taxes $ 519 $ 3,388
Interest expense (net of amounts
capitalized) 199 293
Interest factor on rentals (1/3) 2 3
Equity losses in unconsolidated
ventures (less than 50% owned) 141 138
Minority interest expense 118 42
--------- ---------
Earnings $ 979 $ 3,864
========= =========
Interest expense $ 203 $ 318
Interest factor on rentals (1/3) 2 3
Minority interest expense 118 42
Preferred stock dividends (pre-tax
equivalent) 46 46
--------- ---------
Fixed charges $ 369 $ 409
========= =========
Ratio of earnings to combined fixed
charges and preferred
stock dividends 2.65 A 9.45 B
--------- ---------
A) Earnings for the period ended June 30, 1999 include a $2,482 gain from the
exchange of Airtouch shares for Vodafone shares, partially offset by merger
costs of $1,522. Without the net gain of $960, earnings would be
insufficient to cover fixed charges by $350.
B) Earnings for the period ended June 30, 1998 include a $3,869 gain from the
sale of domestic wireless operations. Without the gain, earnings would be
insufficient to cover fixed charges by $414.
MediaOne Group, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Quarter Ended
6/30/1999 6/30/1998
--------- ---------
Income from continuing operations
before income taxes $ 667 $ 3,716
Interest expense (net of amounts
capitalized) 103 143
Interest factor on rentals (1/3) 1 (1)
Equity losses in unconsolidated
ventures (less than 50% owned) 39 63
Minority interest expense 69 20
--------- ---------
Earnings $ 879 $ 3,941
========= =========
Interest expense $ 104 $ 158
Interest factor on rentals (1/3) 1 (1)
Minority interest expense 69 20
--------- ---------
Fixed charges $ 174 $ 177
========= =========
Ratio of earnings to fixed charges 5.05 A 22.27 B
--------- ---------
A) Earnings for the quarter ended June 30, 1999 include a $2,482 gain from the
exchange of Airtouch shares for Vodafone shares, partially offset by merger
costs of $1,507. Without the net gain of $975, earnings would be
insufficient to cover fixed charges by $270.
B) Earnings for the quarter ended June 30, 1998 include a $3,869 gain from the
sale of domestic wireless operations. Without the gain, earnings would be
insufficient to cover fixed charges by $105.
MediaOne Group, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Year-to-Date
6/30/1999 6/30/1998
--------- ---------
Income from continuing operations
before income taxes $ 519 $ 3,388
Interest expense (net of amounts
capitalized) 199 293
Interest factor on rentals (1/3) 2 3
Equity losses in unconsolidated
ventures (less than 50% owned) 141 138
Minority interest expense 118 42
--------- ---------
Earnings $ 979 $ 3,864
========= =========
Interest expense $ 203 $ 318
Interest factor on rentals (1/3) 2 3
Minority interest expense 118 42
--------- ---------
Fixed charges $ 323 $ 363
========= =========
Ratio of earnings to fixed charges 3.03 A 10.64 B
--------- ---------
A) Earnings for the period ended June 30, 1999 include a $2,482 gain from the
exchange of Airtouch shares for Vodafone shares, partially offset by merger
costs of $1,522. Without the net gain of $960, earnings would be
insufficient to cover fixed charges by $304.
B) Earnings for the period ended June 30, 1998 include a $3,869 gain from the
sale of domestic wireless operations. Without the gain, earnings would be
insufficient to cover fixed charges by $368.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE
</LEGEND>
<CIK> 0000732718
<NAME> MEDIAONE GROUP, INC.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
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<SECURITIES> 56 56
<RECEIVABLES> 409 409
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<PP&E> 5,897 5,897
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<BONDS> 6,245 6,245
1,160 1,160
929 929
<COMMON> 10,409 10,409
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<TOTAL-LIABILITY-AND-EQUITY> 30,511 30,511
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<INCOME-PRETAX> 667 519
<INCOME-TAX> (843) (806)
<INCOME-CONTINUING> (176) (287)
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<EXTRAORDINARY> 17 17
<CHANGES> 0 0
<NET-INCOME> (173) (298)
<EPS-BASIC> (0.29) (0.49)
<EPS-DILUTED> (0.29) (0.49)
</TABLE>
